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, 2010

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)

 

(I.R.S. Employer

Identification No.)

1000 CONSOL Energy Drive

Canonsburg, PA 15317-6506

(724) 485-4000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller Reporting Company  ¨

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 23, 2010

Common stock, $0.01 par value   225,794,229

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
PART I FINANCIAL INFORMATION

Item 1.

  

Condensed Financial Statements

  
  

Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009

   3
  

Consolidated Balance Sheets at June 30, 2010 and December 31, 2009

   4
  

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2010

   6
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   7
  

Notes to Unaudited Consolidated Financial Statements

   8

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   39

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   83

Item 4.

  

Controls and Procedures

   84
PART II OTHER INFORMATION

Item 1.

  

Legal Proceedings

   86

Item 5.

  

Other Information

   86

Item 6.

  

Exhibits

   88

 

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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,
 
     2010     2009     2010     2009  

Sales—Outside

   $ 1,220,116      $ 994,141      $ 2,389,630      $ 2,144,385   

Sales—Gas Royalty Interests

     14,151        8,666        28,490        21,298   

Sales—Purchased Gas

     1,740        1,166        4,756        2,631   

Freight—Outside

     28,075        27,087        59,275        58,003   

Other Income

     25,265        39,505        47,256        62,999   
                                

Total Revenue and Other Income

     1,289,347        1,070,565        2,529,407        2,289,316   

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

     818,771        642,856        1,585,633        1,310,478   

Acquisition and Financing Fees

     17,515        —          64,078        —     

Gas Royalty Interests Costs

     11,528        6,458        23,725        17,049   

Purchased Gas Costs

     1,339        390        3,647        1,920   

Freight Expense

     28,075        27,087        59,275        58,003   

Selling, General and Administrative Expenses

     39,045        35,627        69,175        66,443   

Depreciation, Depletion and Amortization

     132,764        107,475        251,950        213,694   

Interest Expense

     65,038        6,945        73,183        15,457   

Taxes Other Than Income

     79,124        70,472        160,425        148,311   
                                

Total Costs

     1,193,199        897,310        2,291,091        1,831,355   
                                

Earnings Before Income Taxes

     96,148        173,255        238,316        457,961   

Income Taxes

     25,248        54,416        59,534        134,151   
                                

Net Income

     70,900        118,839        178,782        323,810   

Less: Net Income Attributable to Noncontrolling Interest

     (4,232     (5,500     (11,845     (14,652
                                

Net Income Attributable to CONSOL Energy Inc. Shareholders

   $ 66,668      $ 113,339      $ 166,937      $ 309,158   
                                

Earnings Per Share:

        

Basic

   $ 0.30      $ 0.63      $ 0.82      $ 1.71   
                                

Dilutive

   $ 0.29      $ 0.62      $ 0.81      $ 1.69   
                                

Weighted Average Number of Common Shares Outstanding:

        

Basic

     225,715,539        180,644,498        203,842,526        180,610,676   
                                

Dilutive

     228,081,103        183,073,413        206,311,383        182,833,111   
                                

Dividends Paid Per Share

   $ 0.10      $ 0.10      $ 0.20      $ 0.20   
                                

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

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     (Unaudited)
June  30,
2010
   December  31,
2009

ASSETS

     

Current Assets:

     

Cash and Cash Equivalents

   $ 34,313    $ 65,607

Accounts and Notes Receivable:

     

Trade

     245,796      317,460

Other Receivables

     14,882      15,983

Accounts Receivable—Securitized

     200,000      50,000

Inventories

     293,850      307,597

Deferred Income Taxes

     86,200      73,383

Recoverable Income Taxes

     36,145      —  

Prepaid Expenses

     132,658      161,006
             

Total Current Assets

     1,043,844      991,036

Property, Plant and Equipment:

     

Property, Plant and Equipment

     14,589,592      10,681,955

Less—Accumulated Depreciation, Depletion and Amortization

     4,667,316      4,557,665
             

Total Property, Plant and Equipment—Net

     9,922,276      6,124,290

Other Assets:

     

Deferred Income Taxes

     402,078      425,297

Investment in Affiliates

     87,124      83,533

Other

     232,769      151,245
             

Total Other Assets

     721,971      660,075
             

TOTAL ASSETS

   $ 11,688,091    $ 7,775,401
             

 

 

 

 

 

 

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

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     (Unaudited)
June  30,
2010
    December 31,
2009
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts Payable

   $ 265,089      $ 269,560   

Short-Term Notes Payable

     358,550        472,850   

Current Portion of Long-Term Debt

     46,304        45,394   

Accrued Income Taxes

     —          27,944   

Borrowings Under Securitization Facility

     200,000        50,000   

Other Accrued Liabilities

     738,240        612,838   
                

Total Current Liabilities

     1,608,183        1,478,586   

Long-Term Debt:

    

Long-Term Debt

     3,111,079        363,729   

Capital Lease Obligations

     57,870        59,179   
                

Total Long-Term Debt

     3,168,949        422,908   

Deferred Credits and Other Liabilities:

    

Postretirement Benefits Other Than Pensions

     2,688,122        2,679,346   

Pneumoconiosis Benefits

     187,285        184,965   

Mine Closing

     390,214        397,320   

Gas Well Closing

     113,825        85,992   

Workers’ Compensation

     156,420        152,486   

Salary Retirement

     165,127        189,697   

Reclamation

     51,902        27,105   

Other

     133,971        132,517   
                

Total Deferred Credits and Other Liabilities

     3,886,866        3,849,428   
                

TOTAL LIABILITIES

     8,663,998        5,750,922   

Stockholders’ Equity:

    

Common Stock, $.01 Par Value; 500,000,000 Shares Authorized, 227,289,426 Issued and 225,754,286 Outstanding at June 30, 2010; 183,014,426 Issued and 181,086,267 Outstanding at December 31, 2009

     2,273        1,830   

Capital in Excess of Par Value

     2,145,483        1,033,616   

Preferred Stock, 15,000,000 authorized, None issued and outstanding

     —          —     

Retained Earnings

     1,566,921        1,456,898   

Accumulated Other Comprehensive Loss

     (626,940     (640,504

Common Stock in Treasury, at Cost—1,535,140 Shares at June 30, 2010 and 1,928,159 Shares at December 31, 2009

     (55,154     (66,292
                

Total CONSOL Energy Inc. Stockholders’ Equity

     3,032,583        1,785,548   

Noncontrolling Interest

     (8,490     238,931   
                

TOTAL EQUITY

     3,024,093        2,024,479   
                

TOTAL LIABILITIES AND EQUITY

   $ 11,688,091      $ 7,775,401   
                

 

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)
    Accumulated
Other
Comprehensive
Income
(Loss)
    Common
Stock in
Treasury
    Total
CONSOL
Energy Inc.
Stockholders’
Equity
    Non-
Controlling
Interest
    Total
Equity
 

Balance at December 31, 2009

  $ 1,830   $ 1,033,616      $ 1,456,898      $ (640,504   $ (66,292   $ 1,785,548      $ 238,931      $ 2,024,479   
                                                             

(Unaudited)

               

Net Income

    —       —          166,937        —          —          166,937        11,845        178,782   

Treasury Rate Lock (Net of $25 Tax)

    —       —          —          (44     —          (44     —          (44

Gas Cash Flow Hedge (Net of $5,428 Tax)

    —       —          —          (13,806     —          (13,806     5,252        (8,554

Actuarially Determined Long-Term Liability Adjustments (Net of $5,853 Tax)

    —       —          —          9,388        —          9,388        5        9,393   

Purchase of CNX Gas Noncontrolling Interest

    —       —          —          18,026        —          18,026        (18,026     —     
                                                             

Comprehensive Income (Loss)

    —       —          166,937        13,564        —          180,501        (924     179,577   

Issuance of Treasury Stock

    —       —          (16,220     —          11,138        (5,082     —          (5,082

Issuance of Common Stock

    443     1,828,419        —          —          —          1,828,862        —          1,828,862   

Issuance of CNX Gas Stock

    —       —          —          —          —          —          2,178        2,178   

Purchase of CNX Gas Noncontrolling Interest

    —       (746,052     —          —          —          (746,052     (244,982     (991,034

Tax Benefit From Stock-Based Compensation

    —       9,523        —          —          —          9,523        —          9,523   

Stock-Based Compensation Awards to CNX Gas

    —       2,126        —          —          —          2,126        (1,771     355   

Amortization of Stock-Based Compensation Awards

    —       17,851        —          —          —          17,851        2,198        20,049   

Net Change in Crown Drilling Noncontrolling Interest

    —       —          —          —          —          —          (4,120     (4,120

Dividends ($0.20 per share)

    —       —          (40,694     —          —          (40,694     —          (40,694
                                                             

Balance at June 30, 2010

  $ 2,273   $ 2,145,483      $ 1,566,921      $ (626,940   $ (55,154   $ 3,032,583      $ (8,490   $ 3,024,093   
                                                             

 

 

 

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,
 
     2010     2009  

Operating Activities:

    

Net Income

   $ 178,782      $ 323,810   

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

    

Depreciation, Depletion and Amortization

     251,950        213,694   

Stock-Based Compensation

     20,049        21,783   

Gain on Sale of Assets

     (866     (9,788

Amortization of Mineral Leases

     3,981        2,398   

Deferred Income Taxes

     7,740        34,488   

Equity in Earnings of Affiliates

     (8,692     (6,800

Changes in Operating Assets:

    

Accounts and Notes Receivable

     (76,977     100,554   

Inventories

     13,607        (96,845

Prepaid Expenses

     4,712        18,505   

Changes in Other Assets

     19,475        5,347   

Changes in Operating Liabilities:

    

Accounts Payable

     25,409        (64,959

Other Operating Liabilities

     64,643        45,117   

Changes in Other Liabilities

     (18,008     (30,977

Other

     20,037        9,919   
                

Net Cash Provided by Operating Activities

     505,842        566,246   
                

Investing Activities:

    

Capital Expenditures

     (577,625     (496,419

Acquisition of Dominion Exploration and Production Business

     (3,475,665     —     

Purchase of CNX Gas Noncontrolling Interest

     (991,034     —     

Proceeds from Sales of Assets

     2,487        48,184   

Net Investment in Equity Affiliates

     5,101        2,090   
                

Net Cash Used in Investing Activities

     (5,036,736     (446,145
                

Financing Activities:

    

Payments on Short-Term Borrowings

     (114,300     (105,700

Payments on Miscellaneous Borrowings

     (5,590     (9,282

Proceeds from Securitization Facility

     150,000        —     

Proceeds from Issuance of Long-Term Notes

     2,750,000        —     

Tax Benefit from Stock-Based Compensation

     9,714        397   

Dividends Paid

     (40,694     (36,128

Proceeds from Issuance of Common Stock

     1,828,862        —     

Issuance of Treasury Stock

     2,175        611   

Debt Issuance and Financing Fees

     (80,567     —     

Noncontrolling Interest Member Distribution

     —          (200
                

Net Cash Provided By (Used in) Financing Activities

     4,499,600        (150,302

Net Decrease in Cash and Cash Equivalents

     (31,294     (30,201

Cash and Cash Equivalents at Beginning of Period

     65,607        138,512   
                

Cash and Cash Equivalents at End of Period

   $ 34,313      $ 108,311   
                

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

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(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 and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2009 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, 2009 included in CONSOL Energy’s Form 10-K.

On March 31, 2010, CONSOL Energy issued 44,275,000 shares of common stock, which generated net proceeds of $1,828,862 to fund, in part, the acquisition of the Appalachian oil and gas exploration and production business of Dominion Resources, Inc. (Dominion Acquisition). The acquisition transaction closed April 30, 2010.

Basic earnings per share are computed by dividing net income by the weighted average shares outstanding during the reporting period. Dilutive 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 potential dilutive common shares outstanding during the period. The number of additional shares is calculated by assuming that restricted stock units and performance share units were converted, and outstanding stock options were exercised and that the proceeds from such activity were used to acquire shares of common stock at the average market price during the reporting period. The table below sets forth the outstanding options, unvested restricted stock units, and unvested performance stock units that have been excluded from the computation of the diluted earnings per share because their effect would be anti-dilutive:

 

     For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
     2010    2009    2010    2009

Anti-Dilutive Options

   822,749    1,659,105    822,749    1,659,695

Anti-Dilutive Restricted Stock Units

   1,960    4,716    1,960    5,096

Anti-Dilutive Performance Stock Units

   —      33,364    —      120,645
                   
   824,709    1,697,185    824,709    1,785,436
                   

Options exercised during the three months ended June 30, 2010 and 2009 were 62,813 shares and 38,413 shares, respectively. The weighted average exercise price per share of the options exercised during the three months ended June 30, 2010 and 2009 was $15.56 and $13.42, respectively. Additionally, during the three months ended June 30, 2010, and 2009, respectively, 28,395 and 25,668 fully vested restricted stock awards were released.

Options exercised during the six months ended June 30, 2010 and 2009 were 122,793 shares and 57,087 shares, respectively. The weighted average exercise price per share of the options exercised during the six months ended June 30, 2010 and 2009 was $18.02 and $11.69, respectively. Additionally, during the six months ended June 30, 2010, and 2009, respectively, 377,590 and 81,672 fully vested restricted stock awards were released.

 

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Net income attributable to CONSOL Energy Inc. shareholders

   $ 66,668    $ 113,339    $ 166,937    $ 309,158
                           

Weighted average shares of common stock outstanding:

           

Basic

     225,715,539      180,644,498      203,842,526      180,610,676

Effect of stock-based compensation awards

     2,365,564      2,428,915      2,468,857      2,222,435
                           

Dilutive

     228,081,103      183,073,413      206,311,383      182,833,111
                           

Earnings per share:

           

Basic

   $ 0.30    $ 0.63    $ 0.82    $ 1.71
                           

Dilutive

   $ 0.29    $ 0.62    $ 0.81    $ 1.69
                           

We have evaluated all subsequent events through the date the financial statements were issued. No material recognized or non-recognized subsequent events were identified.

NOTE 2—ACQUISITIONS AND DISPOSITIONS:

On April 30, 2010, CONSOL Energy completed the Dominion Acquisition for a cash payment of $3,474,198, which includes approximately $1,467 of unsettled post closing adjustments, which was principally allocated to oil and gas properties, wells and well related equipment. The acquisition, which was accounted for under the Business Combination Topic of the FASB Accounting Standards Codification, includes approximately 1 trillion cubic feet equivalents (Tcfe) of net proved reserves and 1.46 million acres of oil and gas rights within the Appalachian Basin. Included in the acreage holdings are approximately 500 thousand prospective net Marcellus Shale acres located predominantly in southwestern Pennsylvania and northern West Virginia. Dominion is a producer and transporter of natural gas as well as a provider of electricity and related services. The acquisition is expected to enhance CONSOL Energy’s position in the strategic Marcellus Shale fairway by increasing its development assets.

 

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The following table summarizes the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition. CONSOL Energy continues to evaluate assets acquired and liabilities assumed which may result in adjustments to the preliminary values presented below.

 

     Preliminary
Estimates of
Acquisition Date
Fair Value

Assets

  

Current Assets:

  

Inventory

   $ 301

Prepaid Expenses

     2,480
      

Total Current Assets

     2,781

Property, plant and equipment

     3,540,683

Total Assets

   $ 3,543,464
      

Liabilities

  

Current Liabilities:

  

Other Accrued Liabilities

   $ 10,114

Deferred Credits and Other Liabilities:

  

Gas Well Closing

     55,248

Postretirement Benefits Other Than Pension

     2,800

Salary Retirement

     900

Other

     204
      

Total Deferred Credits and Other Liabilities

     59,152

Total Liabilities

   $ 69,266
      

Net Assets Acquired

   $ 3,474,198
      

The results of operations of the acquired entities are included in CONSOL Energy’s Consolidated Statements of Income as of May 1, 2010. Net revenues and net income resulting from the Dominion Acquisition that were included in CONSOL Energy’s operating results were $33,395 and $618, respectively, for the three and six months ended June 30, 2010.

The unaudited pro forma results for the periods presented below are prepared as if the transaction occurred at the beginning of each period presented. Pro forma adjustments include estimated operating results, additional interest related to the bond issuance and 44,275,000 additional shares issued.

 

     For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
     2010    2009    2010    2009

Revenue

   1,302,867    1,107,831    2,596,427    2,376,309

Earnings Before Taxes

   94,080    110,823    184,904    332,318

Net Income

   65,171    69,493    128,277    220,141

Basic Earnings Per Share

   0.29    0.31    0.52    0.98

Dilutive Earnings Per Share

   0.29    0.31    0.51    0.97

The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition of the interest in these entities had been completed as of the beginning of each fiscal period presented, nor are they necessarily indicative of future consolidated results.

On June 1, 2010, CONSOL Energy completed the acquisition of CNX Gas outstanding common stock for a cash payment of $966,811 pursuant to a tender offer followed by a short-form merger in which CNX Gas became a wholly owned subsidiary. All of the shares of CNX Gas that were not already owned by CONSOL Energy were acquired at a

 

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price of $38.25 per share. CONSOL Energy previously owned approximately 83.3% of the approximately 151 million shares of CNX Gas common stock outstanding. An additional $24,223 cash payment was made to cancel previously vested CNX Gas stock options. CONSOL Energy financed the acquisition of CNX Gas shares by means of internally generated funds, borrowings under its credit facilities and/or proceeds from its recently closed offering of common stock.

In 2010, CONSOL Energy incurred $17,515 and $64,078 of acquisition-related costs as a direct result of the Dominion and CNX Gas Acquisitions for the three months and six months ended June 30, 2010, respectively. These expenses have been included within Acquisition and Financing Fees on the Consolidated Statements of Income for the period ended June 30, 2010.

In June 2010, CONSOL Energy paid Yukon Pocahontas Coal Company $30,000 cash to acquire certain coal reserves and $20,000 cash in advanced royalty payments as per the settlement referenced in “Note 11—Commitments and Contingencies.”

In March 2010, CONSOL Energy completed the sale of Jones Fork Mining Complex as part of a litigation settlement with Kentucky Fuel Corporation. No cash proceeds were received and $11,585 of litigation settlement expense was recorded in Cost of Goods Sold and Other Operating Charges. The loss recorded was net of $8,700 related to the fair value of estimated amounts to be collected related to an override royalty on future mineable and merchantable coal extracted and sold from the property.

In June 2009, CONSOL Energy recognized the fair value of the remaining lease payments in the amount of $11,848 in accordance with the Exit or Disposal Cost Obligations Topic of the FASB Accounting Standards Codification related to the Company’s previous headquarters. This liability was recorded in Other Liabilities on the consolidated balance sheet at June 30, 2009. Total expense related to this transaction was $13,374 which was recognized in Cost of Goods Sold and Other Operating Charges. This amount included the fair value of the remaining lease payments of $11,848 as well as the removal of a related asset of $1,526. Additionally, $5,832 was recognized in Other Income for the acceleration of a deferred gain associated with the initial sale-leaseback of the premises that occurred in 2005.

NOTE 3—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,
 
     2010     2009     2010     2009     2010     2009     2010     2009  

Service cost

   $ 3,736      $ 3,302      $ 7,213      $ 6,169      $ 2,808      $ 2,949      $ 6,540      $ 6,327   

Interest cost

     9,369        9,082        18,597        17,741        40,874        35,991        81,366        75,726   

Expected return on plan assets

     (9,206     (9,245     (18,524     (18,315     —          —          —          —     

Amortization of prior service (credits)

     (183     (277     (367     (554     (11,604     (11,604     (23,207     (23,207

Recognized net actuarial loss

     8,070        5,692        15,935        11,131        17,674        10,209        35,072        25,178   
                                                                

Net periodic benefit cost

   $ 11,786      $ 8,554      $ 22,854      $ 16,172      $ 49,752      $ 37,545      $ 99,771      $ 84,024   
                                                                

 

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For the six months ended June 30, 2010, $32,340 in contributions were paid to the pension trust and to pension benefits from operating cash flows. CONSOL Energy expects to contribute to the pension trust using prudent funding methods. Currently, depending on asset values and asset returns held in the trust, we expect to contribute approximately $72,000 to our pension trust in 2010.

CONSOL Energy does not expect to contribute to the other postemployment benefit plan in 2010. We intend to pay benefit claims as they become due. For the six months ended June 30, 2010, $76,555 of other postemployment benefits have been paid.

The Dominion Acquisition resulted in an initial increase of $900 and $2,800 in the pension and other postretirement liabilities. The acquisition did not significantly increase net periodic benefit costs in the three or six months ended June 30, 2010.

NOTE 4—COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS:

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,
 
     2010     2009     2010     2009     2010     2009     2010     2009  

Service cost

   $ 1,040      $ 1,769      $ 2,986      $ 3,537      $ 6,754      $ 7,099      $ 13,508      $ 14,197   

Interest cost

     2,681        3,013        5,427        6,027        2,289        2,191        4,578        4,382   

Amortization of actuarial gain

     (5,777     (5,079     (10,758     (10,159     (768     (1,050     (1,536     (2,100

State administrative fees and insurance bond premiums

     —          —          —          —          1,799        1,793        4,218        3,552   

Legal and administrative costs

     750        675        1,500        1,350        785        850        1,570        1,701   
                                                                

Net periodic cost (benefit)

   $ (1,306   $ 378      $ (845   $ 755      $ 10,859      $ 10,883      $ 22,338      $ 21,732   
                                                                

The CWP liability was remeasured as of April 1, 2010 due to new legislation enacted in the Patient Protection and Affordable Care Act (PPACA). In general, the PPACA impacts CONSOL Energy’s liability in that future claims will be approved at a higher rate than has occurred in the past. The PPACA made two changes to the Federal Black Lung Benefits Act (FBLBA). First, it provided changes to the legal criteria used to assess and award claims by creating a legal presumption that miners are entitled to benefits if they have worked at least 15 years in coal mines and suffer from totally disabling lung disease. A coal company would have to prove that a miner did not have black lung or that the disease was not caused at his/her work. Second, it changed the law so black lung benefits being received by miners automatically go to their dependent survivors, regardless of the cause of the miner’s death. The impact of the new law increased CONSOL Energy’s CWP liability by $45,700. The law change increased expense by $2,219 for the three and six months ended June 30, 2010. In conjunction with the law change, CONSOL Energy conducted an extensive experience study regarding the rate of claim incidence. Based on historical company data and available industry data, with emphasis on recent history, certain assumptions were revised at the remeasurement date. Most notably, the expected number of claims, prior to the law change, was reduced to more appropriately reflect CONSOL historical experience. The assumption changes resulted in a decrease in the liability of $47,700. The assumption changes reduced expense by $3,525 for the three and six months ended June 30, 2010.

 

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The combined impact of the changes in actuarial assumptions and changes to the FBLBA was a net decrease of $2,000 in liability as well as Accumulated Other Comprehensive Income based on an April 1, 2010 remeasurement date. The combined impact of these changes reduced expense by $1,306 for the three and six months ended June 30, 2010.

CONSOL Energy does not expect to contribute to the CWP plan in 2010. We intend to pay benefit claims as they become due. For the six months ended June 30, 2010, $6,772 of CWP benefit claims have been paid.

CONSOL Energy does not expect to contribute to the workers’ compensation plan in 2010. We intend to pay benefit claims as they become due. For the six months ended June 30, 2010, $18,929 of workers’ compensation benefits, state administrative fees and surety bond premiums have been paid.

NOTE 5—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,
 
     2010     2009  
     Amount     Percent     Amount     Percent  

Statutory U.S. federal income tax rate

   $ 83,411      35.0   $ 160,286      35.0

Excess tax depletion

     (30,186   (12.7     (38,927   (8.5

Effect of Domestic Production Activities Deduction

     (3,293   (1.4     (7,327   (1.6

Net effect of state income taxes

     8,009      3.4        18,318      4.0   

Other

     1,593      0.7        1,801      0.4   
                            

Income Tax Expense / Effective Rate

   $ 59,534      25.0   $ 134,151      29.3
                            

The effective rate for the six months ended June 30, 2010 and 2009 was calculated using the annual effective rate projection on recurring earnings and also includes tax liabilities related to certain discrete transactions as described below.

CONSOL Energy was advised by the Canadian Revenue Agency and various provinces that its appeal of tax deficiencies paid as a result of the Agency’s audit of the Canadian tax returns filed for years 1997 through 2003 had been successfully resolved. As a result of the audit settlement, the Company reflected $3,450 as a discrete reduction to foreign income tax expense in the six months ended June 30, 2010. Accordingly, a discrete federal income tax expense of $1,457 was also recognized related to this transaction.

As a result of the Dominion Acquisition, CONSOL Energy recognized a discrete state income tax expense of $1,782 due to the impact of the acquisition on the state tax rates on existing deferred tax assets and liabilities. Accordingly, a discrete reduction to federal income tax expense of $624 was also recognized related to this transaction.

CONSOL Energy was notified by the state of Ohio that the state had completed its audit of the Company’s net operating loss (NOL) carryovers. In 2010, Ohio completed a transition from an income and franchise tax to a Commercial Activities Tax (CAT). The state’s audit concluded that CONSOL Energy is entitled to a credit for unused NOLs against future CAT liabilities. These NOLs were previously fully reserved. CONSOL Energy recognized a discrete reduction to state income tax expense of $2,068 related to the reversal of the previously recognized NOL allowance based on the audit settlement.

The total amounts of unrecognized tax benefits at June 30, 2010 and 2009 were $56,916 and $44,980, respectively. If these unrecognized tax benefits were recognized, approximately $15,502 and $14,657, respectively, would affect CONSOL Energy’s effective tax rate. There were no additions to the liability for unrecognized tax benefits during the six months ended June 30, 2010 and 2009.

 

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CONSOL Energy and its subsidiaries file income tax returns in the U.S. federal, various states and Canadian tax jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005.

CONSOL Energy recognizes interest accrued related to unrecognized tax benefits in its interest expense. As of June 30, 2010 and 2009, the Company reported an accrued interest liability relating to uncertain tax positions of $9,831 and $6,359, respectively. The accrued interest liability includes $1,493 and $438 of interest expense that is reflected in the Company’s Consolidated Statements of Income for the six months ended June 30, 2010 and 2009, respectively.

CONSOL Energy recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. As of June 30, 2010 and 2009, CONSOL Energy had no accrued liability for tax penalties.

NOTE 6—INVENTORIES:

Inventory components consist of the following:

 

     June 30,
2010
   December 31,
2009

Coal

   $ 153,615    $ 173,719

Merchandise for resale

     44,614      44,842

Supplies

     95,621      89,036
             

Total Inventories

   $ 293,850    $ 307,597
             

Merchandise for resale is valued using the last-in, first-out (LIFO) cost method. The excess of replacement cost of merchandise for resale inventories over carrying LIFO value was $18,847 and $13,696 at June 30, 2010 and December 31, 2009, respectively.

NOTE 7—ACCOUNTS RECEIVABLE SECURITIZATION:

In April 2010, CONSOL Energy and certain of our U.S. subsidiaries amended their existing trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. The amended facility allows CONSOL Energy to receive on a revolving basis up to $200,000, a $35,000 increase over the previous facility. The amended facility also allows for the issuance of letters of credit against the $200,000 capacity. At June 30, 2010, there were no letters of credit outstanding against the facility.

CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary, buys and sells 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 CNX Funding Corporation, who in turn sells these receivables to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. This retained interest, which is included in Accounts and Notes Receivable Trade in the Consolidated Balance Sheet, is recorded at fair value. Due to a short average collection cycle for such receivables, our collection experience history and the composition of the designated pool of trade accounts receivable that are part of this program, the fair value of our retained interest approximates the total amount of the designated pool of accounts receivable. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.

Effective January 1, 2010, CONSOL Energy modified the reporting of the Accounts Receivable securitization facility transactions in the Consolidated Financial Statements. The modification includes reporting

 

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the pledge of collateral as Accounts Receivable—Securitized and the borrowings are now classified as debt in Borrowings under Securitization Facility. Additionally, similar reclassifications of prior period data have been made to conform to the six months ended June 30, 2010 classifications required by the Transfers and Servicing Topic of the FASB Accounting Standards Codification.

The cost of funds under this facility is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $553 and $1,005 for the three and six months ended June 30, 2010. Costs associated with the receivables facility totaled $833 and $1,768 for three and six months ended June 30, 2009. 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 2012 with the underlying liquidity agreement renewing annually each April.

At June 30, 2010 and December 31, 2009, eligible accounts receivable totaled $200,000 and $151,000, respectively. There was no subordinated retained interest at June 30, 2010. There was subordinated retained interest of $101,000 at December 31, 2009. Accounts Receivable—Securitization and Borrowings under Securitization Facility of $200,000 and $50,000 were recorded on the Consolidated Balance Sheet at June 30, 2010 and December 31, 2009, respectively. Also, the $150,000 increase in the accounts receivable securitization program for the six months ended June 30, 2010 is reflected in the net cash provided by financing activities in the Consolidated Statement of Cash Flows. There was no change in the facility usage in the six months ended June 30, 2009. In accordance with the facility agreement, the Company is able to receive proceeds based upon the eligible accounts receivable at the previous month end.

NOTE 8—PROPERTY, PLANT AND EQUIPMENT:

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

 

     June 30,
2010
   December 31,
2009

Gas properties and related development

   $ 5,270,183    $ 1,649,476

Coal & other plant and equipment

     4,987,349      4,874,880

Coal properties and surface lands

     1,312,097      1,284,795

Gas gathering equipment

     898,737      804,212

Airshafts

     638,627      622,068

Mine development

     586,641      573,037

Leased coal lands

     503,568      504,475

Coal advance mining royalties

     389,631      366,312

Gas advance royalties

     2,759      2,700
             

Total property, plant and equipment

     14,589,592      10,681,955

Less Accumulated depreciation, depletion and amortization

     4,667,316      4,557,665
             

Total Net Property, Plant and Equipment

   $ 9,922,276    $ 6,124,290
             

NOTE 9—SHORT-TERM NOTES PAYABLE:

On May 7, 2010 CONSOL Energy entered into a four-year $1,500,000 senior secured credit facility, which extends through May 7, 2014. It replaced a five-year $1,000,000 senior secured credit facility which extended through June 2012. The new facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries and collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. 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.

 

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The facility includes a minimum interest coverage ratio covenant of no less than 2.00 to 1.00, measured quarterly. The interest coverage ratio was 8.65 to 1.00 at June 30, 2010. The facility includes a maximum leverage ratio covenant of not more than 4.75 to 1.00, measured quarterly. The leverage ratio was 4.23 at June 30, 2010. The facility also includes a senior secured leverage ratio covenant of not more than 2.50 to 1.00, measured quarterly. The senior secured leverage ratio was 1.01 to 1.00 at June 30, 2010. Affirmative and negative covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock, pay dividends, merge with another corporation and amend, modify or restate the senior unsecured or secured notes. At June 30, 2010, the $1,500,000 facility had $292,200 of borrowings outstanding and $267,985 of letters of credit outstanding, leaving $939,815 of capacity available for borrowings and the issuance of letters of credit. The facility bore a weighted average interest rate of 3.91% as of June 30, 2010.

CNX Gas has a four-year $700,000 senior secured credit agreement effective May 7, 2010, which extends through May 6, 2014. It replaced a five-year $200,000 unsecured credit agreement that extended through October 2010. The new facility is secured by substantially all of the assets of CNX Gas and its subsidiaries. Effective June 30, 2010 the assets acquired in the Dominion Acquisition have been merged into one entity and the shares of this entity have been transferred to CNX Gas, making it a wholly-owned subsidiary of CNX Gas. The acquired assets are now pledged as collateral under the CNX Gas senior secured credit agreement. Collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. 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, pay dividends and merge with another corporation. The facility includes a maximum leverage ratio covenant of not more than 3.50 to 1.00, measured quarterly. The leverage ratio was 0.23 to 1.00 at June 30, 2010. The facility also includes a minimum interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 100.07 to 1.00 at June 30, 2010. At June 30, 2010, the $700,000 facility had $66,350 of borrowings outstanding and $14,913 of letters of credit outstanding, leaving $618,737 of capacity available for borrowings and the issuance of letters of credit. The facility bore a weighted average interest rate of 2.69% as of June 30, 2010.

NOTE 10—LONG-TERM DEBT:

 

     June 30,
2010
   December 31,
2009

Debt:

     

Senior notes due April 2017 at 8.00%, issued at par value

   $ 1,500,000    $ —  

Senior notes due April 2020 at 8.25%, issued at par value

     1,250,000      —  

Secured notes due March 2012 at 7.875% (par value of $250,000 less unamortized discount of $345 and $447 at June 30, 2010 and December 31, 2009, respectively)

     249,655      249,553

Baltimore Port Facility revenue bonds in series due December 2010 at 6.50%

     30,865      30,865

Baltimore Port Facility revenue bonds in series due October 2011 at 6.50%

     72,000      72,000

Advance royalty commitments (7.36% weighted average interest rate for June 30, 2010 and December 31, 2009)

     35,176      35,547

Notes due through 2011 at 6.10%

     12,372      14,628

Other long-term notes maturing at various dates through 2031 (total value of $154 and $164 less unamortized discount of $2 and $4 at June 30, 2010 and December 31, 2009 respectively)

     152      160
             
     3,150,220      402,753

Less amounts due in one year

     39,141      39,024
             

Long-Term Debt

   $ 3,111,079    $ 363,729
             

 

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NOTE 11—COMMITMENTS AND CONTINGENCIES:

CONSOL Energy and its subsidiaries are 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 or cash flows of CONSOL Energy.

In 2008, the Pennsylvania Department of Conservation and Natural Resources (Commonwealth) filed a six-count Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, claiming that the Company’s underground longwall mining activities caused cracks and seepage damage to the Ryerson Park Dam, thereby eliminating the Ryerson Park Lake. The Commonwealth claimed that the Company is liable for dam reconstruction costs, lake restoration costs and natural resources damages totaling $58,000. The Court stayed the proceedings in the state court, holding that the Commonwealth should pursue administrative agency review of the claim. Furthermore, the Court found that the Commonwealth could not recover natural resources damages under applicable law. The Commonwealth then filed a subsidence-damage claim with the Pennsylvania Department of Environmental Protection (“DEP”) and DEP reviewed the issue of whether the dam was damaged by subsidence. On February 16, 2010, DEP issued its interim report, concluding that the alleged damage was subsidence related. The Commonwealth and the Company now move into the next phase of the DEP proceeding, which is the damage phase, in which DEP will determine what amount and in what form the compensatory relief should be provided. Following completion of the next procedural phase before the DEP, either party can appeal the result to the Pennsylvania Environmental Hearing Board (“PEHB”), which will consider the case de novo, meaning without regard to the DEP’s decision, as to any finding of causation of damage and/or the amount of damages. Thereafter, either party may appeal the decision of the PEHB to the Pennsylvania Commonwealth Court, and then, as may be allowed, to the Pennsylvania Supreme Court. As to the underlying claim, the Company believes it is not responsible for the damage to the dam and that numerous grounds exist upon which to attack the propriety of the claims. The Company intends to vigorously defend the case. However, it is reasonably possible that if damages were awarded to the Commonwealth, the result may be material to the financial position, results of operations, or cash flows of CONSOL Energy.

One of our subsidiaries, Fairmont Supply Company (Fairmont), which distributes industrial supplies, currently is named as a defendant in approximately 22,500 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, Mississippi, New Jersey, Texas and Illinois. 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. Past 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 and 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 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

 

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Ward Transformer site. The EPA, CONSOL Energy and two other PRPs entered into an administrative Settlement Agreement and Order of Consent, requiring those PRPs to undertake and complete a PCB soil removal action, at and in the vicinity of the Ward Transformer property. Another party joined the participating PRPs and reduced CONSOL Energy’s interim allocation share from 46% to 32%. In June 2008, while conducting the PCB soil excavation on the Ward property, it was determined that PCBs have migrated onto adjacent properties.

The current estimated cost of remedial action for the area that CONSOL Energy was originally named a PRP, including payment of the EPA’s past and future cost, is approximately $64,000. The current estimated cost of the most likely remediation plan for the additional areas discovered is approximately $11,000. Also, in September 2008, the EPA notified CONSOL Energy and 60 other PRPs that there were additional areas of potential contamination allegedly related to the Ward Transformer Site. Current estimates of the cost or potential range of cost for this area are not yet available. There was $2,880 of expense recognized in cost of goods sold and other charges in the three and six months ended June 30, 2010 related to this matter. There was $1,120 and $3,456 of expense recognized in cost of goods sold for the three and six months ended June 30, 2009, respectively. CONSOL Energy funded $1,209 and $4,000 in the six months ended June 30, 2010 and 2009, respectively, to an independent trust established for this remediation. The remaining liability at June 30, 2010 of $7,587 is reflected in Other Accrued Liabilities.

As of April 30, 2009, CONSOL Energy and the other participating PRPs had asserted CERCLA cost recovery and contribution claims against approximately 225 nonparticipating PRPs to recover a share of the costs incurred and to be incurred to conduct the removal actions at the Ward Site. CONSOL Energy’s portion of probable recoveries from settled claims is estimated to be $3,571. Accordingly, an asset has been included in Other Assets for these claims. We cannot predict the ultimate outcome of this Superfund site; however, it is reasonably possible that payments in the future with respect to this lawsuit may be material to the financial position, results of operations or cash flows of CONSOL Energy.

As part of conducting mining activities at the Buchanan Mine, our subsidiary, Consolidation Coal Company (“CCC”), has to remove water from the mine. Several actions have arisen with respect to the removal of naturally accumulating and pumped water from the Buchanan Mine:

Yukon Pocahontas Coal Company, Buchanan Coal Company and Sayers-Pocahontas Coal Company (“Yukon”) filed an action on March 22, 2004 (the “Yukon Action”) against CCC related to CCC’s depositing of untreated water from its Buchanan Mine into the void spaces of nearby mines of one of our other subsidiaries, Island Creek Coal Company (“ICCC”). The plaintiffs were 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, and to recover over $3,252,000 for alleged damages to the coal and gas estates and punitive damages in the amount of $350. Plaintiffs also asserted damage claims of $150,000 against CONSOL Energy, CNX Gas Company, LLC and ICCC. The Yukon group also filed a demand for arbitration (the “2008 Arbitration”) against ICCC which made similar claims relating to breach of the lease for water deposits and lost coal claims. All of the foregoing claims have been settled through a $75,000 cash payment made to the plaintiffs. The payment represented $25,000 of damages, $15,000 and $25,000 of expense was recognized in the three and six months ended June 30, 2010, respectively, and $50,000 for the purchase of coal reserves and an advance mining royalty on leased coal reserves.

CCC obtained a revision to its environmental permit to deposit water from its Buchanan Mine into void spaces of VP3, and to permit the discharge of water into the nearby Levisa River under controlled conditions. Plaintiffs in the Yukon Action along with the Town of Grundy, Virginia, Buchanan County Board of Supervisors, and others had appealed the revision. As a result of the settlement with the Yukon group, the Yukon group withdrew its appeal.

In 2006, CONSOL Energy and CCC were served with a summons in the name of the Commonwealth of Virginia with the Circuit Court of Buchanan County, Virginia regarding a special grand jury presentment in

 

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response to citizens’ complaints that noise resulting from the ventilation fan at the Buchanan Mine constitutes a public nuisance. CONSOL Energy and CCC deny that the operation of the ventilation fan is a public nuisance and intend to vigorously defend this proceeding. However, if the operation of the ventilation fan is ordered to be stopped, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

South Carolina Electric & Gas Company (“SCE&G”), a utility, has demanded arbitration, seeking $36,000 in damages against CONSOL of Kentucky and CONSOL Energy Sales Company. SCE&G claims it suffered damages in obtaining cover coal to replace coal which was not delivered in 2008 under a coal sales agreement. The Company counterclaimed against SCE&G for $9,400 for terminating coal shipments under the sales agreement which SCE&G had agreed could be made up in 2009. A hearing on the claims is scheduled for October 11, 2010. The named CONSOL Energy defendants deny all liability and intend to vigorously defend the action filed against them. However, if damages were awarded to SCE&G, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

In 2009, a fish kill occurred in Dunkard Creek, which is a creek with segments in both Pennsylvania and West Virginia. The fish kill was caused by the growth of golden algae in the creek, which appears to be an invasive species. Our subsidiary, CCC, discharges treated mine water into Dunkard Creek from its Blacksville No. 2 Mine and from its Loveridge Mine. The discharges have levels of chlorides that cause Dunkard Creek to exceed West Virginia in-stream water quality standards. Prior to the fish kill and continuing thereafter, CCC was subject to an Agreed Order with the West Virginia Department of Environmental Protection (“WVDEP”) that sets forth a schedule for compliance with these in-stream chloride limits. On December 18, 2009, the West Virginia Department of Environmental Protection issued a unilateral Order that imposes additional conditions on CCC’s discharges into Dunkard Creek and requires CCC to develop a plan for long-term treatment of those and other high-chloride discharges. The Dunkard Creek fish kill is being investigated by several agencies, including the West Virginia Department of Environmental Protection, the West Virginia Department of Natural Resources, the Pennsylvania Department of Environmental Protection, and the Pennsylvania Fish and Boat Commission. The U.S. Environmental Protection Agency is also involved. We are cooperating with these investigations. We do not believe that there is a connection between the fish kill and our discharge of water into Dunkard Creek, but the investigation of the matter is continuing. Pursuant to the December 18, 2009 WVDEP Unilateral Order, CCC submitted a plan and schedule to WVDEP which provides for construction of a centralized advanced technology mine water treatment plant by May 31, 2013 to achieve compliance with chloride effluent limits and in-stream chloride water quality standards. The cost of the treatment plant may reach or exceed $100,000. Additionally, CCC is currently negotiating a joint Consent Decree with the EPA and the WVDEP that is likely to include the compliance plan and schedule that was submitted to WVDEP. The December 18, 2009 WVDEP unilateral Order was replaced by another unilateral Order that became effective on April 30, 2010 and will extend until October 31, 2010, unless replaced by the joint WVDEP/EPA consent decree that is being negotiated. The Consent Decree is also likely to include civil penalties to settle alleged past violations related to chlorides without an admission of liability. The parties have not yet discussed the amount of a civil penalty. The Consent Decree will provide CCC with a schedule for orderly construction of the advanced water treatment plant and related facilities. If we are required to comply with in-stream chloride limits on an accelerated basis or if we enter into a Consent Decree that includes a civil penalty, it is reasonably possible that the liabilities or costs that could be incurred by CONSOL Energy in the future with respect to these matters may be material to the financial position, results of operations, or cash flows of CONSOL Energy.

CONSOL Energy has been named as a defendant in five punitive class actions brought by alleged shareholders of CNX Gas challenging the tender offer by CONSOL Energy to acquire all of the shares of CNX Gas common stock that CONSOL Energy did not already own. The cases are: Schurr v. CONSOL Energy and others (No. 2010-2333), filed in the Court of Common Pleas of Washington County, Pennsylvania on March 29, 2010; Gummel v. CONSOL Energy (No. 5377-VCL), filed March 29, 2010 in the Delaware Court of Chancery; Polen v. CONSOL Energy and others (No. 2010-2626), filed in the Court of Common Pleas of Washington County, Pennsylvania on April 12, 2010; Gaines v. CONSOL Energy and others (No. 5378), filed

 

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March 30, 2010 in the Delaware Court of Chancery; and Hurwitz v. CONSOL Energy and others (NO. 5405), filed in the Delaware Court of Chancery on April 13, 2010. Other than the Gummel case, the suits also name CNX Gas and certain officers and directors of CONSOL Energy and CNX Gas as defendants. All five actions generally allege that CONSOL Energy has breached and/or has aided and abetted in the breach of fiduciary duties purportedly owed to CNX Gas public shareholders. Among other things, the actions sought a permanent injunction against or rescission of the tender offer, damages, and attorneys’ fees and expenses. The Pennsylvania lawsuits have been stayed and the Delaware lawsuits have been consolidated. The Delaware Court of Chancery denied an injunction against the tender offer and CONSOL Energy acquired all of the outstanding shares of CNX Gas. The Delaware Court of Chancery certified to the Delaware Supreme Court the question of what standard should be applied to the tender offer, which would determine whether the shareholders can proceed with a damage claim. The Delaware Supreme Court declined to accept the appeal pending a final judgment. Therefore, the lawsuit will likely go through a fact discovery phase and, later, trial. CONSOL Energy believes that these actions are without merit and intends to defend them vigorously. We cannot predict the ultimate outcome of this litigation; however, if damages were awarded to plaintiffs, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

As a result of market conditions, permitting issues, new regulatory requirements and resulting changes in mining plans, the reclamation liability associated with the Fola mining operations in West Virginia have increased. Changes in mining have increased the quantity of material required to reclaim the affected area. As of this time, no detailed reclamation plan has been developed and the definitive costs associated with the increased reclamation are not available, however, our estimates indicate the reclamation liability could equal or exceed $65,000. As a result, $27,900 and $52,900 of expense was recognized in the three and six months ended June 30, 2010, respectively. Detailed reclamation plans and mining plans are being developed to determine the impacts of these revised plans on the associated reclamation liability. It is reasonably possible that the liabilities or costs that could be incurred by CONSOL Energy in the future with respect to Fola reclamation may be material to the financial position, results of operations, or cash flows of CONSOL Energy.

On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against CONSOL Energy and certain of its affiliates, including CNX Gas Company LLC, in the Circuit Court for the County of Tazewell, Virginia. The lawsuit alleges, among other things, that the defendants have violated the Virginia Antitrust Act in their dealings with GeoMet in southwest Virginia. The complaint, as amended, seeks injunctive relief, compensatory damages of $385,600 and treble damages. In April 2010, CNX Gas and GeoMet entered into an agreement involving the exchange of less than 800 acres of coalbed methane rights in Virginia and the grant by Consolidation Coal Company to GeoMet of consent to stimulate the coal seam on certain of GeoMet’s drilling units in Virginia. This litigation was settled as part of that transaction. CNX Gas did not pay any amount to GeoMet in connection with the settlement of this litigation.

On January 7, 2009, CNX Gas received a civil investigative demand for information and documents from the Attorney General of the Commonwealth of Virginia regarding the company’s exploration, production, transportation and sale of coalbed methane gas in Virginia. According to the request, the Attorney General is investigating whether the company may have violated the Virginia Antitrust Act. The request for information does not constitute the commencement of legal proceedings and does not make any specific allegations against the company. CNX Gas does not believe that it has violated the Virginia Antitrust Act and the company is cooperating with the Attorney General’s investigation.

The Company is a party to a case filed in 2007 captioned Earl Kennedy (and others) v. CNX Gas and CONSOL Energy in the Court of Common Pleas of Greene County, Pennsylvania. The lawsuit alleges that CNX Gas and CONSOL Energy trespassed and converted gas and other minerals allegedly belonging to the plaintiffs in connection with wells drilled by CNX Gas. The complaint, as amended, seeks injunctive relief, including having CNX Gas be removed from the property, and compensatory damages of $20,000. The suit also sought to overturn existing law as to the ownership of coalbed methane in Pennsylvania, but that claim was dismissed by the court; the plaintiffs are seeking to appeal that dismissal. CNX Gas believes this lawsuit to be without merit

 

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and intends to vigorously defend it. We cannot predict the ultimate outcome of this litigation; 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, or cash flows of CONSOL Energy.

In April 2005, Buchanan County, Virginia (through its Board of Supervisors and Commissioner of Revenue) filed a lawsuit against CNX Gas Company LLC in the Circuit Court of the County of Buchanan for the year 2002; the county has since filed and served three substantially similar cases for years 2003, 2004 and 2005. These cases have been consolidated. The complaint alleges that CNX Gas’ calculation of the license tax on the basis of the wellhead value (sales price less post production costs) rather than the sales price is improper. For the period from 1999 through mid 2002, CNX Gas paid the tax on the basis of the sales price, but we have filed a claim for a refund for these years. Since 2002, we have continued to pay Buchanan County taxes based on our method of calculating the taxes. This matter was settled on February 2, 2010. Under the terms of the settlement, among other things, CNX Gas agreed to pay an amount to Buchanan County, the present value of which was previously accrued for this matter, and Buchanan County agreed to certain deductions for post-production costs in the calculation of the license tax for periods after January 1, 2010, which will reduce our costs in the future.

At June 30, 2010, CONSOL Energy has provided the following financial guarantees, unconditional purchase obligations and letters of credit to certain third parties, as described by major category in the following table. These amounts represent the maximum potential total of future payments that we could be required to make under these instruments. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credits are recorded as liabilities on the financial statements. CONSOL Energy management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition.

 

     Amount of Commitment
Expiration Per Period
     Total
Amounts
Committed
   Less Than
1 Year
   1-3 Years    3-5 Years    Beyond
5 Years

Letters of Credit:

              

Employee-Related

   $ 198,823    $ 198,823    $ —      $ —      $ —  

Environmental

     57,471      57,471      —        —        —  

Gas

     14,913      14,913      —        —        —  

Other

     11,764      11,600      164      —        —  
                                  

Total Letters of Credit

     282,971      282,807      164      —        —  
                                  

Surety Bonds:

              

Employee-Related

     193,251      181,751      11,500      —        —  

Environmental

     369,480      345,218      24,262      —        —  

Gas

     6,335      6,192      142      —        1

Other

     9,604      9,591      13      —        —  
                                  

Total Surety Bonds

     578,670      542,752      35,917      —        1
                                  

Guarantees:

              

Coal

     160,790      97,045      57,506      1,239      5,000

Gas

     68,206      42,601      22,505      —        3,100

Other

     409,157      72,052      111,802      79,534      145,769
                                  

Total Guarantees

     638,153      211,698      191,813      80,773      153,869
                                  

Total Commitments

   $ 1,499,794    $ 1,037,257    $ 227,894    $ 80,773    $ 153,870
                                  

 

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Employee-related financial guarantees have primarily been provided 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 provided 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 guarantees have been extended to support insurance policies, legal matters and various other items necessary in the normal course of business. 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.

CONSOL Energy and CNX Gas enter into long-term unconditional purchase obligations to procure major equipment purchases, natural gas firm transportation, gas drilling services and other operating goods and services. These purchase obligations are not recorded on the Consolidated Balance Sheet. As of June 30, 2010, the purchase obligations for each of the next five years and beyond were as follows:

 

Obligations Due

   Amount

Less than 1 year

   $ 93,016

1 - 3 years

     186,645

3 - 5 years

     85,476

More than 5 years

     326,558
      

Total Purchase Obligations

   $ 691,695
      

Expenses related to these purchase obligations include:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Major equipment purchases

   $ 8,946    $ 5,670    $ 27,151    $ 69,053

Firm transportation expense

     9,408      5,133      16,103      9,719

Gas drilling obligations

     832      —        1,437      —  

Other

     150      30      180      60
                           

Total expense related to purchase obligations

   $ 19,336    $ 10,833    $ 44,871    $ 78,832
                           

NOTE 12—DERIVATIVE INSTRUMENTS:

CONSOL Energy enters into financial derivative instruments to manage our exposure to commodity price volatility. We measure each derivative instrument at fair value and record it on the balance sheet as either an asset or liability. Changes in the fair value of the derivatives are recorded currently in earnings unless special hedge accounting criteria are met. For derivatives designated as fair value hedges, the changes in fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in Other Comprehensive Income or Loss (OCI) and reclassified into earnings in the same period or periods which the forecasted transaction affects earnings. The ineffective portions of hedges are recognized in earnings in the current year. CONSOL Energy currently utilizes only cash flow hedges that are considered highly effective.

CONSOL Energy formally assesses both at inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in the fair values or the cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, CONSOL Energy will discontinue hedge accounting prospectively.

CONSOL Energy is exposed to credit risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is subject to continuing review. The Company has not experienced any issues of non-performance by derivative counterparties.

 

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CONSOL Energy has entered into forward and option contracts on various commodities to manage the price risk associated with the forecasted revenues from those commodities. The objective of these hedges is to reduce the variability of the cash flows associated with the forecasted revenues from the underlying commodities.

As of June 30, 2010, the total notional amount of the Company’s outstanding natural gas forward contracts was 59.5 billion cubic feet. These forward contracts are forecasted to settle through December 31, 2012 and meet the criteria for cash flow hedge accounting. During the next year, $41,652 of unrealized gain is expected to be reclassified from Other Comprehensive Income and into earnings. No gains or losses have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

As of June 30, 2010, CONSOL Energy did not have any outstanding coal sales options. For the three and six months ended June 30, 2009, CONSOL Energy recognized, in Other Income on the Consolidated Statements of Income, a gain of $203 and $2,338 respectively for the coal sales options which were not designated as hedging instruments.

The fair value of CONSOL Energy’s derivative instruments at June 30, 2010 is as follows:

 

     Derivatives
As of June 30, 2010
     Balance Sheet
Location
   Fair
Value

Derivative designated as hedging instruments

     

Natural Gas Price Swaps

   Prepaid Expense    $ 68,662

Natural Gas Price Swaps

   Other Assets      34,987
         

Total derivatives designated as hedging instruments

      $ 103,649
         

The effect of derivative instruments on the Consolidated Statements of Income for the three months ended June 30, 2010 is as follows:

 

Derivative in Cash Flow Hedging Relationship

   Amount of
Gain
Recognized
in OCI on
Derivative
2010
   Location of
Gain
Reclassified
from
Accumulated
OCI into
Income
   Amount of
Gain
Reclassified
from
Accumulated
OCI into
Income

2010
   Location of
Gain
Recognized
in Income on
Derivative
   Amount of
Gain
Recognized
in Income on
Derivative
2010

Natural Gas Price Swaps

   $ 14,820    Outside Sales    $ 54,535    Outside Sales    $ 290
                          

The effect of derivative instruments on the Consolidated Statements of Income for the six months ended June 30, 2010 is as follows:

 

Derivative in Cash Flow Hedging Relationship

   Amount of
Gain
Recognized
in OCI on
Derivative
2010
   Location of
Gain
Reclassified
from
Accumulated
OCI into
Income
   Amount of
Gain
Reclassified
from
Accumulated
OCI into
Income

2010
   Location of
Gain
Recognized
in Income on
Derivative
   Amount of
Gain
Recognized
in Income on
Derivative
2010

Natural Gas Price Swaps

   $ 89,528    Outside Sales    $ 97,934    Outside Sales    $ 148
                          

 

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The fair value of CONSOL Energy’s derivative instruments at December 31, 2009 is as follows:

 

     Derivatives
As of December 31, 2009
     Balance Sheet
Location
   Fair
Value

Derivative designated as hedging instruments

     

Natural Gas Price Swaps

   Prepaid Expense    $ 99,265

Natural Gas Price Swaps

   Other Assets      18,218
         

Total derivatives designated as hedging instruments

      $ 117,483
         

The effect of derivative instruments on the Consolidated Statements of Income for the three months ended June 30, 2009 is as follows:

 

Derivative in Cash Flow Hedging Relationship

  Amount of
Gain
Recognized
in OCI on
Derivative
2009
  Location of
Gain
Reclassified

from
Accumulated
OCI into

Income
  Amount of
Gain
Reclassified

from
Accumulated
OCI  into
Income

2009
  Location of
(Loss)
Recognized
in Income on
Derivative
  Amount of
(Loss)
Recognized
in Income on
Derivative
2009
 

Natural Gas Price Swaps

  $ 30,394   Outside Sales   $ 66,120   Outside Sales   $ (494
                       

The effect of derivative instruments on the Consolidated Statements of Income for the six months ended June 30, 2009 is as follows:

 

Derivative in Cash Flow Hedging Relationship

   Amount of
Gain
Recognized
in OCI on
Derivative
2009
   Location  of
Gain
Reclassified

from
Accumulated
OCI into
Income
   Amount of
Gain
Reclassified

from
Accumulated
OCI into
Income

2009
   Location of
(Loss)
Recognized

in Income on
Derivative
   Amount of
(Loss)
Recognized
in Income on
Derivative
2009
 

Natural Gas Price Swaps

   $ 109,342    Outside Sales    $ 116,738    Outside Sales    $ (869
                            

NOTE 13—OTHER COMPREHENSIVE LOSS:

Total comprehensive income (loss), net of tax, for the six months ended June 30, 2010 was as follows:

 

     Treasury
Rate
Lock
    Change in
Fair Value
of Cash Flow
Hedges
    Adjustments
for Actuarially
Determined
Liabilities
    Adjustments
for Non-
controlling
Interest
    Accumulated
Other
Comprehensive
Loss
 

Balance at December 31, 2009

   $ 180      $ 71,378      $ (699,293   $ (12,769   $ (640,504

Net increase in value of cash flow hedges

     —          89,528        —          (12,500     77,028   

Reclassification of cash flow hedges from other comprehensive income to earnings

     —          (98,082     —          7,248        (90,834

Elimination of noncontrolling interest from purchase of CNX Gas

     —          —          —          18,026        18,026   

Current period change

     (44     —          9,393        (5     9,344   
                                        

Balance at June 30, 2010

   $ 136      $ 62,824      $ (689,900   $ —        $ (626,940
                                        

 

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NOTE 14—FAIR VALUES OF FINANCIAL INSTRUMENTS:

The financial instruments measured at fair value on a recurring basis are summarized below:

 

     Fair Value Measurements at June 30, 2010

Description

   Quoted Prices in
Active  Markets

for Identical
Liabilities

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable

Inputs
(Level 3)

Gas Cash Flow Hedges

   $ —      $ 103,649    $ —  

The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:

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-term maturity of these instruments.

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

Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses, based on current market rates for instruments with similar cash flows.

The carrying amounts and fair values of financial instruments for which the fair value option was not elected are as follows:

 

     June 30, 2010     December 31, 2009  
     Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Cash and cash equivalents

   $ 34,313      $ 34,313      $ 65,607      $ 65,607   

Short-term notes payable

   $ (358,550   $ (358,550   $ (472,850   $ (472,850

Borrowings Under Securitization Facility

   $ (200,000   $ (200,000   $ (50,000   $ (50,000

Long-term debt

   $ (3,150,220   $ (3,278,647   $ (402,753   $ (420,056

NOTE 15—SEGMENT INFORMATION:

CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Steam, Low Volatile Metallurgical, High Volatile Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines or type of coal sold). For the six months ended June 30, 2010, the Steam aggregated segment includes the following mines: Bailey, Blacksville #2, Buchanan steam, Emery, Enlow Fork, Fola Complex, Loveridge, McElroy, Miller Creek Complex, Robinson Run and Shoemaker. For the six months ended June 30, 2010, the Low Volatile Metallurgical aggregated segment includes the Buchanan mine. For the six months ended June 30, 2010, the High Volatile Metallurgical aggregated segment includes: Bailey, Enlow Fork, Fola Complex and Emery coal sales. The Other Coal segment includes our purchased coal activities, idled mine activities, 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. The Gas unit includes four reportable segments. These reportable segments are Coalbed Methane, Marcellus, Conventional and Other Gas. The Other Gas segment includes our purchased gas activities as well as various other activities assigned to the gas segment but not allocated to each individual well type. CONSOL Energy’s All Other segment includes terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses. Certain reclassifications of 2009 segment information have been made to conform to the 2010 presentation. These reclassifications include changes to the coal operating segments the addition of the Gas operating segments.

 

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Industry segment results for three months ended June 30, 2010 are:

 

    Steam   Low Volatile
Metallurgical
  High Volatile
Metallurgical
  Other
Coal
    Total Coal   Coalbed
Methane
  Marcellus
Shale
  Conventional
Gas
  Other
Gas
    Total
Gas
  All
Other
  Corporate,
Adjustments
&

Eliminations
    Consolidated  

Sales—Outside

  $ 745,597   $ 149,145   $ 55,655   $ 6,097      $ 956,494   $ 149,305   $ 10,399   $ 29,998   $ 1,727      $ 191,429   $ 72,193   $ —        $ 1,220,116   

Sales—Purchased Gas

    —       —       —       —          —       —       —       —       1,740        1,740     —       —          1,740   

Sales—Gas Royalty Interests

    —       —       —       —          —       —       —       —       14,151        14,151     —       —          14,151   

Freight—Outside

    —       —       —       28,075        28,075     —       —       —       —          —       —       —          28,075   

Intersegment transfers

    —       —       —       —          —       —       —       —       696        696     43,566     (44,262     —     
                                                                                     

Total Sales and Freight

  $ 745,597   $ 149,145   $ 55,655   $ 34,172      $ 984,569   $ 149,305   $ 10,399   $ 29,998   $ 18,314      $ 208,016   $ 115,759   $ (44,262   $ 1,264,082   
                                                                                     

Earnings (Loss) Before Income Taxes

  $ 130,146   $ 84,790   $ 25,525   $ (121,938   $ 118,523   $ 70,590   $ 265   $ 2,864   $ (19,526   $ 54,193   $ 5,227   $ (81,795   $ 96,148 (A) 
                                                                                     

Segment assets

          $ 4,946,425           $ 5,818,535   $ 311,613   $ 611,518      $ 11,688,091 (B) 
                                                 

Depreciation, depletion and amortization

          $ 79,424           $ 48,953   $ 4,387   $ —        $ 132,764   
                                                 

Capital expenditures

          $ 185,343           $ 3,599,145   $ 3,458   $ —        $ 3,787,946   
                                                 

 

(A) Includes equity in earnings (loss) of unconsolidated affiliates of $3,998, ($208) and $1,029 for Coal, Gas and All Other, respectively.
(B) Includes investments in unconsolidated equity affiliates of $17,296, $23,866 and $45,962 for Coal, Gas and All Other, respectively.

 

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Industry segment results for three months ended June 30, 2009 are:

 

    Steam   Low Volatile
Metallurgical
    High Volatile
Metallurgical
  Other
Coal
    Total Coal   Coalbed
Methane
  Marcellus
Shale
    Conventional
Gas
  Other
Gas
    Total
Gas
  All
Other
    Corporate,
Adjustments
&
Eliminations
    Consolidated  

Sales—Outside

  $ 759,529   $ 15,226      $ —     $ 8,111      $ 782,866   $ 142,971   $ 3,688      $ 2,788   $ 1,310      $ 150,757   $ 60,518      $ —        $ 994,141   

Sales—Purchased Gas

    —       —          —       —          —       —       —          —       1,166        1,166     —          —          1,166   

Sales—Gas Royalty Interests

    —       —          —       —          —       —       —          —       8,666        8,666     —          —          8,666   

Freight—Outside

    —       —          —       27,087        27,087     —       —          —       —          —       —          —          27,087   

Intersegment transfers

    —       —          —       —          —       —       —          —       107        107     37,664        (37,771     —     
                                                                                           

Total Sales and Freight

  $ 759,529   $ 15,226      $ —     $ 35,198      $ 809,953   $ 142,971   $ 3,688      $ 2,788   $ 11,249      $ 160,696   $ 98,182      $ (37,771   $ 1,031,060   
                                                                                           

Earnings (Loss) Before Income Taxes

  $ 220,297   $ (15,416   $ —     $ (66,769   $ 138,112   $ 70,073   $ (295   $ 194   $ (16,761   $ 53,211   $ (3,808   $ (14,260   $ 173,255 (C) 
                                                                                           

Segment assets

          $ 4,382,989           $ 2,182,678   $ 324,952      $ 466,681      $ 7,357,300 (D) 
                                                   

Depreciation, depletion and amortization

          $ 77,585           $ 24,883   $ 5,007      $ —        $ 107,475   
                                                   

Capital expenditures

          $ 111,961           $ 80,213   $ 4,685      $ —        $ 196,859   
                                                   

 

(C) Includes equity in earnings of unconsolidated affiliates of $1,046, $295 and $2,098 for Coal, Gas and All Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $11,419, $24,511 and $41,776 for Coal, Gas and All Other, respectively.

 

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Industry segment results for six months ended June 30, 2010 are:

 

    Steam   Low Volatile
Metallurgical
  High Volatile
Metallurgical
  Other
Coal
    Total Coal   Coalbed
Methane
  Marcellus
Shale
  Conventional
Gas
  Other
Gas
    Total
Gas
  All
Other
  Corporate,
Adjustments
&
Eliminations
    Consolidated  

Sales—Outside

  $ 1,462,320   $ 275,602   $ 113,022   $ 29,160      $ 1,880,104   $ 310,348   $ 18,382   $ 32,570   $ 3,276      $ 364,576   $ 144,950   $ —        $ 2,389,630   

Sales—Purchased Gas

    —       —       —       —          —       —       —       —       4,756        4,756     —       —          4,756   

Sales—Gas Royalty Interests

    —       —       —       —          —       —       —       —       28,490        28,490     —       —          28,490   

Freight—Outside

    —       —       —       59,275        59,275     —       —       —       —          —       —       —          59,275   

Intersegment transfers

    —       —       —       —          —       —       —       —       1,562        1,562     87,170     (88,732     —     
                                                                                     

Total Sales and Freight

  $ 1,462,320   $ 275,602   $ 113,022   $ 88,435      $ 1,939,379   $ 310,348   $ 18,382   $ 32,570   $ 38,084      $ 399,384   $ 232,120   $ (88,732   $ 2,482,151   
                                                                                     

Earnings (Loss) Before Income Taxes

  $ 299,180   $ 133,376   $ 55,780   $ (254,762   $ 233,574   $ 151,617   $ 2,347   $ 2,899   $ (28,985   $ 127,878   $ 6,635   $ (129,771   $ 238,316 (E) 
                                                                                     

Segment assets

          $ 4,946,425           $ 5,818,535   $ 311,613   $ 611,518      $ 11,688,091 (F) 
                                                 

Depreciation, depletion and amortization

          $ 161,748           $ 81,045   $ 9,157   $ —        $ 251,950   
                                                 

Capital expenditures

          $ 384,668           $ 3,664,459   $ 4,163   $ —        $ 4,053,290   
                                                 

 

(E) Includes equity in earnings (loss) of unconsolidated affiliates of $6,428, ($725) and $2,989 for Coal, Gas and All Other, respectively.
(F) Includes investments in unconsolidated equity affiliates of $17,296, $23,866 and $45,962 for Coal, Gas and All Other, respectively.

 

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Table of Contents

Industry segment results for six months ended June 30, 2009 are:

 

    Steam   Low Volatile
Metallurgical
  High Volatile
Metallurgical
  Other
Coal
    Total Coal   Coalbed
Methane
  Marcellus
Shale
  Conventional
Gas
    Other
Gas
    Total
Gas
  All
Other
  Corporate,
Adjustments
&
Eliminations
    Consolidated  

Sales—Outside

  $ 1,594,592   $ 84,769   $ —     $ 21,741      $ 1,701,102   $ 301,189   $ 5,283   $ 4,433      $ 1,759      $ 312,664   $ 130,619   $ —        $ 2,144,385   

Sales—Purchased Gas

    —       —       —       —          —       —       —       —          2,631        2,631     —       —          2,631   

Sales—Gas Royalty Interests

    —       —       —       —          —       —       —       —          21,298        21,298     —       —          21,298   

Freight—Outside

    —       —       —       58,003        58,003     —       —       —          —          —       —       —          58,003   

Intersegment transfers

    —       —       —       —          —       —       —       —          542        542     75,183     (75,725     —     
                                                                                       

Total Sales and Freight

  $ 1,594,592   $ 84,769   $ —     $ 79,744      $ 1,759,105   $ 301,189   $ 5,283   $ 4,433      $ 26,230      $ 337,135   $ 205,802   $ (75,725   $ 2,226,317   
                                                                                       

Earnings (Loss) Before Income Taxes

  $ 487,605   $ 7,995   $ —     $ (158,842   $ 336,758   $ 160,039   $ 149   $ (68   $ (17,479   $ 142,641   $ 4,138   $ (25,576   $ 457,961 (G) 
                                                                                       

Segment assets

          $ 4,382,989           $ 2,182,678   $ 324,952   $ 466,681      $ 7,357,300 (H) 
                                                 

Depreciation, depletion and amortization

          $ 155,790           $ 47,702   $ 10,202   $ —        $ 213,694   
                                                 

Capital expenditures

          $ 272,896           $ 213,763   $ 9,760   $ —        $ 496,419   
                                                 

 

(G) Includes equity in earnings of unconsolidated affiliates of $2,474, $557 and $3,769 for Coal, Gas and All Other, respectively.
(H) Includes investments in unconsolidated equity affiliates of $11,419, $24,511 and $41,776 for Coal, Gas and All Other, respectively.

 

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Table of Contents

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,
 
     2010     2009     2010     2009  

Segment Earnings Before Income Taxes for total reportable business segments

   $ 172,716      $ 191,323      $ 361,452      $ 479,399   

Segment Earnings Before Income Taxes for all other businesses

     5,227        (3,808     6,635        4,138   

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

     (67,732     (6,754     (69,273     (15,186

Acquisition and Financing Fees (I)

     (14,187     —          (60,750     —     

Operating lease cease-use

     124        (7,543     252        (7,543

Corporate Restructuring (I)

     —          37        —          (2,847
                                

Earnings Before Income Taxes

   $ 96,148      $ 173,255      $ 238,316      $ 457,961   
                                

 

Total Assets    June 30,
   2010    2009

Segment assets for total reportable business segments

   $ 10,764,960    $ 6,565,667

Segment assets for all other businesses

     311,613      324,952

Items excluded from segment assets:

     

Cash and other investments (I)

     33,826      101,206

Recoverable income taxes

     36,145      —  

Deferred tax assets

     488,278      364,614

Bond issuance costs

     53,269      861
             

Total Consolidated Assets

   $ 11,688,091    $ 7,357,300
             

 

 

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

NOTE 16—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:

The payment obligations under the $250,000, 7.875% per annum notes due March 1, 2012, the $1,500,000, 8.000% per annum notes due April 1, 2017, and the $1,250,000, 8.250% per annum notes due April 1, 2020 issued by CONSOL Energy are jointly and severally, and also fully and unconditionally guaranteed by several subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission (“SEC”), the following financial information sets forth separate financial information with respect to the parent, CNX Gas, a guarantor subsidiary, the remaining guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries include investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all other 100% owned subsidiaries. These include, for example, 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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Table of Contents

Income Statement for the three months ended June 30, 2010 (unaudited):

 

     Parent
Issuer
    CNX Gas
Guarantor
   Other
Subsidiary
Guarantors
    Non-
Guarantors
    Elimination     Consolidated  

Sales—Outside

   $ —        $ 192,124    $ 982,731      $ 46,714      $ (1,453   $ 1,220,116   

Sales—Purchased Gas

     —          1,740      —          —          —          1,740   

Sales—Gas Royalty Interests

     —          14,151      —          —          —          14,151   

Freight—Outside

     —          —        28,075        —          —          28,075   

Other Income (including equity earnings)

     84,499        528      14,450        7,941        (82,153     25,265   
                                               

Total Revenue and Other Income

     84,499        208,543      1,025,256        54,655        (83,606     1,289,347   

Cost of Goods Sold and Other Operating Charges

     23,114        59,087      684,569        (380     52,381        818,771   

Purchased Gas Costs

     —          1,339      —          —          —          1,339   

Acquisition and Financing Fees

     14,187        3,328      —          —          —          17,515   

Gas Royalty Interests’ Costs

     —          11,544      —          —          (16     11,528   

Related Party Activity

     745        —        (2,883     44,815        (42,677     —     

Freight Expense

     —          —        28,075        —          —          28,075   

Selling, General and Administrative Expense

     —          21,361      26,026        353        (8,695     39,045   

Depreciation, Depletion and Amortization

     2,425        48,953      80,725        661        —          132,764   

Interest Expense

     60,248        2,108      2,769        5        (92     65,038   

Taxes Other Than Income

     2,864        6,722      68,824        714        —          79,124   
                                               

Total Costs

     103,583        154,442      888,105        46,168        901        1,193,199   
                                               

Earnings (Loss) Before Income Taxes

     (19,084     54,101      137,151        8,487        (84,507     96,148   

Income Tax Expense (Benefit)

     (39,188     20,608      40,271        3,557        —          25,248   
                                               

Net Income (Loss)

     20,104        33,493      96,880        4,930        (84,507     70,900   

Less: Net Income Attributable to Noncontrolling Interest

     —          —        —          —          (4,232     (4,232
                                               

Net Income (Loss) Attributable to CONSOL Energy Inc. Shareholders

   $ 20,104      $ 33,493    $ 96,880      $ 4,930      $ (88,739   $ 66,668   
                                               

 

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Table of Contents

Balance Sheet at June 30, 2010 (unaudited):

 

     Parent
Issuer
   CNX Gas
Guarantor
    Other
Subsidiary
Guarantors
    Non-
Guarantors
   Elimination     Consolidated  

Assets:

              

Current Assets:

              

Cash and Cash Equivalents

   $ 28,358    $ 1,041      $ 3,294      $ 1,620    $ —        $ 34,313   

Accounts and Notes Receivable:

              

Trade

     —        61,407        391        183,998      —          245,796   

Securitized

     200,000      —          —          —        —          200,000   

Other

     3,024      1,600        5,556        4,702      —          14,882   

Inventories

     2      3,296        245,938        44,614      —          293,850   

Recoverable Income Taxes

     41,261      (5,116     —          —        —          36,145   

Deferred Income Taxes

     109,063      (22,863     —          —        —          86,200   

Prepaid Expenses

     32,126      74,476        22,653        3,403      —          132,658   
                                              

Total Current Assets

     413,834      113,841        277,832        238,337      —          1,043,844   

Property, Plant and Equipment:

              

Property, Plant and Equipment

     162,066      6,125,043        8,277,185        25,298      —          14,589,592   

Less-Accumulated Depreciation, Depletion and Amortization

     88,699      516,966        4,044,457        17,194      —          4,667,316   
                                              

Property, Plant and Equipment-Net

     73,367      5,608,077        4,232,728        8,104      —          9,922,276   

Other Assets:

              

Deferred Income Taxes

     764,394      (362,316     —          —        —          402,078   

Investment in Affiliates

     8,275,199      23,866        972,266        7,105      (9,191,312     87,124   

Other

     126,317      44,367        50,908        11,177      —          232,769   
                                              

Total Other Assets

     9,165,910      (294,083     1,023,174        18,282      (9,191,312     721,971   
                                              

Total Assets

   $ 9,653,111    $ 5,427,835      $ 5,533,734      $ 264,723    $ (9,191,312   $ 11,688,091   
                                              

Liabilities and Stockholders’ Equity:

              

Current Liabilities:

              

Accounts Payable

   $ 76,623    $ 83,126      $ 93,440      $ 11,900    $ —        $ 265,089   

Accounts Payable (Recoverable)—Related Parties

     2,160,512      7,223        (2,318,340     150,605      —          —     

Short-Term Notes Payable

     292,200      66,350        —          —        —          358,550   

Current Portion Long-Term Debt

     584      9,197        36,063        460      —          46,304   

Accrued Income Taxes

     —        —          —          —        —          —     

Borrowings under Securitization Facility

     200,000      —          —          —        —          200,000   

Other Accrued Liabilities

     661,718      40,754        28,773        6,995      —          738,240   
                                              

Total Current Liabilities

     3,391,637      206,650        (2,160,064     169,960      —          1,608,183   

Long-Term Debt:

     3,000,315      62,006        106,009        619      —          3,168,949   

Deferred Credits and Other Liabilities

              

Postretirement Benefits Other Than Pensions

     —        6,864        2,681,258        —        —          2,688,122   

Pneumoconiosis

     —        —          187,285        —        —          187,285   

Mine Closing

     —        —          390,214        —        —          390,214   

Gas Well Closing

     —        63,576        50,249        —        —          113,825   

Workers’ Compensation

     —        —          156,398        22      —          156,420   

Salary Retirement

     165,127      —          —          —        —          165,127   

Reclamation

     —        —          51,902        —        —          51,902   

Other

     63,450      36,608        33,906        7      —          133,971   
                                              

Total Deferred Credits and Other Liabilities

     228,577      107,048        3,551,212        29      —          3,886,866   

Total Consol Energy Inc. Stockholders’ Equity

     3,032,582      5,060,621        4,028,087        94,115      (9,182,822     3,032,583   

Noncontrolling Interest

     —        (8,490     8,490        —        (8,490     (8,490
                                              

Total Liabilities and Stockholders’ Equity

   $ 9,653,111    $ 5,427,835      $ 5,533,734      $ 264,723    $ (9,191,312   $ 11,688,091   
                                              

 

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Income Statement for the three months ended June 30, 2009 (unaudited):

 

     Parent
Issuer
    CNX Gas
Guarantor
   Other
Subsidiary
Guarantors
   Non-
Guarantors
   Elimination     Consolidated  

Sales—Outside

   $ —        $ 150,863    $ 799,027    $ 44,686    $ (435 ) $      994,141   

Sales—Purchased Gas

     —          1,166      —        —        —          1,166   

Sales—Gas Royalty Interests

     —          8,666      —        —        —          8,666   

Freight—Outside

     —          —        27,087      —        —          27,087   

Other Income (including equity earnings)

     140,605        913      26,225      5,669      (133,907     39,505   
                                             

Total Revenue and Other Income

     140,605        161,608      852,339      50,355      (134,342     1,070,565   

Cost of Goods Sold and Other Operating Charges

     28,843        53,039      462,973      43,993      54,008        642,856   

Purchased Gas Costs

     —          390      —        —        —          390   

Gas Royalty Interests’ Costs

     —          6,470      —        —        (12     6,458   

Related Party Activity

     2,972        —        34,229      359      (37,560     —     

Freight Expense

     —          —        27,087      —        —          27,087   

Selling, General and Administrative Expense

     —          18,366      32,473      341      (15,553     35,627   

Depreciation, Depletion and Amortization

     3,284        24,883      78,643      665      —          107,475   

Interest Expense

     3,147        1,931      1,951      4      (88     6,945   

Taxes Other Than Income

     1,536        3,406      64,831      699      —          70,472   
                                             

Total Costs

     39,782        108,485      702,187      46,061      795        897,310   
                                             

Earnings (Loss) Before Income Taxes

     100,823        53,123      150,152      4,294      (135,137     173,255   

Income Tax Expense (Benefit)

     (12,516     20,146      45,162      1,624      —          54,416   
                                             

Net Income (Loss)

     113,339        32,977      104,990      2,670      (135,137     118,839   

Less: Net Income Attributable to Noncontrolling Interest

     —          —        —        —        (5,500     (5,500
                                             

Net Income (Loss) Attributable to CONSOL Energy Inc. Shareholders

   $ 113,339      $ 32,977    $ 104,990    $ 2,670    $ (140,637   $ 113,339   
                                             

 

33


Table of Contents

Balance Sheet at December 31, 2009:

 

     Parent
Issuer
   CNX Gas
Guarantor
    Other
Subsidiary
Guarantors
    Non-
Guarantors
   Elimination     Consolidated

Assets:

              

Current Assets:

              

Cash and Cash Equivalents

   $ 59,549    $ 1,124      $ 3,764      $ 1,170    $ —        $ 65,607

Accounts and Notes Receivable:

              

Trade

     —        43,421        113        273,926      —          317,460

Securitized

     50,000      —          —          —        —          50,000

Other

     4,781      975        3,281        6,946      —          15,983

Inventories

     —        —          262,755        44,842      —          307,597

Deferred Income Taxes

     108,254      (34,871     —          —        —          73,383

Prepaid Expenses

     18,979      103,094        36,767        2,166      —          161,006
                                            

Total Current Assets

     241,563      113,743        306,680        329,050      —          991,036

Property, Plant and Equipment:

              

Property, Plant and Equipment

     162,145      2,409,751        8,082,159        27,900      —          10,681,955

Less-Accumulated Depreciation, Depletion and Amortization

     82,733      433,201        4,022,295        19,436      —          4,557,665
                                            

Property, Plant and Equipment-Net

     79,412      1,976,550        4,059,864        8,464      —          6,124,290

Other Assets:

              

Deferred Income Taxes

     759,790      (334,493     —          —        —          425,297

Investment in Affiliates

     4,399,823      24,591        797,269        3,921      (5,142,071     83,533

Other

     84,736      21,627        33,216        11,666      —          151,245
                                            

Total Other Assets

     5,244,349      (288,275     830,485        15,587      (5,142,071     660,075
                                            

Total Assets

   $ 5,565,324    $ 1,802,018      $ 5,197,029      $ 353,101    $ (5,142,071   $ 7,775,401
                                            

Liabilities and Stockholders’ Equity:

              

Current Liabilities:

              

Accounts Payable

   $ 93,876    $ 53,516      $ 114,872      $ 7,296    $ —        $ 269,560

Accounts Payable (Recoverable)—Related Parties

     2,117,616      5,171        (2,378,119     255,332      —          —  

Short-Term Notes Payable

     415,000      57,850        —          —        —          472,850

Current Portion Long-Term Debt

     501      8,616        35,853        424      —          45,394

Accrued Income Taxes

     27,944      31,765        (31,765     —        —          27,944

Borrowings under Securitization Facility

     50,000      —          —          —        —          50,000

Other Accrued Liabilities

     546,066      25,455        34,569        6,748      —          612,838
                                            

Total Current Liabilities

     3,251,003      182,373        (2,224,590     269,800      —          1,478,586