Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

(Mark One)

 

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

For the quarterly period ended June 30, 2006

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)   (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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

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 July 25, 2006

Common stock, $0.01 par value

  183,350,899

 



Table of Contents

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

          Page

ITEM 1.

   CONDENSED FINANCIAL STATEMENTS   
   Consolidated Statements of Income for the three and six months ended June 30, 2006 and June 30, 2005    1
   Consolidated Balance Sheets at June 30, 2006 and December 31, 2005    2
   Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2006    4
   Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005    5
   Notes to Consolidated Financial Statements    6

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    31

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    56

ITEM 4.

   CONTROLS AND PROCEDURES    58
   PART II   
   OTHER INFORMATION   

ITEM 1.

   LEGAL PROCEEDINGS    59

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    61

ITEM 4.

   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    61

ITEM 6.

   EXHIBITS    62


Table of Contents

PART I

FINANCIAL INFORMATION

 

ITEM 1. CONDENSED FINANCIAL STATEMENTS

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2006     2005    2006     2005

Sales—Outside

   $ 824,390     $ 708,591    $ 1,693,591     $ 1,436,939

Sales—Gas Royalty Interests

     12,686       9,066      28,493       18,742

Sales—Purchased Gas

     9,778       44,975      32,130       69,257

Sales—Related Party

     —         614      —         614

Freight—Outside

     37,689       31,665      74,768       61,789

Other Income

     47,720       22,238      89,169       46,796
                             

Total Revenue and Other Income

     932,263       817,149      1,918,151       1,634,137

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

     543,906       533,177      1,093,456       1,052,154

Gas Royalty Interests’ Costs

     10,267       7,026      23,683       14,463

Purchased Gas Costs

     9,986       45,592      32,751       70,086

Freight Expense

     37,689       31,665      74,768       61,789

Selling, General and Administrative
Expense

     21,911       18,797      41,991       35,186

Depreciation, Depletion and
Amortization

     74,448       66,780      146,264       130,159

Interest Expense

     6,253       7,189      12,106       14,113

Taxes Other Than Income

     66,156       56,236      138,156       115,813
                             

Total Costs

     770,616       766,462      1,563,175       1,493,763
                             

Earnings Before Income Taxes and Minority Interest

     161,647       50,687      354,976       140,374

Income Taxes

     48,647       9,613      109,034       24,088
                             

Earnings Before Minority Interest

     113,000       41,074      245,942       116,286

Minority Interest

     (7,066 )     —        (15,562 )     —  
                             

Net Income

   $ 105,934     $ 41,074    $ 230,380     $ 116,286
                             

Basic Earnings Per Share

   $ 0.58     $ 0.22    $ 1.25     $ 0.64
                             

Diluted Earnings Per Share

   $ 0.57     $ 0.22    $ 1.24     $ 0.63
                             

Weighted Average Number of Common Shares Outstanding:

         

Basic

     183,286,425       182,873,976      183,775,190       182,382,952
                             

Dilutive

     185,820,234       185,168,622      186,156,863       184,535,874
                             

Dividends Paid Per Share

   $ 0.07     $ 0.07    $ 0.14     $ 0.14
                             

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

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     (Unaudited)     
     JUNE 30,
2006
   DECEMBER 31,
2005
ASSETS      

Current Assets:

     

Cash and Cash Equivalents

   $ 345,267    $ 340,640

Accounts and Notes Receivable:

     

Trade

     278,066      276,277

Other Receivables

     32,257      23,340

Inventories

     184,977      140,976

Deferred Income Taxes

     144,914      152,730

Prepaid Expenses

     68,676      64,537
             

Total Current Assets

     1,054,157      998,500

Property, Plant and Equipment:

     

Property, Plant and Equipment

     7,417,798      7,096,660

Less—Accumulated Depreciation, Depletion and Amortization

     3,691,411      3,561,897
             

Total Property, Plant and Equipment—Net

     3,726,387      3,534,763

Other Assets:

     

Deferred Income Taxes

     336,144      367,228

Investment in Affiliates

     52,877      52,261

Other

     137,373      134,900
             

Total Other Assets

     526,394      554,389
             

TOTAL ASSETS

   $ 5,306,938    $ 5,087,652
             

 

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

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     (Unaudited)        
     JUNE 30,
2006
    DECEMBER 31,
2005
 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities:

    

Accounts Payable

   $ 147,596     $ 197,375  

Current Portion of Long-Term Debt

     56,844       4,629  

Accrued Income Taxes

     24,206       17,557  

Other Accrued Liabilities

     585,845       584,361  
                

Total Current Liabilities

     814,491       803,922  

Long-Term Debt:

    

Long-Term Debt

     393,652       438,367  

Capital Lease Obligations

     30,534       —    
                

Total Long-Term Debt

     424,186       438,367  

Deferred Credits and Other Liabilities:

    

Postretirement Benefits Other Than Pensions

     1,597,997       1,592,907  

Pneumoconiosis Benefits

     403,908       411,022  

Mine Closing

     381,674       356,776  

Workers’ Compensation

     139,171       134,759  

Deferred Revenue

     19,436       27,343  

Salary Retirement

     30,883       33,703  

Reclamation

     29,376       32,183  

Other

     129,815       137,870  
                

Total Deferred Credits and Other Liabilities

     2,732,260       2,726,563  

Minority Interest

     116,939       93,444  
                

Total Liabilities and Minority Interest

     4,087,876       4,062,296  

Stockholders’ Equity:

    

Common Stock, $.01 par value; 500,000,000 Shares Authorized, 185,125,990 Issued and 183,336,487 Outstanding at June 30, 2006; 185,050,824 Issued and Outstanding at December 31, 2005

     1,851       1,850  

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

     —         —    

Capital in Excess of Par Value

     905,135       883,316  

Retained Earnings

     454,907       252,109  

Other Comprehensive Loss

     (84,371 )     (105,162 )

Unearned Compensation on Restricted Stock Units

     —         (6,757 )

Common Stock in Treasury, at Cost—1,789,503 Shares at June 30, 2006 and -0- Shares at December 31, 2005

     (58,460 )     —    
                

Total Stockholders’ Equity

     1,219,062       1,025,356  
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 5,306,938     $ 5,087,652  
                

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

 

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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, 2005

  $ 1,850   $  883,316     $  252,109     $  (105,162 )   $ (6,757 )   $ —       $  1,025,356  
                                                     

(Unaudited)

             

Net Income

    —       —         230,380       —         —         —         230,380  

Treasury Rate Lock (Net of $27 tax)

    —       —         —         (41 )     —         —         (41 )

Minority Interest in Other Comprehensive Income and Stock-based Compensation of Gas

    —       (1,996 )     —         (4,734 )     —         —         (6,730 )

Gas Cash Flow Hedge (Net of ($16,428) tax)

    —       —         —         25,566       —         —         25,566  
                                                     

Comprehensive Income (Loss)

    —       (1,996 )     230,380       20,791       —         —         249,175  

Issuance of Treasury Stock

    —       (11,643 )     (1,798 )     —         —         25,171       11,730  

Purchases of Treasury Stock

    —       —         —         —         —         (83,631 )     (83,631 )

Stock Options Exercised

    1     1,361       —         —         —         —         1,362  

Tax Benefit from Stock-Based Compensation

    —       35,796       —         —         —         —         35,796  

Amortization of Stock-Based Compensation Awards

    —       5,058       —         —         —         —         5,058  

Elimination of Unearned Compensation on Restricted Stock Units

    —       (6,757 )     —         —         6,757       —         —    

Dividends ($.14 per share)

    —       —         (25,784 )     —         —         —         (25,784 )
                                                     

Balance—June 30, 2006

  $ 1,851   $  905,135     $  454,907     $ (84,371 )   $ —       $ (58,460 )   $  1,219,062  
                                                     

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

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

    

Six Months Ended

June 30,

 
     2006     2005  

Operating Activities:

    

Net Income

   $ 230,380     $ 116,286  

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

    

Depreciation, Depletion and Amortization

     146,264       130,159  

Stock-based Compensation

     6,259       1,797  

Gain on the Sale of Assets

     (3,112 )     (10,653 )

Change in Minority Interest

     15,562       —    

Amortization of Mineral Leases

     3,397       3,661  

Deferred Income Taxes

     14,677       (772 )

Equity in Earnings of Affiliates

     (719 )     (1,818 )

Changes in Operating Assets:

    

Accounts Receivable Securitization

     —         (110,000 )

Accounts and Notes Receivable

     (8,156 )     (20,077 )

Inventories

     (43,097 )     (13,757 )

Prepaid Expenses

     (4,061 )     (8,028 )

Changes in Other Assets

     (2,019 )     766  

Changes in Operating Liabilities:

    

Accounts Payable

     (51,097 )     (16,425 )

Other Operating Liabilities

     6,497       49,895  

Changes in Other Liabilities

     32,081       37,630  

Other

     6,228       (1,216 )
                

Net Cash Provided by Operating Activities

     349,084       157,448  
                

Investing Activities:

    

Capital Expenditures

     (294,384 )     (169,562 )

Acquisition of Mon River Towing and J.A.R. Barge Lines

     (24,750 )     —    

Additions to Mineral Leases

     (4,190 )     (6,352 )

Net Investment in Equity Affiliates

     103       (6,838 )

Proceeds from Sales of Assets

     39,374       29,471  
                

Net Cash Used in Investing Activities

     (283,847 )     (153,281 )
                

Financing Activities:

    

Payments on Miscellaneous Borrowings

     (83 )     (166 )

Payments on Revolver

     —         (1,700 )

Tax Benefit from Stock-Based Compensation

     35,796       —    

Dividends Paid

     (25,784 )     (25,468 )

Issuance of Treasury Stock

     11,730       21,437  

Purchases of Treasury Stock

     (83,631 )     —    

Stock Options Exercised

     1,362       —    
                

Net Cash Used in Financing Activities

     (60,610 )     (5,897 )
                

Net Increase (Decrease) in Cash and Cash Equivalents

     4,627       (1,730 )

Cash and Cash Equivalents at Beginning of Period

     340,640       6,422  
                

Cash and Cash Equivalents at End of Period

   $ 345,267     $ 4,692  
                

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

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(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 six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for future periods.

On May 4, 2006, CONSOL Energy’s Board of Directors declared a two-for-one stock split of the common stock payable on or about May 31, 2006 to shareholders of record on May 15, 2006. The stock split was effected in the form of a stock dividend. This stock split resulted in the issuance of approximately 92.5 million additional shares of common stock and was accounted for by the transfer of approximately $925 from capital in excess of par value to common stock. This transfer of $925 has been retroactively presented on the December 31, 2005 balance sheet. The stock split also resulted in additional shares available for awards under the CONSOL Energy Inc. Equity Incentive Plan. Earnings per share and dividends paid per share amounts on the face of the consolidated income statement are reflected on a post-split basis.

The balance sheet at December 31, 2005 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, 2005 included in CONSOL Energy’s Form 10-K.

Certain reclassifications of 2005 data have been made to conform to the six months ended June 30, 2006 classifications.

Effective January 1, 2006, CONSOL Energy adopted Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” (EITF 04-13). EITF 04-13 defines when a purchase and a sale of inventory with the same party that operates in the same line of business is recorded at fair value or considered a single non-monetary transaction subject to the fair value exception of Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions”. The purchase and sale transactions may be pursuant to a single contractual arrangement or separate contractual arrangements and the inventory purchased or sold may be in the form of raw materials, work-in-process, or finished goods. In general, two or more transactions with the same counter party are treated as one if they are entered into in contemplation of each other. In accordance with EITF 04-13, CONSOL Energy has applied this accounting to new or modified agreements after January 1, 2006. Previously, these transactions were recorded on a gross basis. The adoption of EITF 04-13 did not have an impact on net income or cash flows.

Effective January 1, 2006, CONSOL Energy adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123R), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the three and six months ended June 30, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”(SFAS 123). Stock-based compensation expense for all

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. CONSOL Energy recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Prior to the adoption of SFAS 123R, CONSOL Energy recognized stock-based compensation expense in accordance with Accounting Principles Board Opinion No. 25. “Accounting for Stock Issued to Employees”, (APB 25). In March 2005, the Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. CONSOL Energy has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 3 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.

Basic earnings per share are computed by dividing net income 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 effect of dilutive potential common shares outstanding during the period as calculated in accordance with SFAS 123R. The number of additional shares is calculated by assuming that restricted stock units were converted and outstanding stock options were exercised and that the proceeds from such activity was used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 740,916 and 751,654 shares of common stock were outstanding for the three and six month period ended June 30, 2006, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. There were no options to purchase shares of common stock outstanding for the three and six month period ended June 30, 2005 that were not included in the computation of diluted earnings per share.

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

 

    

Three Months Ended

June 30,

  

Six Months Ended

June 30,

     2006    2005    2006    2005

Net Income

   $ 105,934    $ 41,074      230,380    $ 116,286
                           

Average shares of common stock outstanding:

           

Basic

     183,286,425      182,873,976      183,775,190      182,382,952

Effect of stock options

     2,533,809      2,294,646      2,381,673      2,152,922
                           

Diluted

     185,820,234      185,168,622      186,156,863      184,535,874
                           

Earnings per share:

           

Basic

   $ 0.58    $ 0.22    $ 1.25    $ 0.64
                           

Diluted

   $ 0.57    $ 0.22    $ 1.24    $ 0.63
                           

NOTE 2—ACQUISITIONS AND DISPOSITIONS:

On March 28, 2006, CONSOL Energy, through a subsidiary, completed a sale/lease back of longwall equipment. Cash proceeds from the sale were $36,363 which was equal to our basis in the equipment. Accordingly, no gain or loss was recorded on the transaction. The lease has been accounted for as a capital lease. The lease term is five years.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

In January 2006, CONSOL Energy, through a subsidiary, completed the acquisition of Mon River Towing and J.A.R. Barge Lines, LLC, from The Guttman Group for a cash payment of $24,750. The acquisition included 13 towboats and more than 350 barges with the capacity to transport 13 million tons of coal annually. Mon River Towing transports petroleum products, coal, limestone and other bulk commodities to various locations along the navigable rivers of Pennsylvania, Ohio, West Virginia and Kentucky. J.A.R. Barge Line, LLC charters motor vessels and barges to other river transportation firms along the inland waterways. CONSOL Energy expects to continue to provide these business services through its river and dock operations.

On March 30, 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 West Virginia Energy, LLC. The discounted liability assumed by CONSOL Energy was $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 in the period ending June 30, 2005. In the period ending September 30, 2005, after all agreements were substantially completed, the acquisition was fully consolidated in accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities.”

NOTE 3—STOCK-BASED COMPENSATION:

CONSOL Energy adopted the CONSOL Energy Inc. Equity Incentive Plan on April 7, 1999. The plan provides for grants of stock-based awards to key employees and to non-employee directors. Amendments to the plan have been approved by the Board of Directors since the commencement of the plan, and the total number of shares of common stock that can be covered by grants at June 30, 2006 is 18,200,000 of which 2,600,000 are available for issuance of awards other than stock options. No award of stock options may be exercised under the plan after the tenth anniversary of the effective date of the award.

The total stock-based compensation expense was $2,857 and $5,058 for the three and six months ended June 30, 2006 and the related deferred tax benefit totaled $1,111 and $1,967 respectively. Prior to January 1, 2006, CONSOL Energy accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” as amended. Generally, no stock-based employee compensation cost for stock options is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Prior to January 1, 2006, CONSOL Energy provided pro forma disclosure amounts in accordance with Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure – an Amendment of SFAS No. 123” (SFAS 148), as if the fair value method defined by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) had been applied to its stock-based compensation.

Effective January 1, 2006, CONSOL Energy adopted the fair value recognition provisions of SFAS 123R, “Share-Based Payment” (SFAS 123R) using the modified prospective transition method and therefore has not restated prior periods’ results. Under this transition method, stock-based compensation expense for the six months ended June 30, 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. CONSOL Energy recognizes these compensations costs net of a forfeiture rate and recognizes the

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term.

As a result of adopting SFAS 123R, pretax income and net income for the three months ended June 30, 2006 was $1,829 and $1,118 lower, respectively, than if we had continued to account for stock-based compensation under APB 25. Pretax income and net income for the six months ended June 30, 2006 was $3,266 and $1,996 lower, respectively, than if we had continued to account for stock-based compensation under APB 25. The impact on basic and diluted earnings per share for the three months ended June 30, 2006 was less than $0.01 per share and $0.01 per share, respectively. The impact on basic and diluted earnings per share for the six months ended June 30, 2006 was $0.01 per share. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows.

The pro forma table below reflects net earnings and basic and diluted net earnings per share for the three and six months ended June 30, 2005, had CONSOL Energy applied the fair value recognition provisions of SFAS 123, as follows:

 

    

Three Months Ended

June 30,

2005

   

Six Months Ended

June 30,

2005

 
    
    

Net income as reported

   $ 41,074     $ 116,286  

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

     —         735  

Add: Stock-based compensation expense for restricted stock units

     622       1,062  

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

     (2,190 )     (4,466 )
                

Pro forma net income

   $ 39,506     $ 113,617  
                

Earnings per share:

    

Basic—as reported

   $ 0.22     $ 0.64  
                

Basic—pro forma

   $ 0.22     $ 0.63  
                

Diluted—as reported

   $ 0.22     $ 0.63  
                

Diluted—pro forma

   $ 0.22     $ 0.62  
                

As a result of SFAS 123R, CONSOL Energy reevaluated its assumptions used in estimating the fair value of employee stock options granted. As part of this assessment, management determined that a combination of historical and implied volatility is a better indicator of expected volatility and future stock price trends than solely historical volatility. Therefore, expected volatility for the three and six month periods ended June 30, 2006 was based on a combination of historical and market-based implied volatility.

As part of its SFAS 123R adoption, CONSOL Energy also examined its historical pattern of stock option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, CONSOL Energy identified two distinct employee populations. CONSOL Energy used the Black-Scholes option pricing model to value the options for each of the employee populations.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

The table below presents the weighted average expected option life in years of the two employee populations. The expected life computation is based upon historical exercise patterns and post-vesting termination behavior of the populations. The risk-free interest rate was determined for each vesting tranche of an award based upon the calculated yield on U.S. Treasury obligations for the expected term of the award. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values:

 

    

Six Months Ended

June 30, 2006

   

Six Months Ended

June 30, 2005

 
    

Weighted average fair value of grants

   $ 15.46     $ 11.88  

Risk-free interest rate

     5.0 %     3.6 %

Dividend yield

     0.6 %     1.5 %

Expected Forfeiture Rate

     2.0 %     —    

Expected volatility

     38.5 %     45.6 %

Expected life in years

     4.3       2.5  

Option activity under the option plans as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:

 

    

Shares

   

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term

(in years)

  

Aggregate

Intrinsic

Value

(in thousands)

          
          
          
          
          

Outstanding at December 31, 2005

   6,450,314     $ 13.98      

Granted

   745,168       43.37      

Exercised

   (835,463 )     15.40      

Forfeited

   (32,712 )     15.35      
              

Outstanding at June 30, 2006

   6,327,307     $ 17.22    7.30    $ 186,685
                        

Vested and expected to vest at June 30, 2006

   6,312,404     $ 17.11    7.28    $ 186,635
                        

Exercisable at June 30, 2006

   3,592,818     $ 12.94    6.56    $ 121,353
                        

These stock options will terminate ten years after the date on which they were granted. The employee stock options, covered by the Equity Incentive Plan adopted April 7, 1999, vest 25% per year, beginning one year after the grant date. There are 5,353,592 stock options outstanding under this plan. Additionally there are 813,791 employee stock options outstanding which are fully vested. These stock options had vesting terms ranging from six months to one year. Non-employee director stock options vest 33% per year, beginning one year after the grant date. There are 159,924 stock options outstanding under these grants. The vesting of the options will accelerate in the event of death, disability or retirement and may accelerate upon a change of control of CONSOL Energy.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between CONSOL Energy’s closing stock price on the last trading day of the six months ended June 30, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2006. This amount changes based on the fair market value of CONSOL Energy’s stock. Total intrinsic value of options exercised for the three and six

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

months ended June 30, 2006 was $14,974 and $20,322 respectively. Total pre-tax fair value of options vested was $4,558 and $4,612 for the three and six months ended June 30, 2006, respectively.

Cash received from option exercises for the three and six months ended June 30, 2006 was $8,681 and $13,092, respectively. The windfall tax benefit realized for the tax deduction from option exercises totaled $4,576 and $35,796 for the three and six months ended June 30, 2006, respectively. As of June 30, 2006, $31,232 of total unrecognized compensation cost related to unvested awards is expected to be recognized over a weighted-average period of 2.13 years.

Under the equity incentive plan, CONSOL Energy granted certain employees restricted stock unit awards. These awards entitle the holder to receive shares of common stock as the award vests. A total of 637,926 restricted stock units were outstanding at June 30, 2006, vesting over a weighted average remaining period of 2.43 years. Compensation expense will be recognized over the vesting period of the units. The following represents the unvested restricted stock units and corresponding fair value (based upon the closing share price) at the date of grant:

 

    

Number
of Shares

  

Weighted

Average Grant

Date Fair Value

     
     

Nonvested at December 31, 2005

   477,572    $ 18.46

Granted

   160,354    $ 42.99
       

Nonvested at June 30, 2006

   637,926    $ 24.57
       

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

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

 

    Pension Benefits     Other Benefits  
   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2006     2005     2006     2005     2006     2005     2006     2005  

Service cost

  $ 3,951     $ 5,539     $ 7,903     $ 11,078     $ 2,523     $ 3,175     $ 5,046     $ 6,351  

Interest cost

    7,061       7,255       14,123       14,510       32,416       34,854       64,833       69,709  

Expected return on plan assets

    (6,531 )     (5,114 )     (13,062 )     (10,228 )     —         —         —         —    

Amortization of prior service costs (credit)

    (271 )     54       (542 )     108       (14,155 )     (1,843 )     (28,310 )     (3,686 )

Recognized net actuarial loss

    4,171       4,851       8,342       9,702       16,077       11,602       32,152       23,205  
                                                               

Net periodic benefit cost

  $ 8,381     $ 12,585     $ 16,764     $ 25,170     $ 36,861     $ 47,788     $ 73,721     $  95,579  
                                                               

For the three and six month period ended June 30, 2006, $50 and $574 have been paid to the pension plan. CONSOL Energy presently anticipates contributing a total of $71,000 to the pension plan in 2006.

We do not expect to contribute to the other post employment benefit plan in 2006. We intend to pay benefit claims as they become due. For the three and six month period ended June 30, 2006, $30,970 and $61,531 of other post employment benefits have been paid.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

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

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

 

    CWP     Workers’ Compensation  
   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2006     2005     2006     2005     2006     2005     2006     2005  

Service cost

  $ 1,490     $ 948     $ 2,981     $  1,897     $ 7,574     $ 7,162     $  15,147     $  14,324  

Interest cost

    3,018       2,991       6,035       5,982       2,092       2,146       4,184       4,218  

Amortization of actuarial gain

    (5,462 )     (5,652 )     (10,925 )     (11,305 )     (692 )     (803 )     (1,384 )     (1,744 )

State administrative fees and insurance bond premiums

    —         —         —         —         1,685       4,733       3,303       10,640  

Legal and administrative costs

    675       675       1,350       1,350       872       968       1,744       1,937  
                                                               

Net periodic (benefit) cost

  $ (279 )   $ (1,038 )   $ (559 )   $ (2,076)     $ 11,531     $ 14,206     $ 22,994     $ 29,375  
                                                               

CONSOL Energy does not expect to contribute to the CWP plan in 2006. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2006, $3,248 and $5,742 of CWP benefit claims have been paid, respectively.

CONSOL Energy does not expect to contribute to the workers’ compensation plan in 2006. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2006, $10,065 and $23,413 of workers’ compensation benefits, state administrative fees and surety bond premiums have been paid.

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 Six Months Ended

June 30,

 
     2006     2005  
     Amount     Percent     Amount     Percent  

Statutory U.S. federal income tax rate

   $ 124,242     35.0 %   $ 49,131     35.0 %

Excess tax depletion

     (27,831 )   (7.8 )     (23,169 )   (16.5 )

Effect of domestic production activities deduction

     (1,975 )   (0.6 )     (537 )   (0.3 )

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

     1,003     0.3       (4,215 )   (3.0 )

Net Effect of state tax

     13,287     3.7       2,855     2.0  

Other

     308     0.1       23     —    
                            

Income Tax Expense / Effective Rate

   $ 109,034     30.7 %   $ 24,088     17.2 %
                            

The effective tax rate for the six months ended June 30, 2006 was calculated using the annual effective rate projection on recurring earnings.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

NOTE 7—INVENTORIES:

Inventory components consist of the following:

 

    

June 30,

2006

  

December 31,

2005

Coal

   $ 89,162    $ 52,853

Merchandise for resale

     18,123      16,995

Supplies

     77,692      71,128
             

Total Inventories

   $ 184,977    $ 140,976
             

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 $123 and $253 for the three and six months ended June 30, 2006, respectively. Costs associated with the receivables facility totaled $1,022 and $2,114 for the three and six months ended June 30, 2005, 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 April 2007.

At June 30, 2006 and December 31, 2005, eligible accounts receivable totaled approximately $112,200 and $116,100, respectively. The subordinated retained interest approximated $112,200 and $116,100 at June 30, 2006 and December 31, 2005, respectively. No accounts receivable were removed from the consolidated balance sheet at June 30, 2006 because CONSOL Energy retained the total eligible accounts receivable. Reductions of $110,000 in the accounts receivable securitization program for the six months ended June 30, 2005 were reflected in cash flows from operating activities in the consolidated statement of cash flows.

The key economic assumptions used to measure the retained interest at the date of securitization for all such sales completed in 2006 were a discount rate of 3.91% and an estimated life for eligible accounts receivables of 32 days. At June 30, 2006, an increase in the discount rate or estimated life of 10% and 20% would have reduced the fair value of the retained interest by $39 and $78, 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.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

NOTE 9—PROPERTY, PLANT AND EQUIPMENT:

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

 

     June 30,    December 31,
     2006    2005

Plant & equipment

   $ 4,221,199    $ 4,020,837

Coal properties and surface lands

     1,102,145      1,079,202

Airshafts

     842,390      789,270

Mine development

     444,768      404,771

Leased Coal Lands

     450,158      449,587

Advance Mining Royalties

     357,138      352,993
             

Total Gross

     7,417,798      7,096,660

Less: Accumulated depreciation, depletion and amortization

     3,691,411      3,561,897
             

Total net property, plant and equipment

   $ 3,726,387    $ 3,534,763
             

NOTE 10—DEBT:

CONSOL Energy has a $750,000 revolving credit facility which expires in 2010. The facility is collateralized by liens on substantially all of the assets of CONSOL Energy and our wholly-owned subsidiaries. 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 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 covenant was 0.17 to 1.00 at June 30, 2006. The facility also includes an interest coverage ratio covenant of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio covenant was 31.83 to 1.00 at June 30, 2006. At June 30, 2006, the $750,000 facility had no borrowings outstanding and $389,556 of letters of credit outstanding, leaving $360,444 of capacity available for borrowings and the issuance of letters of credit.

CNX Gas, an 81.5% subsidiary of CONSOL Energy, also has a $200,000 revolving credit facility that is unsecured, however it does contain a negative pledge provision restricting CNX Gas assets from being used to secure any other obligations. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Covenants in the facility limit CNX Gas’ ability to dispose of assets, make investments, purchase or redeem CNX Gas stock and merge with another corporation. The facility includes a leverage ratio covenant of not more than 3.0 to 1.0, measured quarterly. The leverage ratio was 0.00 to 1.0 at June 30, 2006. The facility also includes an interest coverage ratio of no less than 3.0 to 1.0 measured quarterly. The interest coverage ratio was met at June 30, 2006. At June 30, 2006, the CNX Gas credit agreement had no borrowings outstanding and $16,847 of letters of credit outstanding, leaving $183,153 of capacity available for borrowings and the issuance of letters of credit.

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.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

One of our subsidiaries, Fairmont Supply Company, which distributes industrial supplies, currently is named as a defendant in approximately 25,531 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland 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. For the six months ended June 30, 2006 and the year ended December 31, 2005, payments by Fairmont with respect to asbestos cases have not been material. Our current estimates related to these asbestos claims, individually and in the aggregate, are immaterial to the financial position, results of operations or cash flows of CONSOL Energy. However, it is reasonably possible that payments in the future with respect to pending or future asbestos cases may 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. Our current estimates related to these pending claims, individually and in the aggregate, are immaterial to the financial position, results of operations or cash flows of CONSOL Energy. However, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations and cash flows of CONSOL Energy.

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. At that time, the EPA also identified 38 other PRPs for the Ward Transformer site. On September 16, 2005, EPA, CONSOL Energy and three other PRPs entered into an administrative Settlement Agreement and Order on Consent, requiring those PRPs to undertake and complete a PCB soil removal action, at and in the vicinity of the Ward Transformer property. In December 2005, EPA approved the PRPs’ work plan, and field work began the first week of January 2006. The current estimated cost of remedial action including payment of EPA’s past and future costs, is approximately $20,000. CONSOL Energy’s interim allocation among the participating PRPs is 46%. Accordingly, CONSOL Energy recognized a $9,200 liability, of which $3,000 was recognized prior to December 31, 2005. This liability is included in other accrued liabilities. CONSOL Energy and the other participating PRPs are investigating contribution claims against other, non-participating PRPs, and such claims will be brought to recover a share of the costs incurred. To date, CONSOL Energy’s portion of probable recoveries are estimated to be $5,200. Accordingly, an asset has been included in other assets for these claims. The net cost of the liability and the asset has been included in Cost of Goods Sold and Other Charges. There were $1,626 of costs which were recognized in the six months ended June 30, 2006. No costs were recognized in Cost of Goods Sold and Other Charges for the three months ended June 30, 2006. CONSOL Energy has funded $626 and $1,252 in the three and six month period ended June 30, 2006, respectively, to an independent trust established for this remediation. CONSOL Energy expects the majority of payments related to this liability to be made over the next twelve to eighteen months. In addition, the EPA has advised the PRPs that it is investigating additional areas of potential contamination allegedly related to the Ward Transformer site.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

On October 21, 2003 a complaint was filed in the United States District Court for the Western District of Pennsylvania on behalf of Seth Moorhead against CONSOL Energy, J. Brett Harvey and William J. Lyons. The complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act and that during the period between January 24, 2002 and 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 its financial condition; (d) CONSOL Energy’s production problems and costs thereof were also weakening its financial condition; and (e) 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. It is anticipated that the plaintiff will seek class certification. CONSOL Energy management believes these claims are without merit and have a remote chance of being awarded. Accordingly, we have not accrued any liability associated with these claims.

Yukon Pocahontas Coal Company, Buchanan Coal Company, and Sayers-Pocahontas Coal Company filed an action on March 22, 2004 against one of our subsidiaries, Consolidation Coal Company (“CCC”), which is presently pending in the Circuit Court of Buchanan County, Virginia. The action related to untreated water in connection with mining activities at CCC’s Buchanan Mine being deposited in the void spaces of nearby mines of one of our other subsidiaries, Island Creek Coal Company (“ICCC”). The plaintiffs are seeking to stop CCC from depositing any additional water in these areas, to require CCC to remove the water that is stored there along with any remaining impurities, to recover $300,000 of compensatory and trebled damages and to recover punitive damages. On July 26, 2006, plaintiffs filed a motion to amend the original complaint to assert additional damage claims of $3,252,000 against CCC. The plaintiffs also seek to amend the complaint to add CONSOL Energy, CNX Gas Company, LLC and ICCC as additional defendants and to assert additional damage claims of $150,000 against these defendants. With respect to this action, we believe we had, and continue to have, the right to store water in these areas. The named defendants deny liability and intend to vigorously defend this action; consequently, we have not recognized any liability related to these claims. However, it is reasonably possible that payments in the future, or the issuance of an injunction, with respect to the pending claims may be material to the financial position, results of operations or cash flows of CONSOL Energy.

Levisa Coal Company filed an action on July 10, 2006 against CCC which is presently pending in the U.S. Circuit Court of Buchanan County, Virginia. The action is for injunctive relief and declaratory judgment and seeks a court order prohibiting CCC from depositing water from its Buchanan Mine into the void spaces of ICCC’s VP3 mine, part of which is under lease from Levisa Coal Company. The plaintiff claims the water will adversely affect its remaining coal reserves and coal bed methane production, thereby impacting the plaintiff’s future royalties. We believe that CCC has the right to deposit the water in that void area. CCC intends to vigorously defend this action; consequently, we have not recognized any liability related to this action. However, if an injunction were to be issued, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

As previously disclosed, we 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 $2,000 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. We believe the calculation of the unassigned beneficiary premium is not accurate and, therefore, we have 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 us 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. The mine resumed production on December 13, 2005. This accident is covered under our property and business interruption insurance policy, subject to certain deductibles. No insurance recovery for business interruption was received for this incident in the three months ended June 30, 2006. Insurance recovery for business interruption of $21,392 was received for this incident in the six months ended June 30, 2006, and accordingly was recognized as other income. CONSOL Energy is pursuing additional reimbursement from the insurance carriers. There can be no assurance that we will obtain any additional recovery from our insurance carriers.

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 $23,291 and $36,858, net of recognized insurance recovery, were incurred for the three and six months ended June 30, 2005, respectively. Costs to CONSOL Energy were primarily reflected in Cost of Goods Sold and Other Charges and Depreciation, Depletion and Amortization on the consolidated statement of income. In the year ended December 31, 2005, CONSOL Energy received $31,585 of insurance proceeds related to this incident. No receivables related to this incident were remaining at December 31, 2005. In the three and six month period ended June 30, 2006, CONSOL Energy recognized $25,015 of insurance proceeds related to this incident in other income. A $7,521 receivable was remaining at June 30, 2006. This receivable was collected in July 2006. CONSOL Energy is pursuing additional reimbursement from the insurance carriers. There can be no assurance that we will obtain any additional recovery from our insurance carriers.

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 were reflected in Other Receivables at June 30, 2006 and December 31, 2005. CONSOL Energy received $1,785 of insurance proceeds related to this

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

incident in the year ended December 31, 2005. CONSOL Energy has filed suit against one of the underwriter insurance carriers for insurance proceeds and bad faith settlement practices.

Certain excise taxes paid on export sales of coal were determined to be unconstitutional. CONSOL Energy filed claims with the Internal Revenue Service (IRS) seeking refunds for these excise taxes that were paid during the period 1991 through 1999. Accordingly, CONSOL Energy recognized receivables for these claims in 2001. The IRS completed an audit of our refund claims and confirmed the validity of the claim filed for the period 1994 through 1999. We received the refunds for this portion of the claim in 2003 and 2002. The United States Supreme Court denied review of the refund claim under the Tucker Act, which allows the refunds of taxes for the period 1991 through 1993. CONSOL Energy has a receivable of $26,006, which excludes an interest component, for this portion of the claim classified in Other Assets at June 30, 2006 and December 31, 2005. We also have a payable of $1,914 related to this claim classified in Other Liabilities at June 30, 2006 and December 31, 2005. Litigation has been filed with the Department of Justice regarding interest on the claims for the 1991 through 1993 period. CONSOL Energy believes the refund claim will be collected, although there can be no assurance that we will obtain any interest on the claim.

In 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, which was $15,000, was placed into an escrow account pending provision of financial assurance supporting CONSOL Energy water treatment obligations. The financial assurances were provided and the money was released to CONSOL Energy subsequent to June 30, 2005. CONSOL Energy recorded the funding and $8,517 for present value of the water treatment liability, resulting in $6,483 of income in the six months ended June 30, 2005.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

At June 30, 2006, CONSOL Energy and certain subsidiaries have provided the following financial guarantees. We believe that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition. The fair value of all liabilities associated with these guarantees have been properly recorded and reported in the financial statements.

 

     Total Amounts
Committed
  

Less Than

1 Year

   1-3 Years    3-5
Years
   Beyond 5
Years

Letters of Credit:

              

Employee-Related

   $ 303,620    $ 303,620    $ —      $ —      $ —  

Environmental

     76,736      76,736      —        —        —  

Gas

     16,847      16,847      —        —        —  

Other

     9,200      9,200      —        —        —  
                                  

Total Letters of Credit

   $ 406,403    $ 406,403    $ —      $ —      $ —  
                                  

Surety Bonds:

              

Employee-Related

   $ 245,501    $ 234,701    $ 10,800    $ —      $ —  

Environmental

     243,513      227,908      15,572      33      —  

Gas

     969      934      35      —        —  

Other

     6,915      6,627      288      —        —  
                                  

Total Surety Bonds

   $ 496,898    $ 470,170    $ 26,695    $ 33    $ —  
                                  

Guarantees:

              

Coal

   $ 197,816    $ 54,042    $ 47,016    $ 61,304    $ 35,454

Gas

     112,314      93,414      15,800      —        3,100

Other

     82,639      26,895      40,663      13,283      1,798
                                  

Total Guarantees

   $ 392,769    $ 174,351    $ 103,479    $ 74,587    $ 40,352
                                  

Total Commitments

   $ 1,296,070    $ 1,050,924    $ 130,174    $ 74,620    $ 40,352
                                  

Employee-related financial guarantees 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 financial guarantees have primarily been extended to support various performance bonds related to reclamation and other environmental issues. Gas financial guarantees have primarily been provided to support various performance bonds related to land usage and restorative issues. Other contingent liabilities 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 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.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

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

Capital Leases: The carrying amount reported in the balance sheet for capital leases approximates its fair value due to recording the obligation at the present value of minimum lease payments.

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

 

     June 30, 2006     December 31, 2005  
     Carrying
Amount
   

Fair

Value

    Carrying
Amount
   

Fair

Value

 

Cash and cash equivalents

   $ 345,267     $ 345,267     $ 340,640     $ 340,640  

Long-term debt

   $ (444,012 )   $ (453,838 )   $ (442,996 )   $ (468,701 )

Capital leases

   $ (37,018 )   $ (37,018 )   $ —       $ —    

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 six months ended June 30, 2006, 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 six months ended June 30, 2006, Central Appalachian aggregated segment includes the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the three and six months ended June 30, 2006, the Metallurgical aggregated segment includes the following mines: Buchanan, Amonate and V.P. #8. The Other Coal segment includes our purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to 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 2005 segment information was reclassified to conform to the 2006 presentation. Gas royalty income, gas miscellaneous revenues and expenses and various gas assets previously reported within Coal and All Other segments are now included in the Gas segment.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Industry segment results for the three months ended June 30, 2006:

 

    Northern
Appalachian
  Central
Appalachian
  Metallurgical   Other Coal     Total Coal   Gas   All Other   Corporate
Adjustments &
Eliminations
    Consolidated  

Sales—outside

  $ 467,653   $ 62,479   $ 87,532   $ 61,978     $ 679,642   $ 92,592   $ 52,156   $ —       $ 824,390  

Sales—gas royalty interest

    —       —       —       —         —       12,686     —       —         12,686  

Sales—purchased gas

    —       —       —       —         —       9,778     —       —         9,778  

Freight—outside

    —       —       —       37,689       37,689     —       —       —         37,689  

Intersegment transfers

    —       —       —       —         —       1,006     34,440     (35,446 )     —    
                                                           

Total Sales and Freight

  $ 467,653   $ 62,479   $ 87,532   $ 99,667     $ 717,331   $ 116,062   $ 86,596   $ (35,446 )   $ 884,543  
                                                           

Earnings (Loss) Before Income Taxes

  $ 99,338   $ 1,550   $ 33,091   $ (21,478 )   $ 112,501   $ 61,354   $ 3,245   $ (15,453 )   $ 161,647 (A)
                                                           

Segment asset

          $ 3,392,222   $ 968,457   $ 181,056   $ 765,203     $ 5,306,938 (B)
                                         

Depreciation, depletion and amortization

          $ 61,089   $ 8,987   $ 4,372   $ —       $ 74,448  
                                         

Capital Expenditures (including acquisitions)

          $ 98,578   $ 42,832   $ 7,872   $ —       $ 149,282  
                                         

(A) Includes equity in earnings (losses) of unconsolidated affiliates of $625 and ($12) for Gas and All Other, respectively.
(B) Includes investments in unconsolidated equity affiliates of $50,196 and $2,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

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

 

    Northern
Appalachian
  Central
Appalachian
  Metallurgical   Other Coal     Total Coal   Gas   All Other     Corporate
Adjustments &
Eliminations
    Consolidated  

Sales—outside

  $ 471,818   $ 57,756   $ 51,382   $ 42,179     $ 623,135   $ 54,898   $ 30,558     $ —       $ 708,591  

Sales—related party

    —       —       —       614       614     —       —         —         614  

Sales—gas royalty interest

    —       —       —       —         —       9,066     —         —         9,066  

Sales—purchased gas

    —       —       —       —         —       44,975     —         —         44,975  

Freight—outside

    —       —       —       31,665       31,665     —       —         —         31,665  

Intersegment transfers

    —       —       —       —         —       114     28,482       (28,596 )     —    
                                                             

Total Sales and Freight

  $ 471,818   $ 57,756   $ 51,382   $ 74,458     $ 655,414   $ 109,053   $ 59,040     $ (28,596 )   $ 794,911  
                                                             

Earnings (Loss) Before Income Taxes

  $ 63,729   $ 2,213   $ 7,218   $ (27,818 )   $ 45,342   $ 28,130   $ (1,234 )   $ (21,551 )   $ 50,687 (C)
                                                             

Segment asset

          $ 2,974,398   $ 762,469   $ 174,894     $ 512,106     $ 4,423,867 (D)
                                           

Depreciation, depletion and amortization

          $ 55,265   $ 8,112   $ 3,403     $ —       $ 66,780  
                                           

Capital Expenditures

          $ 88,790   $ 22,875   $ 1,028     $ —       $ 112,693  
                                           

(C) Includes equity in earnings (losses) of unconsolidated affiliates of ($1,207),$398 and $641 for Coal, Gas and All Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $17,264, $50,003 and $3,374 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.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Industry segment results for the six months ended June 30, 2006:

 

    Northern
Appalachian
  Central
Appalachian
  Metallurgical   Other Coal     Total Coal   Gas   All Other   Corporate
Adjustments &
Eliminations
    Consolidated  

Sales—outside

  $ 969,123   $ 129,118   $ 174,280   $ 128,014     $ 1,400,535   $ 194,604   $ 98,452   $ —       $ 1,693,591  

Sales—gas royalty interest

    —       —       —       —         —       28,493     —       —         28,493  

Sales—purchased gas

    —       —       —       —         —       32,130     —       —         32,130  

Freight—outside

    —       —       —       74,768       74,768     —       —       —         74,768  

Intersegment transfers

    —       —       —       —         —       2,417     70,477     (72,894 )     —    
                                                           

Total Sales and Freight

  $ 969,123   $ 129,118   $ 174,280   $ 202,782     $ 1,475,303   $ 257,644   $ 168,929   $ (72,894 )   $ 1,828,982  
                                                           

Earnings (Loss) Before Income Taxes

  $ 195,208   $ 8,553   $ 75,899   $ (36,308 )   $ 243,352   $ 134,880   $ 5,899   $ (29,155 )   $ 354,976 (E)
                                                           

Segment asset

          $ 3,392,222   $ 968,457   $ 181,056   $ 765,203     $ 5,306,938 (F)
                                         

Depreciation, depletion and amortization

          $ 119,653   $ 17,891   $ 8,720   $ —       $ 146,264  
                                         

Capital Expenditures (including acquisitions)

          $ 199,280   $ 83,009   $ 36,845   $ —       $ 319,134  
                                         

(E) Includes equity in earnings (losses) of unconsolidated affiliates of $772 and ($53) for Gas and All Other, respectively.
(F) Includes investments in unconsolidated equity affiliates of $50,196 and $2,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

Industry segment results for the six months ended June 30, 2005:

 

    Northern
Appalachian
  Central
Appalachian
    Metallurgical   Other Coal     Total Coal   Gas   All Other     Corporate
Adjustments &
Eliminations
    Consolidated  

Sales—outside

  $ 928,210   $ 113,449     $ 122,492   $ 89,496     $ 1,253,647   $ 123,971   $ 59,321     $ —       $ 1,436,939  

Sales—related party

    —       —         —       614       614     —       —         —         614  

Sales—gas royalty interest

    —       —         —       —         —       18,742     —         —         18,742  

Sales—purchased gas

    —       —         —       —         —       69,257     —         —         69,257  

Freight—outside

    —       —         —       61,789       61,789     —       —         —         61,789  

Intersegment transfers

    —       —         —       —         —       626     55,734       (56,360 )     —    
                                                               

Total Sales and Freight

  $ 928,210   $ 113,449     $ 122,492   $ 151,899     $ 1,316,050   $ 212,596   $ 115,055     $ (56,360 )   $ 1,587,341  
                                                               

Earnings (Loss) Before Income Taxes

  $ 154,438   $ (3,783 )   $ 32,644   $ (68,050 )   $ 115,249   $ 70,136   $ (4,761 )   $ (40,250 )   $ 140,374 (G)
                                                               

Segment asset

          $ 2,974,398   $ 762,469   $ 174,894     $ 512,106     $ 4,423,867 (H)
                                           

Depreciation, depletion and amortization

          $ 106,151   $ 17,212   $ 6,796     $ —       $ 130,159  
                                           

Capital Expenditures (including acquisitions)

          $ 130,817   $ 36,642   $ 2,103     $ —       $ 169,562  
                                           

(G) Includes equity in earnings (losses) of unconsolidated affiliates of ($1,207), $219 and $2,806 for Coal, Gas and All Other, respectively.
(H) Includes investments in unconsolidated equity affiliates of $17,264, $50,003 and $3,374 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Reconciliation of Segment Information to Consolidated Amounts

Earnings Before Income Taxes:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2006     2005     2006     2005  

Segment earnings before income taxes for total reportable business segments

   $ 173,855     $ 73,472     $ 378,232     $ 186,411  

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

     3,245       (1,234 )     5,899       (5,787 )

Incentive compensation (A)

     (7,193 )     (8,515 )     (13,038 )     (14,776 )

Stock-based compensation expense (A)

     (2,857 )     (622 )     (5,058 )     (1,797 )

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

     (5,403 )     (12,414 )     (11,059 )     (23,677 )
                                

Earnings Before Income Taxes

   $ 161,647     $ 50,687     $ 354,976     $ 140,374  
                                

 

     June 30,
     2006    2005

Total Assets:

     

Segment assets for total reportable business segments

   $ 4,360,679    $ 3,736,867

Segment assets for all other businesses

     181,056      174,894

Items excluded from segment assets:

     

Cash and other investments (A)

     282,226      5,433

Deferred tax assets

     481,058      504,136

Intangible asset—overfunded pension plan

     —        248

Bond issuance costs

     1,919      2,289
             

Total Consolidated Assets

   $ 5,306,938    $ 4,423,867
             

(A) Excludes amounts specifically related to the gas segment.

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. 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 (including recently acquired subsidiaries being added to the guarantee in accordance with the terms of the Notes) and the non-guarantor subsidiaries. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent and a guarantor subsidiary manage several assets and liabilities of all of their subsidiaries. For example, these include deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Income statement for the Three Months ended June 30, 2006:

 

    Parent     Guarantors     Non-Guarantors   Elimination     Consolidated  

Sales—Outside

  $ —       $ 775,301     $ 53,818   $ (4,729 )   $ 824,390  

Sales—Purchased Gas

    —         9,778       —       —         9,778  

Sales—Gas Royalty Interests

    —         12,686       —       —         12,686  

Freight—Outside

    —         37,689       —       —         37,689  

Other Income (including equity earnings)

    134,889       34,926       8,993     (131,088 )     47,720  
                                     

Total Revenue and Other Income

    134,889       870,380       62,811     (135,817 )     932,263  

Cost of Goods Sold and Other

         

Operating Charges

    11,884       477,017       16,751     38,254       543,906  

Purchased Gas Costs

    —         9,986       —       —         9,986  

Gas Royalty Interests’ Costs

    —         10,267       —       —         10,267  

Related Party Activity

    (1,027 )     8,494       35,229     (42,696 )     —    

Freight Expense

    —         37,689       —       —         37,689  

Selling, General and Administrative Expense

    —         20,952       959     —         21,911  

Depreciation, Depletion and Amortization

    1,654       70,838       2,114     (158 )     74,448  

Interest Expense

    5,039       924       290     —         6,253  

Taxes Other Than Income

    1,417       62,508       2,231     —         66,156  
                                     

Total Costs

    18,967       698,675       57,574     (4,600 )     770,616  
                                     

Earnings (Loss) Before Income Taxes and Minority Interest

    115,922       171,705       5,237     (131,217 )     161,647  

Income Tax Expense

    9,988       37,384       1,275     —         48,647  
                                     

Earnings (Loss) before Minority Interest

    105,934       134,321       3,962     (131,217 )     113,000  

Minority Interest

    —         (7,066 )     —       —         (7,066 )
                                     

Net Income (Loss)

  $ 105,934     $ 127,255     $ 3,962   $ (131,217 )   $ 105,934  
                                     

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Balance Sheet at June 30, 2006:

 

    Parent   Guarantors     Non-Guarantors   Elimination     Consolidated
Assets:          

Current Assets:

         

Cash and Cash Equivalents

  $ 271,855   $ 63,901     $ 9,511   $ —       $ 345,267

Accounts and Notes Receivable:

         

Trade

    —       28,480       249,586     —         278,066

Other

    6,925     22,197       3,135     —         32,257

Inventories

    —       164,960       20,017     —         184,977

Deferred Income Taxes

    144,914     —         —       —         144,914

Prepaid Expenses

    18,397     49,564       715     —         68,676
                                 

Total Current Assets

    442,091     329,102       282,964     —         1,054,157

Property, Plant and Equipment:

         

Property, Plant and Equipment

    79,655     7,257,546       80,597     —         7,417,798

Less-Accumulated Depreciation, Depletion and Amortization

    41,291     3,624,586       25,534     —         3,691,411
                                 

Property, Plant and Equipment—Net

    38,364     3,632,960       55,063     —         3,726,387

Other Assets:

         

Deferred Income Taxes

    336,144     —         —       —         336,144

Investment in Affiliates

    2,557,239     1,239,764       —       (3,744,126 )     52,877

Other

    19,787     83,865       33,721     —         137,373
                                 

Total Other Assets

    2,913,170     1,323,629       33,721     (3,744,126 )     526,394
                                 

Total Assets

  $ 3,393,625   $ 5,285,691     $ 371,748   $ (3,744,126 )   $ 5,306,938
                                 
Liabilities and Stockholders’ Equity:          

Current Liabilities:

         

Accounts Payable

  $ 132,754   $ 264     $ 14,578   $ —       $ 147,596

Accounts Payable (Recoverable)- Related Parties

    1,571,384     (1,829,005 )     257,621     —         —  

Current Portion of Long-Term Debt

    —       54,844       2,000     —         56,844

Accrued Income Taxes

    24,206     —         —       —         24,206

Other Accrued Liabilities

    131,140     444,504       10,201     —         585,845
                                 

Total Current Liabilities

    1,859,484     (1,329,393 )     284,400     —         814,491

Long-Term Debt:

         

Long-Term Debt

    248,830     132,937       11,885     —         393,652

Capital Lease Obligations

    —       30,534       —       —         30,534
                                 

Total Long-Term Debt

    248,830     163,471       11,885     —         424,186

Deferred Credits and Other Liabilities:

         

Postretirement Benefits Other Than Pensions

    —       1,597,997       —       —         1,597,997

Pneumoconiosis Benefits

    —       403,908       —       —         403,908

Mine Closing

    —       370,848       10,826     —         381,674

Workers’ Compensation

    —       139,171       —       —         139,171

Deferred Revenue

    —       19,436       —       —         19,436

Salary Retirement

    30,883     —         —       —         30,883

Reclamation

    —       4,874       24,502     —         29,376

Other

    35,366     80,250       14,199     —         129,815
                                 
Total Deferred Credits and Other Liabilities     66,249     2,616,484       49,527     —         2,732,260

Minority Interest

    —       116,939       —       —         116,939
                                 

Total Liabilities and Minority Interest

    2,174,563     1,567,501       345,812     —         4,087,876

Stockholders’ Equity

    1,219,062     3,718,190       25,936     (3,744,126 )     1,219,062
                                 

Total Liabilities and Stockholders’ Equity

  $ 3,393,625   $ 5,285,691     $ 371,748   $ (3,744,126 )   $ 5,306,938
                                 

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Income Statement for the Three Months Ended June 30, 2005:

 

    Parent     Guarantors     Non-Guarantors     Elimination     Consolidated

Sales—Outside

  $ —       $ 686,392     $ 22,199     $ —       $ 708,591

Sales—Purchased Gas

    —         44,975       —         —         44,975

Sales—Gas Royalty Interests

    —         9,066       —         —         9,066

Sales—Related Party

      614       —           614

Freight—Outside

    —         31,665       —         —         31,665

Other Income (including equity earnings)

    55,248       12,256       6,266       (51,532 )     22,238
                                     

Total Revenue and Other Income

    55,248       784,968       28,465       (51,532 )     817,149

Cost of Goods Sold and Other

         

Operating Charges

    13,437       502,934       53,076       (36,270 )     533,177

Purchased Gas Costs

    —         45,592       —         —         45,592

Gas Royalty Interests’ Costs

    —         7,026       —         —         7,026

Related Party Activity

    (63 )     (10,964 )     (25,801 )     36,828       —  

Freight Expense

    —         31,665       —         —         31,665

Selling, General and Administrative Expense

    —         18,540       257       —         18,797

Depreciation, Depletion and Amortization

    1,652       64,864       266       (2 )     66,780

Interest Expense

    4,936       2,252       1       —         7,189

Taxes Other Than Income

    757       55,047       432       —         56,236
                                     

Total Costs

    20,719       716,956       28,231       556       766,462
                                     

Earnings (Loss) Before Income Taxes and Minority Interest

    34,529       68,012       234       (52,088 )     50,687

Income Tax Expense (Benefit)

    (6,545 )     16,076       82       —         9,613
                                     

Earnings (Loss) before Minority Interest

    41,074       51,936       152       (52,088 )     41,074

Minority Interest

    —         —         —         —         —  
                                     

Net Income (Loss)

  $ 41,074     $ 51,936     $ 152     $ (52,088 )   $ 41,074
                                     

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Balance Sheet at December 31, 2005:

 

    Parent   Guarantors     Non-Guarantors     Elimination     Consolidated
Assets:          

Current Assets:

         

Cash and Cash Equivalents

  $ 308,606   $ 20,353     $ 11,681     $ —       $ 340,640

Accounts and Notes Receivable:

         

Trade

    —       41,121       235,156       —         276,277

Other

    5,737     14,318       3,285       —         23,340

Inventories

    —       121,527       19,449       —         140,976

Deferred Income Taxes

    152,730     —         —         —         152,730

Prepaid Expenses

    4,340     54,072       6,125       —         64,537
                                   

Total Current Assets

    471,413     251,391       275,696       —         998,500

Property, Plant and Equipment:

         

Property, Plant and Equipment

    79,359     6,939,949       77,352       —         7,096,660

Less-Accumulated Depreciation, Depletion and Amortization

    41,226     3,499,157       21,514       —         3,561,897
                                   

Property, Plant and Equipment—Net

    38,133     3,440,792       55,838       —         3,534,763

Other Assets:

         

Deferred Income Taxes

    367,228     —         —         —         367,228

Investment in Affiliates

    2,197,768     1,133,645       —         (3,279,152 )     52,261

Other

    33,875     75,569       25,456       —         134,900
                                   

Total Other Assets

    2,598,871     1,209,214       25,456       (3,279,152 )     554,389
                                   

Total Assets

  $ 3,108,417   $ 4,901,397     $ 356,990     $ (3,279,152 )   $ 5,087,652
                                   
Liabilities and Stockholders’ Equity:          

Current Liabilities:

         

Accounts Payable

  $ 161,405   $ 15,361     $ 20,609     $ —       $ 197,375

Accounts Payable (Recoverable)-Related Parties

    1,478,439     (1,731,002 )     252,563       —         —  

Current Portion of Long-Term Debt

    —       3,462       1,167       —         4,629

Accrued Income Taxes

    17,557     —         —         —         17,557

Other Accrued Liabilities

    107,584     468,793       7,984       —         584,361
                                   

Total Current Liabilities

    1,764,985     (1,243,386 )     282,323       —         803,922

Long-Term Debt

    248,727     176,807       12,833       —         438,367

Deferred Credits and Other Liabilities:

         

Postretirement Benefits Other Than Pensions

    —       1,592,907       —         —         1,592,907

Pneumoconiosis Benefits

    —       411,022       —         —         411,022

Mine Closing

    —       346,051       10,725       —         356,776

Workers’ Compensation

    71     134,703       (15 )     —         134,759

Deferred Revenue

    —       27,343       —         —         27,343

Salary Retirement

    33,666     37       —         —         33,703

Reclamation

    —       5,590       26,593       —         32,183

Other

    35,612     90,833       11,425       —         137,870
                                   

Total Deferred Credits and Other Liabilities

    69,349     2,608,486       48,728       —         2,726,563

Minority Interest

    —       93,444       —         —         93,444
                                   

Total Liabilities and Minority Interest

    2,083,061     1,635,351       343,884       —         4,062,296

Stockholders’ Equity

    1,025,356     3,266,046       13,106       (3,279,152 )     1,025,356
                                   

Total Liabilities and Stockholders’ Equity

  $ 3,108,417   $ 4,901,397     $ 356,990     $ (3,279,152 )   $ 5,087,652
                                   

 

27


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Income Statement for the Six Months Ended June 30, 2006:

 

     Parent     Guarantors     Non-Guarantors    Elimination     Consolidated  

Sales—Outside

   $ —       $ 1,596,414     $ 103,880    $ (6,703 )   $ 1,693,591  

Sales—Purchased Gas

     —         32,130       —        —         32,130  

Sales—Gas Royalty Interests

     —         28,493       —        —         28,493  

Freight—Outside

     —         74,768       —        —         74,768  

Other Income (including equity earnings)

     254,052       64,674       17,335      (246,892 )     89,169  
                                       

Total Revenue and Other Income

     254,052       1,796,479       121,215      (253,595 )     1,918,151  

Cost of Goods Sold and Other Operating Charges

     20,734       964,268       26,944      81,510       1,093,456  

Purchased Gas Costs

     —         32,751       —        —         32,751  

Gas Royalty Interests’ Costs

     —         23,683       —        —         23,683  

Related Party Activity

     (3,355 )     12,111       71,626      (80,382 )     —    

Freight Expense

     —         74,768       —        —         74,768  

Selling, General and Administrative Expense

     —         39,924       2,067      —         41,991  

Depreciation, Depletion and Amortization

     3,306       140,660       4,456      (2,158 )     146,264  

Interest Expense

     10,084       1,732       290      —         12,106  

Taxes Other Than Income

     3,090       130,582       4,484      —         138,156  
                                       

Total Costs

     33,859       1,420,479       109,867      (1,030 )     1,563,175  
                                       

Earnings (Loss) Before Income Taxes and Minority Interest

     220,193       376,000       11,348      (252,565 )     354,976  

Income Tax Expense (Benefit)

     (10,187 )     115,249       3,972      —         109,034  
                                       

Earnings (Loss) before Minority Interest

     230,380       260,751       7,376      (252,565 )     245,942  

Minority Interest

     —         (15,562 )     —        —         (15,562 )
                                       

Net Income (Loss)

   $ 230,380     $ 245,189     $ 7,376    $ (252,565 )   $ 230,380  
                                       

Cash Flow for the Six Months Ended June 30, 2006:

 

     Parent     Guarantors     Non-Guarantors     Elimination    Consolidated  

Net Cash Provided by Operating Activities

   $ 28,464     $ 318,935     $ 1,685     $ —      $ 349,084  

Cash Flows from Investing Activities:

           

Capital Expenditures

   $ (4,667 )   $ (285,977 )   $ (3,740 )   $ —      $ (294,384 )

Acquisition of Mon River Towing and J.A.R. Barge Lines

     —         (24,750 )     —         —        (24,750 )

Investment in Equity Affiliates

     —         103       —         —        103  

Other Investing Activities

     —         35,184         —        35,184  
                                       

Net Cash Used in Investing Activities

   $ (4,667 )   $ (275,440 )   $ (3,740 )   $ —      $ (283,847 )
                                       

Cash Flows from Financing Activities:

           

Purchase of Treasury Stock

   $ (83,631 )   $ —       $ —       $ —      $ (83,631 )

Tax Benefit from Stock-Based Compensation

     35,796       —         —         —        35,796  

Dividends Paid

     (25,784 )     —         —         —        (25,784 )

Other Financing Activities

     13,071       53       (115 )     —        13,009  
                                       

Net Cash (Used in) Provided by Financing Activities

   $ (60,548 )   $ 53     $ (115 )   $ —      $ (60,610 )
                                       

 

28


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

Income Statement for the Six Months Ended June 30, 2005:

 

     Parent     Guarantors     Non-Guarantors     Elimination     Consolidated

Sales—Outside

   $ —       $ 1,391,278     $ 45,661     $ —       $ 1,436,939

Sales—Purchased Gas

     —         69,257       —         —         69,257

Sales—Gas Royalty Interests

     —         18,742       —         —         18,742

Sales—Related Party

       614           614

Freight—Outside

     —         61,789       —         —         61,789

Other Income (including equity earnings)

     142,081       29,704       12,513       (137,502 )     46,796
                                      

Total Revenue and Other Income

     142,081       1,571,384       58,174       (137,502 )     1,634,137

Cost of Goods Sold and Other Operating Charges

     23,882       994,622       105,563       (71,913 )     1,052,154

Purchased Gas Costs

     —         70,086       —         —         70,086

Gas Royalty Interests’ Costs

     —         14,463       —         —         14,463

Related Party Activity

     (1,178 )     (27,111 )     (51,165 )     79,454       —  

Freight Expense

     —         61,789       —         —         61,789

Selling, General and Administrative Expense

     —         34,701       485       —         35,186

Depreciation, Depletion and Amortization

     3,174       128,321       521       (1,857 )     130,159

Interest Expense

     10,355       3,757       1       —         14,113

Taxes Other Than Income

     2,420       112,482       911       —         115,813
                                      

Total Costs

     38,653       1,393,110       56,316       5,684       1,493,763
                                      

Earnings (Loss) Before Income Taxes and Minority Interest

     103,428       178,274       1,858       (143,186 )     140,374

Income Tax Expense (Benefit)

     (12,858 )     36,296       650       —         24,088
                                      

Earnings (Loss) before Minority Interest

     116,286       141,978       1,208       (143,186 )     116,286

Minority Interest

     —         —         —         —         —  
                                      

Net Income (Loss)

   $ 116,286     $ 141,978     $ 1,208     $ (143,186 )   $ 116,286
                                      

Cash Flow for the Six Months Ended June 30, 2005:

 

     Parent     Guarantors     Non-Guarantors     Elimination    Consolidated  

Net Cash (Used in) Provided by Operating Activities

   $ (11,466 )   $ 169,078     $ (164 )   $ —      $ 157,448  
                                       

Cash Flows from Investing Activities:

           

Capital Expenditures

   $ (2,783 )   $ (166,779 )   $ —       $ —      $ (169,562 )

Investment in Equity Affiliates

     (273 )     (6,565 )     —         —        (6,838 )

Other Investing Activities

     18,715       4,404         —        23,119  
                                       

Net Cash Used in Investing Activities

   $ 15,659     $ (168,940 )   $ —       $ —      $ (153,281 )
                                       

Cash Flows from Financing Activities:

           

Payments on Short-Term Debt

   $ (1,700 )   $       $       $      $ (1,700 )

Dividends Paid

     (25,468 )     —         —         —        (25,468 )

Other Financing Activities

     21,437       (166 )     —         —        21,271  
                                       

Net Cash (Used in) Financing Activities

   $ (5,731 )   $ (166 )   $ —       $ —      $ (5,897 )
                                       

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2006

(Dollars in thousands, except per share data)

 

NOTE 15—RECENT ACCOUNTING PRONOUNCEMENTS:

In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109” (FIN 48). FIN 48 provides a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. We are in the process of evaluating the financial impact of adopting FIN 48, which will be effective for us beginning in 2007.

 

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

General

CONSOL Energy had net income of $106 million for the three months ended June 30, 2006 compared to $41 million in the 2005 period. Net income for the 2006 period was improved primarily due to increased average sales prices for both coal and gas. Coal unit costs also decreased in the period-to-period comparison improving net income. Decreased coal unit costs were attributable to lower other post employment benefit costs, workers’ compensation costs, salary pension costs, combined fund costs, offset, in part, by higher contract mining fees, higher supply costs and higher labor costs. Net income for 2006 was also improved relative to 2005 due to expenses related to the Buchanan Mine fire that were incurred in the 2005 period. These costs were not incurred in the 2006 period. CONSOL Energy also recognized $25 million of business interruption insurance proceeds in other income related to the Buchanan Mine fire. These increases in net income were offset, in part, by higher gas unit costs. Higher gas unit costs were primarily attributable to increased firm transportation costs and power costs. Net income for the three months ended June 30, 2006 also included higher income taxes than the 2005 period due primarily to higher pre-tax earnings.

Total coal sales for the three months ended June 30, 2006 were 17.5 million tons, of which 17.2 million tons were produced by CONSOL Energy operations, consolidated variable interest entities, or sold from inventory of company produced coal. This compares with total coal sales of 17.4 million tons for the three months ended June 30, 2005, of which 17.0 million tons were produced by CONSOL Energy operations, by our equity affiliates or sold from inventory of company-produced coal. Sales of company produced coal increased in the 2006 period due to higher coal production, additional spot coal sales and advancement of 2006 customer commitments.

Produced coalbed methane gas sales volumes, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 21.1% to 13.6 billion cubic feet in the 2006 period compared with 11.3 billion cubic feet in the 2005 period. This increase was primarily due to the 2005 period sales volumes being negatively impacted by the shutdown of Buchanan Mine due to the mine fire. Sales volumes in the 2006 period also increased as a result of additional wells coming online from our on-going drilling program. Our average sales price for coalbed methane gas, including sales of equity affiliates increased 38.8% to $6.83 per thousand cubic feet in the 2006 period compared with $4.92 per thousand cubic feet in the 2005 period. The increase in average sales price is a result of CNX Gas, an 81.5% owned subsidiary, exposing a larger portion of sales volumes to prevailing market prices in the current period compared to the prior period, where a large portion of production was locked in at lower prices than the current period market prices.

On May 4, 2006, CONSOL Energy’s Board of Directors declared a two-for-one stock split of the common stock payable on or about May 31, 2006 to shareholders of record on May 15, 2006. The stock split was effected in the form of a stock dividend. This stock split resulted in the issuance of approximately 92.5 million additional shares of common stock. The stock split also resulted in additional shares being available for awards under the CONSOL Energy Inc. Equity Incentive Plan.

Mine accidents involving multiple fatalities occurred earlier this year in West Virginia at mines operated by other coal companies. These accidents attracted widespread public attention and have resulted in both federal government and some state government changes to statutory and regulatory control of mine safety, particularly for underground mines. Because nearly all of our mines are underground, these legislative and regulatory changes could affect our performance.

The actions taken thus far by federal and state governments include requiring: the caching of additional supplies of self-contained self rescuer (SCSR) devices underground; the purchase and installation during the next several years of electronic communication and personal tracking devices underground; the installation, in some states of rescue chambers – structures designed to provide refuge for groups of miners for long periods of time during a mine emergency when evacuation from the mine is not possible; and additional training and testing requirements that are expected to create a need to hire additional employees.

 

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In reviewing actions taken to date, we estimate that implementation of these new requirements could cost $10 million to $37 million during the period from now until the end of 2007. The actual costs will depend primarily on: the number of additional SCSR oxygen units purchased; the design requirements as well as the extent of deployment of rescue chambers; final interpretation of other regulatory requirements; and final approval of mine-by-mine implementation plans. Nearly half the estimated additional costs are related to the purchase of additional SCSR oxygen units.

We did not have material expense or cost related to these regulatory requirements during the reporting period. We also are reviewing our coal sales agreements to determine the degree to which costs related to these regulatory requirements may be passed through to customers. While the amount will vary from contract to contract, we believe that some portion of the cost of implementation can be passed to the customer in most of our existing sales agreements.

Results of Operations

Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005

Net Income

Net income changed primarily due to the following items (table in millions):

 

     2006
Period
   2005
Period
   Dollar
Variance
   Percentage
Change

Coal Sales-Produced and Purchased

   $ 679    $ 623    $ 56    9.0%

Produced Gas Sales

     92      55      37    67.3%

Gas Royalty Interest

     13      9      4    44.4%

Purchased Gas Sales

     10      45      (35)    (77.8)%

Other Sales and Other Income

     138      85      53    62.4%
                       

Total Revenue and Other Income

     932      817      115    14.1%

Coal Cost of Goods Sold—Produced and Purchased

     421      426      (5)    (1.2)%

Produced Gas Cost of Goods Sold

     26      20      6    30.0%

Gas Royalty Interest Costs of Goods Sold

     10      7      3    42.9%

Purchased Gas Cost of Goods Sold

     10      46      (36)    (78.3)%

Other Cost of Goods Sold

     97      87      10    11.5%
                       

Total Cost of Goods Sold

     564      586      (22)    (3.8)%

Other

     206      180      26    14.4%
                       

Total Costs

     770      766      4    0.5%
                       

Earnings Before Income Taxes and Minority Interest

     162      51      111    217.6%

Income Tax Expense

     49      10      39    390.0%
                       

Earnings Before Minority Interest

     113      41      72    175.6%

Minority Interest

     (7)      —        (7)    (100.0)%
                       

Net Income

   $ 106    $ 41    $ 65    158.5%
                       

Net income for the 2006 period was improved primarily due to increased average sales prices for both coal and gas. Coal unit costs also decreased in the period-to-period comparison improving net income. Decreased coal unit costs were attributable to lower other post employment benefit costs, workers’ compensation costs, salary pension costs, combined fund costs, offset, in part, by higher contract mining fees, higher supply costs and higher labor costs. Net income for 2006 was also improved relative to 2005 due to expenses related to the Buchanan Mine fire that were incurred in the 2005 period. These costs were not incurred in the 2006 period. CONSOL

 

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Energy also recognized $25 million of business interruption insurance proceeds in other income related to the Buchanan Mine fire. These increases in net income were offset, in part, by higher gas unit costs. Higher gas unit costs were primarily attributable to higher firm transportation costs and higher power costs. Net income for the three months ended June 30, 2006 also included higher income taxes than the 2005 period due primarily to higher pre-tax earnings.

Revenue

Revenue and other income increased due to the following items:

 

     2006
Period
   2005
Period
   Dollar
Variance
    Percentage
Change

Sales

          

Produced Coal (including related party)

   $ 661    $ 606    $ 55     9.1%

Purchased Coal

     18      17      1     5.9%

Produced Gas

     92      55      37     67.3%

Gas Royalty Interest

     13      9      4     44.4%

Purchased Gas

     10      45      (35 )   (77.8)%

Industrial Supplies

     33      22      11     50.0%

Other

     19      9      10     111.1%
                        

Total Sales

     846      763      83     10.9%

Freight Revenue (including related party)

     38      32      6     18.8%

Other Income

     48      22      26     118.2%
                        

Total Revenue and Other Income

   $ 932    $ 817    $ 115     14.1%
                        

The increase in company produced coal sales revenue, including related party, during the 2006 period was due mainly to the increase in average sales price per ton.

 

    

2006

Period

  

2005

Period

   Variance   

Percentage

Change

Produced Tons Sold (in millions)

     17.2      17.0      0.2    1.2%

Average Sales Price Per Ton

   $ 38.40    $ 35.66    $ 2.74    7.7%

The increase in average sales price primarily reflects stronger prices negotiated in 2005 and early 2006 resulting from an overall improvement in prices in the eastern coal market for domestic and foreign power generators and steel producers. Sales of company produced coal increased in the 2006 period due to higher coal production, additional spot coal sales and advancement of 2006 customer commitments. The 2005 period production and sales volumes were impacted by the Buchanan Mine fire that occurred on February 14, 2005. The mine was temporarily sealed in order to extinguish the fire. Coal production resumed on June 16, 2005.

The increase in company-purchased coal sales revenue was due to higher average sales prices.

 

    

2006

Period

  

2005

Period

   Variance   

Percentage

Change

Purchased Tons Sold (in millions)

     0.3      0.3       —      —  

Average Sales Price Per Ton

   $ 57.22    $ 49.62    $      7.60    15.3%

The increase in produced gas sales revenue was primarily due to a higher average sales price per thousand cubic feet and increased volumes sold in the 2006 period compared to the 2005 period.

 

    

2006

Period

  

2005

Period

   Variance   

Percentage

Change

Produced Gas Sales Volumes (in billion cubic feet)

     13.6      11.2      2.4    21.4%

Average Sales Price Per thousand cubic feet (including effects of derivative transactions)

   $ 6.82    $ 4.91    $ 1.91    38.9%

 

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The increase in average sales price is the result of CNX Gas, an 81.5% owned subsidiary, exposing a larger portion of sales volumes to prevailing market prices in the current period compared to the prior period. The prior period had a large portion of production locked in at lower prices than the current period market prices. Periodically, CNX Gas enters into physical gas supply transactions with both gas marketers and end users for terms varying in length. CNX Gas also enters into various gas swap transactions that qualify as financial cash flow hedges. These gas swap transactions exist parallel to the underlying physical transactions. For the three months ended June 30, 2006, these physical and financial hedges represented approximately 4.6 billion cubic feet of our gas sales volumes at an average price of $7.73 per million cubic feet, compared to approximately 9.8 billion cubic feet at an average price of $4.62 per million cubic feet for the three months ended June 30, 2005. The 2006 period sales volumes were higher than the 2005 period sales volumes. This was due primarily to the 2005 period sales volumes being negatively impacted by the shutdown of Buchanan Mine due to the mine fire. Sales volumes in the 2006 period also increased as a result of additional wells coming online from our on-going drilling program.

 

    

2006

Period

  

2005

Period

   Variance   

Percentage

Change

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     1.9      1.6      0.3    18.8%

Average Sales Price Per Thousand Cubic Feet

   $ 6.82    $ 5.66    $ 1.16    20.5%

Included in royalty interest gas sales are the revenues related to the portion of production belonging to royalty interest owners sold, on their behalf, by CNX Gas. The increase in average sales price is the result of CNX Gas exposing a larger portion of sales volumes to prevailing market prices in the current period compared to the prior period, where a large portion of production was locked in at lower prices than the current period market prices.

 

    

2006

Period

  

2005

Period

   Variance   

Percentage

Change

Purchased Gas Sales Volumes (in billion cubic feet)

     1.4      6.4      (5.0)    (78.1)%

Average Sales Price Per thousand cubic feet

   $ 6.80    $ 7.03    $ (0.23)    (3.3)%

Included in purchased gas sales revenue are volumes of gas we simultaneously purchased from and sold to the same counterparties between the segmentation and interruptible pools on the Columbia Gas Transmission Corporation (TCO) pipeline in order to satisfy obligations to certain customers. In accordance with the Emerging Issues Task Force (EITF) on Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, we have historically increased our revenues and our costs. However, because of the January 1, 2006 application of EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty,” reported purchased gas sales and volumes have decreased. EITF 04-13 requires matching buy/sell transactions, done in contemplation of one another, that were committed to on or after January 1, 2006 to be combined and reflected as transportation expense. The net result of transactions that meet the above criteria are reflected in Costs of Goods Sold and Other Charges as transportation expense in the current year. Additionally, there are some small volumes of gas we purchased from third party producers at market prices, less our gathering charge.

The $11 million increase in revenues from the sale of industrial supplies was primarily due to increased sales volumes and higher average sales prices.

The $10 million increase in other sales was primarily attributable to revenues from river barge towing. CONSOL Energy has an initiative to increase towing revenues for outside parties now that we are no longer restricted under the Jones Act Bowater exemption. Prior to February 2004, foreign ownership of CONSOL Energy exceeded 25%, prohibiting us from providing river barge towing to third parties. In January 2006, CONSOL Energy completed the acquisition of Mon River Towing, which contributed to the increase in revenues.

 

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Freight revenue, outside and related party, is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to which CONSOL Energy contractually provides transportation services. Freight revenue is the amount billed to customers for transportation costs incurred.

Other income consists of interest income, gain or loss on the disposition of assets, equity in earnings of affiliates, service income, royalty income, derivative gains and losses, rental income and miscellaneous income.

 

    

2006