Form 10-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

x   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended December 31, 2002; or

 

¨   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                             

 

Commission file number: 333-68987

 

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.)

 

Consol Plaza

1800 Washington Road

Pittsburgh, Pennsylvania 15241

(Address of principal executive offices including zip code)

 

Registrant’s telephone number, including area code:  412-831-4000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Name of exchange on which registered

 

Title of each Class

New York Stock Exchange

 

Common Stock ($.01 par value)

 

No securities are registered pursuant to Section 12(g) of the Act:

 


 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 125-2)    Yes x    No ¨

 

The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of the common stock on the New York Stock Exchange on such date was $440,597,224.

 

The number of shares outstanding of the registrant’s common stock as of March 12, 2003 is 78,749,504 shares.

 

Documents Incorporated by Reference:

 

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2003, are

incorporated by reference in Part III

 



Table of Contents

 

TABLE OF CONTENTS

 

         

Page


PART I

Item 1

  

Business

  

4

Item 2

  

Properties

  

23

Item 3

  

Legal Proceedings

  

24

Item 4

  

Submission of Matters to a Vote of Security Holders

  

24

PART II

Item 5

  

Market for Registrant’s Common Equity and Related Shareholder Matters

  

25

Item 6

  

Selected Financial Data

  

27

Item 7

  

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

  

30

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risks

  

54

Item 8

  

Financial Statements and Supplementary Data

  

55

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

  

111

PART III

Item 10

  

Directors, and Executive Officers of the Registrant

  

111

Item 11

  

Executive Compensation

  

111

Item 12

  

Security Ownership of Certain Beneficial Owners and Management

  

111

Item 13

  

Certain Relationships and Related Transactions

  

111

Item 14

  

Controls and Procedures

  

111

PART IV

Item 15

  

Index to the Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

112

Signatures

  

115

 

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Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

We are including the following cautionary statement in this Report on Form 10-K to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf us. With the exception of historical matters, the matters discussed in this Report on Form 10-K are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and uncertainties that could cause actual results to differ materially from projected results. In addition to other factors and matters discussed elsewhere in this Report on Form 10-K, these risks, uncertainties and contingencies include, but are not limited to, the following:

 

  ·   a loss of our competitive position because of the competitive nature of the coal and gas markets;

 

  ·   a decline in prices we receive for our coal and gas affecting our operating results and cash flows;

 

  ·   the inability to produce a sufficient amount of coal to fulfill our customers’ requirements which could result in our customers initiating claims against us;

 

  ·   overcapacity in the coal or gas industry impairing our profitability;

 

  ·   reliance on customers extending existing contracts or entering into new long-term contracts for coal;

 

  ·   reliance on major customers;

 

  ·   the credit worthiness of our customer base declining;

 

  ·   our ability to identify suitable acquisition candidates and to successfully finance, consummate the acquisition of, and integrate these candidates as part of our acquisition strategy;

 

  ·   disputes with customers concerning contracts resulting in litigation;

 

  ·   the risks inherent in coal mining being subject to unexpected disruptions, including geological conditions, equipment failure, fires, accidents and weather conditions which could cause our results to deteriorate;

 

  ·   uncertainties in estimating our economically recoverable coal and gas reserves;

 

  ·   risks in exploring for and producing gas;

 

  ·   the disruption of rail, barge and other systems which deliver our coal, or pipeline systems which deliver our gas;

 

  ·   the effects of government regulation;

 

  ·   obtaining governmental permits and approvals for our operations;

 

  ·   coal users switching to other fuels in order to comply with various environmental standards related to coal combustion;

 

  ·   the effects of mine closing, reclamation and certain other liabilities;

 

  ·   results of litigation;

 

  ·   federal, state and local authorities regulating our gas production activities;

 

  ·   deregulation of the electric utility industry having unanticipated effects on our industry;

 

  ·   new legislation resulting in restrictions on coal use;

 

  ·   federal and state laws imposing treatment, monitoring and reporting obligations on us;

 

  ·   management’s ability to correctly estimate and accrue for contingent liabilities;

 

  ·   increased exposure to workers’ compensation and black lung benefit liabilities;

 

  ·   the outcome of various asbestos litigation cases; and

 

  ·   our ability to comply with laws or regulations requiring that we obtain surety bonds for workers’ compensation and other statutory requirements.

 

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Table of Contents

 

PART I

 

Item 1. Business.

 

CONSOL ENERGY’S HISTORY

 

CONSOL Energy Inc. (“CONSOL Energy” or the “Company”) is a multi-fuel energy producer and energy services provider which primarily serves the electric power generation industry in the United States. That industry generates two-thirds of its output by burning coal or gas, the two fuels CONSOL Energy produces. As of December 31, 2002, CONSOL Energy produced high-Btu bituminous coal from 22 mining complexes in the United States, Canada and Australia. Bituminous coal is the most common type of coal and has a moisture content less than 20% by weight and heating value of 10,500 to 14,000 Btu per pound. Btu is a measure of energy required to raise the temperature of one pound of water by one degree Fahrenheit. Our coal generally has a high Btu content which creates more energy per unit when burned than coals with lesser Btu content. As a result, coals with greater Btu content can be more efficient to use. CONSOL Energy also produces pipeline-quality coalbed methane gas primarily from our coal properties in Virginia. CONSOL Energy believes that the use of coal and gas to generate electricity will grow as demand for power increases. For the twelve months ended December 31, 2002, our coal operations accounted for 88% of our revenues, our gas operations accounted for 7% of our revenues and our other operations accounted for 5% of our revenues.

 

Historically, CONSOL Energy ranks among the largest coal producers in the United States based upon total production, revenue, net income and operating cash flow. Our total production, including our portion of production from equity affiliates for the twelve months ended December 31, 2002, was 66 million tons. Our United States production of 63 million tons of coal in the twelve months ended December 31, 2002, accounted for approximately 6% of the total tons produced in the United States and 13% of the total tons produced east of the Mississippi River during that year. CONSOL Energy is one of the premier coal producers in the United States by several measures:

 

  ·   CONSOL Energy mines more high-Btu bituminous coal than any other United States producer;

 

  ·   CONSOL Energy is the largest coal producer, in terms of tons produced, east of the Mississippi River;

 

  ·   CONSOL Energy exports more coal from the United States than any other coal producer or trading company;

 

  ·   CONSOL Energy has the second largest amount of recoverable coal reserves among United States coal producers; and

 

  ·   CONSOL Energy is the largest United States producer of coal from underground mines.

 

CONSOL Energy also ranks as one of the largest coalbed methane gas companies in the United States based on both its proved reserves and its current daily production. Its leading industry position is highlighted by several measures:

 

  ·   We possess one of the largest coalbed methane reserve bases among publicly traded oil and gas companies in the United States with 1.1 trillion cubic feet of proved reserves of gas;

 

  ·   We currently have 134 million cubic feet of average daily coalbed methane gas production;

 

  ·   CONSOL Energy operates more than 1,300 wells connected by approximately 740 miles of gathering lines and associated infrastructure; and

 

  ·   CONSOL Energy facilities have the capacity to transport 250 million cubic feet of gas per day.

 

CONSOL Energy was organized as a Delaware corporation in 1991 and is currently a holding company for 63 direct and indirect wholly owned subsidiaries, principally engaged in the mining and sale of bituminous coal and the production and sale of coalbed methane gas.

 

RECENT EVENTS

 

In February 2003, we sold our Canadian coal assets and port facilities to Fording Inc. for a note and cash. The note was exchanged for 3.2 million units in the Fording Canadian Coal Trust, a newly organized publicly traded trust which acquired the assets of Fording Inc. We subsequently sold the units. CONSOL Energy received total proceeds of $71.7 million.

 

In February 2003, our Loveridge Mine experienced a fire near the bottom of the slope entry that is used to carry coal from the mine to the surface. The cost of extinguishing the fire is estimated to be approximately $5 million, net of insurance recovery. The Loveridge Mine was idle during 2002. In late December 2002, the mine began the process of developing a new underground area that would be mined with longwall mining equipment that was expected to be installed later in 2003. The fire will delay this installation.

 

In January 2003, an explosion occurred at an airshaft construction site at the McElroy Mine resulting in the deaths of three construction workers and the injury of three other construction workers. The workers were employees of the construction

 

4


Table of Contents

company installing the shaft. The airshaft is located in an area ahead of mining activity. The explosion did not affect the normal production schedule of the mine. We do not believe that this event will have a material adverse effect on our financial condition.

 

In January 2003, Mine 84, near Washington, Pennsylvania experienced a fire along several hundred feet of the conveyor belt entry servicing the longwall section of the mine. The fire was extinguished approximately two weeks later. On January 20, 2003, the mine resumed production on a limited basis with continuous mining machines, while repairs continued on the belt entry. The fire caused damage to the roof support system, the conveyor belt and the steel framework on which the belt travels. Repairs took several weeks to complete and are estimated to cost approximately $5 million, net of insurance recovery. Longwall coal production, which accounts for the majority of coal normally produced at the mine, was suspended while repairs were made. Lost coal production is estimated to be approximately 650 thousand tons. Longwall production resumed in February 2003.

 

In January 2003, we announced that we had entered into a 17-year, 76.5 million-ton coal supply agreement with FirstEnergy Generation Corp., a subsidiary of FirstEnergy Corp. The agreement provides for annual shipments of 4.5 million tons to FirstEnergy primarily from our McElroy Mine. The agreement includes a price re-opener provision every three years, beginning in 2005. If CONSOL Energy and FirstEnergy do not agree on price at that time, the contract can be terminated by either party.

 

In January 2003, Standard and Poor’s lowered its rating of CONSOL Energy’s long-term debt from BBB+ to BBB (9th lowest out of 22 rating categories) and raised the outlook to stable. An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Standard and Poor’s reaffirmed the Company’s A-2 rating (2nd lowest out of six rating categories) for short term corporate debt. A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes to circumstances and economic conditions than obligations in higher rating categories. However, the rating means that the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

 

Also, in August 2002, Moody’s Investor Service lowered the senior unsecured debt ratings of CONSOL Energy from Baa1 to Baa2 (9th lowest out of 21 rating categories). Moody’s Investor Service also changed our rating outlook from stable to negative. Bonds which are rated ‘Baa’ are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). The rating means that interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. The modifier 2 indicates that the obligation ranks in the mid-range of its generic rating category.

 

A security rating is not a recommendation by a rating agency to buy, sell or hold securities. The security rating may be subject to change.

 

The new McElroy Mine preparation plant was put into service in September 2002. The plant was designed to improve coal quality from the McElroy Mine by increasing the Btu content of the final product. The plant is part of a larger expansion of the McElroy Mine. We expect the expansion of the mine to be completed in mid 2004, increasing capacity at the McElroy Mine from about 7 million tons per year to about 11 million tons per year.

 

CONSOL Energy continues to convert to a new integrated information technology system provided by SAP AG to support business processes. The new technology is expected to provide cost-effective strategic software alternatives to meet future core business needs. The system will continue to be implemented in stages throughout 2003 at an estimated total cost of $53 million, $32 million of which has already been incurred.

 

INDUSTRY SEGMENTS

 

CONSOL Energy has two reportable business segments: Coal and Gas. The principal business of the Coal segment is mining, preparation and marketing of steam coal, sold primarily to electric utilities, and metallurgical coal, sold to steel and coke producers. The principal business of the Gas segment is to produce pipeline quality methane gas for sale primarily to gas wholesalers. Financial information concerning industry segments, as defined by generally accepted accounting principles, for the twelve months ended December 31, 2002, the six months ended December 31, 2001, and the fiscal years ended June 30, 2001 and 2000 is included in Note 27 of Notes to Consolidated Financial Statements included as Item 8 in Part II of this Annual Report on Form 10-K.

 

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Table of Contents

 

Coal Operations

 

Mining Complexes

 

At December 31, 2002, CONSOL Energy had 22 mining complexes located in the United States, Canada and Australia, including a 50% interest in the Cardinal River and the Line Creek mines located in Canada and a 50% interest in the Glennies Creek mine located in Australia.

 

The following table provides the location of each of CONSOL Energy’s mining complexes at December 31, 2002, the amount of coal reserves, and a summary of the characteristics of the coal reserves associated with each of its mining complexes.

 

CONSOL ENERGY MINING COMPLEXES

 

Average Quality and Reserves as of December 31, 2002

 

    

Average Quality (Dry-Basis)


  

Assigned Reserves (12/31/02)


    

Total Accessible & Assigned Reserves (000 tons)


    

Heat Content (Btu/lb)


  

Sulfur Content (%)


  

Total (000 tons)


  

Owned (%)


    

Lease (%)


    

Northern Appalachia

                                 

Enlow Fork

  

14,114

  

1.73

  

68,215

  

60

%

  

40

%

  

231,936

Bailey

  

14,067

  

2.13

  

93,115

  

 

  

100

%

  

167,382

Mine 84

  

14,249

  

1.59

  

53,294

  

64

%

  

36

%

  

111,810

McElroy

  

13,962

  

3.21

  

176,959

  

100

%

  

 

  

176,959

Shoemaker

  

13,877

  

3.67

  

70,008

  

96

%

  

4

%

  

85,644

Loveridge

  

13,969

  

2.40

  

13,322

  

100

%

  

 

  

120,355

Robinson Run

  

14,126

  

3.36

  

33,950

  

74

%

  

26

%

  

158,989

Blacksville 2

  

14,165

  

2.69

  

39,965

  

100

%

  

 

  

160,227

Mahoning Valley

  

12,400

  

2.28

  

1,374

  

100

%

  

 

  

1,374

Central Appalachia

                                 

Buchanan

  

14,950

  

0.78

  

42,467

  

2

%

  

98

%

  

136,957

VP-3

  

15,185

  

0.70

  

7,890

  

 

  

100

%

  

7,890

VP-8

  

14,903

  

0.81

  

6,467

  

1

%

  

99

%

  

6,467

Mill Creek

  

14,230

  

1.51

  

8,534

  

96

%

  

4

%

  

26,224

Jones Fork

  

13,654

  

1.09

  

15,717

  

56

%

  

44

%

  

43,952

Amonate

  

14,071

  

0.70

  

7,756

  

59

%

  

41

%

  

7,756

Elk Creek

  

14,648

  

0.79

  

10,836

  

50

%

  

50

%

  

24,293

Illinois Basin

                                 

Rend Lake

  

13,738

  

1.02

  

21,348

  

12

%

  

88

%

  

55,053

Ohio 11

  

13,500

  

3.13

  

8,310

  

 

  

100

%

  

10,508

Western U.S.

                                 

Emery

  

12,691

  

0.79

  

21,712

  

80

%

  

20

%

  

34,015

Western Canada

                                 

Cardinal River

  

14,000

  

0.37

  

691

  

 

  

100

%

  

1,763

Line Creek

  

13,958

  

0.41

  

30,742

  

 

  

100

%

  

33,205

Australia

                                 

Glennies Creek

  

13,740

  

0.48

  

10,205

  

 

  

100

%

  

10,205

 

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Table of Contents

 

CONSOL Energy assigns coal reserves to each of its mining operations, but each mine also may have access to additional reserves that have not yet been assigned to a particular mine. Accessible reserves are proved and probable unassigned reserves that can be accessed by a current mining complex. These reserves may be accessed by one or more than one of CONSOL Energy’s current mining operations and in the chart above may be reflected in amounts for more than one mining complex.

 

Assigned and unassigned coal reserves are proved and probable reserves which are either owned in fee or leased. The leases have terms extending up to 30 years and generally provide for renewal through the anticipated life of the associated mine. These renewals are exercisable by the payment of minimum royalties.

 

At December 31, 2002, the Loveridge Mine was in development. At December 31, 2002, Rend Lake, Elk Creek, VP-3 and Ohio 11 complexes were idle. These mines are anticipated to remain idle until market conditions support reopening. Also during 2002, CONSOL Energy ceased production at the Dilworth, Humphrey, Meigs, Muskingum and Windsor Mines due to the depletion of economically recoverable reserves. In February 2003, we sold our Cardinal River and Line Creek Mines in western Canada.

 

Coal Reserves

 

CONSOL Energy had an estimated 4.3 billion tons of proved and probable reserves. Reserves are the portion of the proved and probable tonnage that meet CONSOL Energy’s economic criteria regarding mining height, preparation plant recovery, depth of overburden and stripping ratio. Generally, these reserves would be commercially mineable at year-end price and cost levels. Information with respect to proved and probable coal reserves has been determined by CONSOL Energy’s geologists and mining engineers.

 

CONSOL Energy’s reserves are located in northern Appalachia (52%), central Appalachia (11%), the midwestern United States (21%), the western United States (11%), and in western Canada and Australia (5%) at December 31, 2002.

 

The following table summarizes our proved and probable reserves as of December 31, 2002 by region, type of coal or sulfur content (sulfur content per million British thermal unit). Proved and probable reserves include both assigned and unassigned reserves. Amounts for unassigned reserves are net amounts based on various recovery rates reflecting CONSOL Energy’s experience in recovering coal from seams. In reporting unassigned reserves, CONSOL Energy has assumed approximately 60% recovery of in-place coal for reserves that can be mined using the longwall method, approximately 50% recovery of in-place coal for reserves that will be mined using other underground methods and approximately 90% recovery for surface mines. The following table classifies bituminous coal as high volatile A, B and C. High volatile A, B and C bituminous coals are classified on the basis of heat value. The table also classifies bituminous coals as medium and low volatile which are classified on the basis of fixed carbon and volatile matter.

 

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Table of Contents

 

CONSOL ENERGY PROVED AND PROBABLE COAL RESERVES

BY PRODUCING REGION AND PRODUCT (000 TONS) AS OF DECEMBER 31, 2002

 

   

£ 1.20 lbs


    

> 1.20–< 2.50 lbs


   

³ 2.50 lbs


              
   

S02/MMBtu


    

S02/MMBtu


   

S02/MMBtu


              

By Region


 

Low Btu


   

Med Btu


   

High Btu


    

LowBtu


   

Med Btu


   

High Btu


   

Low Btu


   

Med Btu


   

High Btu


   

Total


    

Percentage by Region


 

Northern Appalachia:

                                                                   

Metallurgical:

                                                                   

High Vol A Bituminous

 

 

 

 

 

 

  

 

 

 

 

187,205

 

 

 

 

 

 

 

 

187,205

 

  

4.4

%

Steam:

                                                                   

High Vol A Bituminous

 

 

 

49,359

 

 

 

  

 

 

10,038

 

 

121,509

 

 

48,231

 

 

119,283

 

 

1,699,121

 

 

2,047,541

 

  

47.9

%

Low Vol Bituminous

 

 

 

 

 

 

  

 

 

 

 

15,911

 

 

 

 

 

 

 

 

15,911

 

  

0.3

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

 

 

49,359

 

 

 

  

 

 

10,038

 

 

324,625

 

 

48,231

 

 

119,283

 

 

1,699,121

 

 

2,250,657

 

  

52.6

%

Central Appalachia:

                                                                   

Metallurgical:

                                                                   

High Vol A Bituminous

 

7,325

 

 

 

 

18,645

 

  

 

 

 

 

2,103

 

 

 

 

 

 

 

 

28,073

 

  

0.6

%

Med. Vol Bituminous

 

 

 

3,456

 

 

81,381

 

  

 

 

2,417

 

 

6,129

 

 

 

 

 

 

 

 

93,383

 

  

2.2

%

Low Vol Bituminous

 

 

 

 

 

158,968

 

  

 

 

 

 

8,174

 

 

 

 

 

 

 

 

167,142

 

  

3.9

%

Steam:

                                                                   

High Vol A Bituminous

 

26,967

 

 

24,724

 

 

1,306

 

  

27,341

 

 

32,266

 

 

42,354

 

 

 

 

 

 

15,163

 

 

170,121

 

  

4.0

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

34,292

 

 

28,180

 

 

260,300

 

  

27,341

 

 

34,683

 

 

58,760

 

 

 

 

 

 

15,163

 

 

458,719

 

  

10.7

%

Midwest—Illinois Basin:

                                                                   

Steam:

                                                                   

High Vol B Bituminous

 

 

 

 

 

 

  

 

 

68,535

 

 

55,053

 

 

56,963

 

 

425,894

 

 

34,437

 

 

640,882

 

  

15.0

%

High Vol C Bituminous

 

 

 

 

 

 

  

 

 

158,136

 

 

 

 

91,987

 

 

 

 

 

 

250,123

 

  

5.9

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

 

 

 

 

 

  

 

 

226,671

 

 

55,053

 

 

148,950

 

 

425,894

 

 

34,437

 

 

891,005

 

  

20.9

%

Northern Powder River Basin:

                                                                   

Steam:

                                                                   

Subbituminous B

 

 

 

 

 

248,609

 

  

 

 

 

 

4,126

 

 

 

 

 

 

 

 

252,735

 

  

5.9

%

Subbituminous C

 

 

 

186,637

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

186,637

 

  

4.4

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

 

 

186,637

 

 

248,609

 

  

 

 

 

 

4,126

 

 

 

 

 

 

 

 

439,372

 

  

10.3

%

Utah—Emery Field:

                                                                   

High Vol B Bituminous

 

 

 

 

 

 

  

 

 

34,015

 

 

 

 

 

 

 

 

 

 

34,015

 

  

0.8

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

 

 

 

 

 

  

 

 

34,015

 

 

 

 

 

 

 

 

 

 

34,015

 

  

0.8

%

Western, Canada:

                                                                   

Metallurgical:

                                                                   

Med. Vol Bituminous

 

102,407

 

 

31,684

 

 

26,575

 

  

 

 

 

 

 

 

 

 

 

 

 

 

160,666

 

  

3.7

%

Low Vol Bituminous

 

 

 

28,588

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

28,588

 

  

0.7

%

Steam:

                                                                   

Low Vol Bituminous

 

2,154

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

2,154

 

  

0.1

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

104,561

 

 

60,272

 

 

26,575

 

  

 

 

 

 

 

 

 

 

 

 

 

 

191,408

 

  

4.5

%

Hunter Valley, Australia:

                                                                   

Metallurgical

                                                                   

High Vol A Bituminous

 

 

 

10,205

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

10,205

 

  

0.2

%

   

 

 

  

 

 

 

 

 

 

  

Region Total

 

 

 

10,205

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

10,205

 

  

0.2

%

   

 

 

  

 

 

 

 

 

 

  

Total Company

 

138,853

 

 

334,653

 

 

535,484

 

  

27,341

 

 

305,407

 

 

442,564

 

 

197,181

 

 

545,177

 

 

1,748,721

 

 

4,275,381

 

  

100.0

%

   

 

 

  

 

 

 

 

 

 

  

Percent of Total

 

3.3

%

 

7.8

%

 

12.5

%

  

0.6

%

 

7.1

%

 

10.4

%

 

4.6

%

 

12.8

%

 

40.9

%

 

100.0

%

      
   

 

 

  

 

 

 

 

 

 

      

 

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CONSOL ENERGY PROVED AND PROBABLE COAL RESERVES

BY PRODUCT (000 TONS) AS OF DECEMBER 31, 2002

 

The following table classifies bituminous coal as high volatile A, B and C. High volatile A, B and C bituminous coals are classified on the basis of heat value. The table also classifies bituminous coals as medium and low volatile which are classified on the basis of fixed carbon and volatile matter.

 

    

£1.20 lbs


    

> 1.20£ 2.50 lbs


    

>2.50 lbs


                 
    

S02/MMBtu


    

S02/MMBtu


    

S02/MMBtu


                 

By Product

  

Low Btu


    

Med Btu


    

High Btu


    

Low Btu


    

Med Btu


    

High Btu


    

Low Btu


    

Med Btu


    

High Btu


    

Total


      

Percentage by Product


 

Metallurgical:

                                                                              

High Vol A Bituminous

  

7,325

 

  

10,205

 

  

18,645

 

  

 

  

 

  

189,308

 

  

 

  

 

  

 

  

225,483

 

    

5.3

%

Med. Vol Bituminous

  

102,407

 

  

35,140

 

  

107,956

 

  

 

  

2,417

 

  

6,129

 

  

 

  

 

  

 

  

254,049

 

    

5.9

%

Low Vol Bituminous

  

 

  

28,588

 

  

158,968

 

  

 

  

 

  

8,174

 

  

 

  

 

  

 

  

195,730

 

    

4.6

%

    

  

  

  

  

  

  

  

  

  

    

Total Metallurgical

  

109,732

 

  

73,933

 

  

285,569

 

  

 

  

2,417

 

  

203,611

 

  

 

  

 

  

 

  

675,262

 

    

15.8

%

Steam:

                                                                              

High Vol A Bituminous

  

26,967

 

  

74,083

 

  

1,306

 

  

27,341

 

  

42,304

 

  

163,863

 

  

48,231

 

  

119,283

 

  

1,714,284

 

  

2,217,662

 

    

51.8

%

High Vol B Bituminous

  

 

  

 

  

 

  

 

  

102,550

 

  

55,053

 

  

56,963

 

  

425,894

 

  

34,437

 

  

674,897

 

    

15.8

%

High Vol C Bituminous

  

 

  

 

  

 

  

 

  

158,136

 

  

 

  

91,987

 

  

 

  

 

  

250,123

 

    

5.9

%

Low Vol Bituminous

  

2,154

 

  

 

  

 

  

 

  

 

  

15,911

 

  

 

  

 

  

 

  

18,065

 

    

0.4

%

Subbituminous B

  

 

  

 

  

248,609

 

  

 

  

 

  

4,126

 

  

 

  

 

  

 

  

252,735

 

    

5.9

%

Subbituminous C

  

 

  

186,637

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

186,637

 

    

4.4

%

    

  

  

  

  

  

  

  

  

  

    

Total Steam

  

29,121

 

  

260,720

 

  

249,915

 

  

27,341

 

  

302,990

 

  

238,953

 

  

197,181

 

  

545,177

 

  

1,748,721

 

  

3,600,119

 

    

84.2

%

    

  

  

  

  

  

  

  

  

  

    

Total

  

138,853

 

  

334,653

 

  

535,484

 

  

27,341

 

  

305,407

 

  

442,564

 

  

197,181

 

  

545,177

 

  

1,748,721

 

  

4,275,381

 

    

100.0

%

    

  

  

  

  

  

  

  

  

  

    

Percent of Total

  

3.3

%

  

7.8

%

  

12.5

%

  

0.6

%

  

7.1

%

  

10.4

%

  

4.6

%

  

12.8

%

  

40.9

%

  

100.0

%

        
    

  

  

  

  

  

  

  

  

  

        

 

The following table categorizes the relative Btu values (low, medium and high) for each of CONSOL Energy’s producing regions in Btus per pound of coal.

 

Region

  

Low


  

Medium


  

High


Northern, Central Appalachia, Canada and Australia

  

< 12,500

  

12,500 – 13,000

  

> 13,000

Midwest

  

< 11,600

  

11,600 – 12,000

  

> 12,000

Northern Powder River Basin

  

<   8,400

  

8,400 –   8,800

  

>   8,800

Colorado and Utah

  

< 11,000

  

11,000 – 12,000

  

> 12,000

 

CONSOL Energy’s reserve estimates are based on geological, engineering and market data assembled and analyzed by our staff of geologists and engineers located at individual mines, operations offices and at its principal office. The reserve estimates and general economic criteria upon which they are based are reviewed and adjusted annually to reflect production of coal from the reserves, analysis of new engineering and geological data, changes in property control, modification of mining methods and other factors. Reserve information, including the quantity and quality of reserves, coal and surface ownership, lease payments and other information relating to CONSOL Energy’s coal reserve and land holdings, is maintained through a system of interrelated computerized databases developed by CONSOL Energy.

 

CONSOL Energy’s reserve estimates are predicated on information obtained from its ongoing exploration drilling and in-mine channel sampling programs. Data including elevation, thickness, and where samples are available, the quality of the coal from individual drill holes and channel samples are input into a computerized geological database. The information derived from the geological database is then combined with data on ownership or control of the mineral and surface interests to determine the extent of the reserves in a given area.

 

Production

 

In the twelve months ended December 31, 2002, 92% of CONSOL Energy’s production came from underground mines and 8% from surface mines. Where the geology is favorable and where reserves are sufficient, CONSOL Energy employs longwall mining systems in its underground mines. For the twelve months ended December 31, 2002, 82% of its production came from mines equipped with longwall mining systems. Underground longwall systems are highly mechanized, capital intensive

 

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operations. Mines using longwall systems have a low variable cost structure compared with other types of mines and can achieve high productivity levels compared with those of other underground mining methods. Because CONSOL Energy has substantial reserves readily suitable to these operations, CONSOL Energy believes that these longwall mines can increase capacity at low incremental cost.

 

The following table shows the production, in millions of tons, for CONSOL Energy’s mines in the twelve months ended December 31, 2002, the location of each mine, the type of mine, the type of equipment used at each mine and the year each mine was established or acquired by us. The table includes information for five mines, Dilworth, Humphrey, Meigs, Muskingum and Windsor, that closed during the year because of reserve depletion. In February 2003, we sold our Cardinal River and Line Creek Mines in western Canada.

 

Mine


  

Location


  

Mine Type


  

Mining Equipment


    

Tons Produced (millions)


    

Year Established or Acquired


Northern Appalachia

                            

Enlow Fork

  

Enon, Pennsylvania

  

U

  

LW/CM

    

9.6

    

1990

Bailey

  

Enon, Pennsylvania

  

U

  

LW/CM

    

9.7

    

1984

McElroy

  

Glen Easton, West Virginia

  

U

  

LW/CM

    

4.7

    

1968

Robinson Run

  

Shinnston, West Virginia

  

U

  

LW/CM

    

5.0

    

1966

Mine No. 84

  

Eighty Four, Pennsylvania

  

U

  

LW/CM

    

4.0

    

1998

Blacksville 2

  

Wana, West Virginia

  

U

  

LW/CM

    

4.8

    

1970

Dilworth (2)

  

Rices Landing, Pennsylvania

  

U

  

LW/CM

    

3.6

    

1984

Shoemaker

  

Moundsville, West Virginia

  

U

  

LW/CM

    

3.4

    

1966

Loveridge (3)

  

Fairview, West Virginia

  

U

  

LW/CM

    

    

1956

Humphrey (2)

  

Maidsville, West Virginia

  

U

  

CM

    

0.5

    

1956

Mahoning Valley

  

Cadiz, Ohio

  

S

  

S/L

    

0.3

    

1974

Meigs (2)

  

Point Rock, Ohio

  

U

  

LW/CM

    

0.4

    

2001

Muskingum (2)

  

Cumberland, Ohio

  

S

  

D

    

    

2001

Windsor (2)

  

West Liberty, West Virginia

  

U

  

LW/CM

    

1.3

    

2001

Central Appalachia

                            

Buchanan

  

Mavisdale, Virginia

  

U

  

LW/CM

    

4.1

    

1983

VP—3 (3)

  

Vansant, Virginia

  

U

  

LW/CM

    

    

1993

VP—8

  

Rowe, Virginia

  

U

  

LW/CM

    

2.2

    

1993

Mill Creek (1)

  

Deane, Kentucky

  

U/S

  

CM

    

3.5

    

1994

Jones Fork (1)

  

Mousie, Kentucky

  

U/S

  

CM

    

4.0

    

1992

Amonate (1)

  

Amonate, Virginia

  

U

  

CM

    

0.5

    

1925

Illinois Basin

                            

Rend Lake (3)

  

Sesser, Illinois

  

U

  

LW/CM

    

1.7

    

1986

Ohio No.11 (3)

  

Morganfield, Kentucky

  

U

  

CM

    

    

1993

Western U.S.

                            

Emery (4)

  

Emery County, Utah

  

U

  

LW/CM

    

    

1945

Western Canada

                            

Cardinal River

  

Hinton, Alberta, Canada

  

S

  

S/L

    

1.2

    

1969

Line Creek

  

Sparwood, British Columbia, Canada

  

S

  

S/L

    

1.7

    

2000

Australia

                            

Glennies Creek

  

Hunter Valley, New South Wales, Australia

  

U

  

LW/CM

    

0.1

    

2001


S   = Surface
U   = Underground
LW   = Longwall
CM   = Continuous Miner
S/L   = Stripping Shovel and Front End Loaders
D   = Dragline & Dozers

 

(1)   Amonate, Mill Creek and Jones Fork complexes includes operations by independent contractors.

 

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(2)   Production at the complex ceased during the twelve months ended December 31, 2002, due to the depletion of economically recoverable reserves.
(3)   Complex was idled for all or part of the year ended December 31, 2002.
(4)   Complex was in development at December 31, 2002.

 

The amounts shown for production by Cardinal River, 1.2 million tons, Line Creek, 1.7 million tons and Glennies Creek, 0.1 million tons, actually represents 50% of the production of each mine, reflecting our 50% interest in each mine at December 31, 2002.

 

CONSOL Energy operates approximately 23% of the United States longwall mining systems.

 

The following table ranks the 20 largest underground mines in the United States by tons of coal produced in calendar year 2001, the latest information available at the time of filing.

 

MAJOR U.S. UNDERGROUND COAL MINES — 2001

In millions of tons

 

Mine Name


  

Operating Company


    

Production


Bailey

  

CONSOL Energy

    

10.3

Enlow Fork

  

CONSOL Energy

    

10.3

Twentymile

  

Twentymile Coal Company

    

7.7

SUFCO

  

Canyon Fuel Company

    

7.0

Galatia

  

The American Coal Co.

    

6.8

Cumberland

  

RAG Cumberland Resources Corp.

    

6.7

Emerald

  

RAG Emerald Resources Corp.

    

6.7

McElroy

  

CONSOL Energy

    

6.6

Baker

  

Lodestar Energy, Inc.

    

6.3

Bowie

  

Bowie Resources, LTD

    

5.4

Mountaineer

  

Arch Coal, Inc.

    

5.3

Blacksville 2

  

CONSOL Energy

    

5.0

Federal No. 2

  

Eastern Associated Coal Corp.

    

5.0

West Elk

  

Arch Coal Inc.

    

5.0

Robinson Run

  

CONSOL Energy

    

4.9

Dilworth

  

CONSOL Energy

    

4.7

Dotiki

  

Webster County Coal LLC

    

4.6

Powhatan No. 6

  

Ohio Valley Coal Co.

    

4.6

Buchanan

  

CONSOL Energy

    

4.4

Deer Creek

  

Energy West Mining Co.

    

4.3


Source: National Mining Association

 

Marketing and Sales

 

We sell coal produced by our mining complexes and additional coal that is purchased by us for resale from other producers. We maintain United States sales offices in Atlanta, Norfolk, Philadelphia and Pittsburgh and an overseas office in Brussels, Belgium. In addition, we sell coal through agents, brokers and unaffiliated trading companies. In the twelve months ended December 31, 2002, we sold 67 million tons of coal, including our percentage of sales in equity affiliates, 89% of which was sold in domestic markets. Our direct sales to domestic electricity generators represented 78% of our total tons sold in the twelve months ended December 31, 2002. Including equity affiliate sales, we had approximately 170 customers in the twelve months ended December 31, 2002. During the twelve months ended December 31, 2002, Allegheny Energy accounted for 15% of our total revenue and American Electric Power accounted for approximately 11% of our total revenue.

 

Coal Contracts

 

We sell coal to customers under arrangements that are the result of both bidding procedures and extensive negotiations. We sell coal for terms that range from a single shipment to multi-year agreements for millions of tons. During the twelve months ended December 31, 2002, approximately 82% of the coal we produced was sold under contracts with terms of one year or more. The pricing mechanisms under our multiple-year agreements typically consist of contracts with one or more of the following pricing mechanisms:

 

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Table of Contents

 

  ·   Fixed price contracts; or

 

  ·   Annually negotiated prices that reflect market conditions at the time; or

 

  ·   Base-price-plus-escalation methods which allow for periodic price adjustments based on inflation indices or, in some cases, pass-through of actual cost changes.

 

A few contracts have features of several contract types, such as provisions that allow for renegotiation of prices on a limited basis within a base-price-plus-escalation agreement. Such reopener provisions allow both the customer and us an opportunity to adjust prices to a level close to then current market conditions. Each contract is negotiated separately, and the triggers for reopener provisions differ from contract to contract. Many contracts provide for a periodic resetting of prices if market prices fall outside negotiated parameters. Most of our existing contracts with reopener provisions adjust the contract price to market price at the time the reopener provision is triggered. Market price generally is based on recent published transactions for similar quantities and quality of coal. Reopener provisions could result in early termination of a contract or in requirements that certain volumes be purchased if the parties were to fail to agree on price and other terms that may be subject to renegotiation.

 

The following table sets forth, as of February 1, 2003, the total tons of coal CONSOL Energy is committed to deliver at predetermined prices, including prices that are adjusted as often as quarterly based upon indices which are prenegotiated, under existing contracts during calendar years 2003 through 2007.

 

    

Tons of Coal to be Delivered

(in millions of nominal tons)


    

2003


  

2004


  

2005


  

2006


  

2007


Volume under existing contracts

  

52.4

  

32.7

  

13.8

  

6.8

  

4.9

 

The foregoing table does not include an aggregate of 12.1 million tons that we may be required to deliver in 2003 at predetermined prices:

 

  ·   under tentative agreements reached by February 1, 2003, for which no binding contracts have been negotiated or executed;

 

  ·   upon exercise of rights by customers under existing contracts to buy more coal at previously agreed prices; and

 

  ·   under agreements which call for the price to be determined by mutual agreement of the parties.

 

We routinely engage in efforts to renew or extend contracts scheduled to expire. Although there are no guarantees that contracts will be renewed, we have been successful in the past in renewing or extending contracts.

 

Contracts also typically contain force majeure provisions allowing for the suspension of performance by the customer or us for the duration of specified events beyond the control of the affected party, including labor disputes. Some contracts may terminate upon continuance of an event of force majeure for an extended period, which is generally three to twelve months. Contracts also typically specify minimum and maximum quality specifications regarding the coal to be delivered. Failure to meet these conditions could result in substantial price reductions or termination of the contract, at the election of the customer. Although the volume to be delivered under a long-term contract is stipulated, we or the buyer may vary the volume or timing of delivery within specified limits.

 

Many of our recently negotiated contracts have had shorter terms, generally no longer than three to five years. Many contracts provide the opportunity to adjust the contract prices. Contract prices may be adjusted as often as quarterly based upon indices which are prenegotiated, to reflect changing markets. One exception to this is a seventeen year, 76.5 million ton coal agreement entered into in January 2003. This agreement provides for annual shipments of 4.5 million tons to FirstEnergy Generation Corp., a subsidiary of FirstEnergy Corp., primarily from McElroy Mine. Most of the supply is expected to be used at FirstEnergy’s Bruce Mansfield Plant. The agreement includes a price re-opener provision every three years, beginning in 2005. If CONSOL Energy and FirstEnergy do not agree on price at that time, the contract can be terminated by either party.

 

Distribution

 

Coal is transported from CONSOL Energy’s mining complexes to customers by means of railroad cars, river barges, trucks, conveyor belts or a combination of these means of transportation. The Robinson Run Mine transports coal to customers by conveyor belt. The McElroy, Shoemaker, and Ohio No. 11 complexes ship coal to customers by means of river barges. Trucks are used to transport coal from the Loveridge, Mine 84, Jones Fork, Blacksville, Rend Lake, Mahoning Valley and Emery complexes. The Enlow Fork, Bailey, Mine No. 84, Robinson Run, Loveridge, Line Creek, Blacksville, Buchanan, Mill Creek, VP-3, Jones Fork, VP-8, Amonate, Elk Creek, Rend Lake and Cardinal River complexes primarily transport coal to customers by rail.

 

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Table of Contents

 

We employ transportation specialists who negotiate freight and equipment agreements with various transportation suppliers, including railroads, barge lines, terminal operators, ocean vessel brokers and trucking companies.

 

We own five towboats and six harbor boats and a fleet of nearly 300 barges to serve customers along the Ohio and Monongahela Rivers. The barge operation allows us to control delivery schedules and serves as temporary floating storage for coal where land storage is unavailable. Approximately 40% of the coal that we produced was shipped on the inland waterways in the twelve months ended December 31, 2002.

 

Competition

 

The United States coal industry is highly competitive, with numerous producers in all coal producing regions. CONSOL Energy competes against other large producers and hundreds of small producers in the United States and overseas. The largest producer is estimated to have produced less than 18% (based on tonnage produced) of the total United States production in 2002. The U.S. Department of Energy reported 1,453 active coal mines in the United States in 2000, the latest year for which government statistics are available. Demand for our coal by our principal customers is affected by:

 

  ·   the price of competing coal and alternative fuel supplies, including nuclear, natural gas, oil and renewable energy sources, such as hydroelectric power;

 

  ·   coal quality;

 

  ·   transportation costs from the mine to the customer; and

 

  ·   the reliability of supply.

 

Continued demand for CONSOL Energy’s coal and the prices that CONSOL Energy obtains are affected by demand for electricity, environmental and government regulation, technological developments and the availability and price of competing coal and alternative fuel supplies. We sell coal to foreign electricity generators and to the more specialized metallurgical coal market, both of which are significantly affected by international demand and competition.

 

Gas Operations

 

CONSOL Energy produces coalbed methane, which is pipeline quality gas that resides in coal seams. In the eastern United States, conventional natural gas fields typically are located in various types of sedimentary formations at depths ranging from 2,000 to 15,000 feet. Exploration companies often put their capital at risk by searching for gas in commercially exploitable quantities at these depths. By contrast, gas in the coal seams that CONSOL Energy drills or anticipates drilling is typically in formations less than 2,500 feet deep which are usually better defined than deeper formations. CONSOL Energy believes that this contributes to lower exploration costs than those incurred by producers that operate in deeper, less defined formations.

 

Nearly all of our gas production currently is from operations in southwestern Virginia. In this region, we operate 1,235 wells, 708 miles of gathering lines and various compression stations. Our southwestern Virginia operations control approximately 210,000 acres of gas rights. At December 31, 2002, we reported 1.1 trillion cubic feet of proved reserves of gas, of which approximately 33.2% is developed. Our December 2002 average daily production in this region is approximately 131 million cubic feet per day.

 

We have been developing gas production in southwestern Pennsylvania and northern West Virginia by gathering gas currently being vented to the atmosphere by our mines in the area. In this region, our December 2002 average daily production was approximately 2.5 million cubic feet per day. At December 31, 2002, we reported 15.8 billion cubic feet of proved reserves of gas, of which approximately 78% is developed. We expect to expand production of gas in this area by drilling additional production wells into the coal seams that we own or control.

 

We have also been developing gas production in the Tennessee area through a 50% joint venture. In this area, our 50% portion of December 2002 average daily production was approximately 0.3 thousand cubic feet per day. At December 31, 2002, our portion of proved gas reserves for this area was 0.6 billion cubic feet, all of which were developed.

 

CONSOL Energy has not filed reserve estimates with any federal agency.

 

Drilling

 

The total average daily rate of production controlled by CONSOL Energy during the twelve months ended December 31, 2002, was 129.2 million cubic feet. During the twelve months ended December 31, 2002, the six months ended December 31, 2001, and the twelve months ended June 30, 2001, and 2000, we drilled in the aggregate, 197, 141, 203, and 130 coalbed methane development wells, respectively, all of which were productive. The net number of wells for those periods were approximately 194, 141, 157, and 82 wells, respectively. Ten coalbed methane and nineteen conventional exploratory wells were being drilled and evaluated at December 31, 2002, 17 exploratory wells were being drilled at December 31, 2001, and two exploratory wells were being drilled at June 30, 2001.

 

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Table of Contents

 

Production

 

The following table sets forth CONSOL Energy’s working interest production for the periods indicated.

 

      

For the Twelve Months Ended December 31,

    

For the Six

Months Ended December 31,

  

For the Twelve

Months Ended

June 30,

      

2002


    

2001


  

2001


  

2000


Coalbed methane (in millions of cubic feet)

    

47,164

    

19,885

  

34,004

  

16,235

 

Average Sales Prices and Lifting Costs

 

The following table sets forth the average sales price and the average lifting cost for all of our gas production for the periods indicated. Lifting cost is the cost of raising gas to the gathering system and does not include depreciation, depletion or amortization. See Note 30 of Notes to Consolidated Financial Statements.

 

      

Average Gas Sales Price, Lifting Cost, and Royalty for the


      

Twelve Months Ended December 31,


    

Six Months Ended December 31,


  

Twelve Months Ended June 30,


      

2002


    

2001


  

2001


  

2000


Average gas sales price (per million Btu)

    

$3.22

    

$2.67

  

$

5.27

  

$

3.06

Average lifting cost (per million Btu)

    

$0.36

    

$0.47

  

$

0.37

  

$

0.48

Average royalty (per million Btu)

    

$0.27

    

$0.18

  

$

0.54

  

$

0.20

 

Productive Wells and Acreage

 

The following table sets forth, at December 31, 2002, the number of CONSOL Energy’s producing wells, developed acreage and undeveloped acreage.

 

    

Gross


  

Net


Producing Wells

  

1,317

  

1,313

Developed Acreage

  

105,881

  

105,631

Undeveloped Acreage

  

360,267

  

243,681

 

We drilled 197 development wells in the twelve months ended December 31, 2002, of which eight wells were in process at December 31, 2002. Nearly all of our development wells and acreage are located in southwestern Virginia. Some leases are beyond their primary term, but such leases are extended in accordance with their terms as long as continuous drilling commitments are satisfied.

 

We currently plan to drill approximately 269 wells in the twelve month period ending December 31, 2003. 161 of these wells are proposed to be conventional coalbed methane wells drilled into coal seams not yet mined. 68 of the remaining wells are to be drilled into mine areas to produce gob gas, which is methane gas that has collected in abandoned areas of underground coal mines. 40 of the projected wells are conventional gas wells. Compared to coalbed methane wells, conventional gas wells put capital at a higher risk due to the potential for unsuccessful drilling. As such, the success rate of conventional gas wells may not reflect that of our coalbed methane drilling program.

 

Sales

 

In order to manage the market risk exposure of volatile natural gas prices in the future, CONSOL Energy enters into various physical gas supply transactions with our gas marketers, selling gas under short-term multi-month contracts generally not exceeding one year. Within the terms of the individual sales confirmations executed under the master marketing contracts, at December 31, 2002, we were obligated to deliver 44.8 billion cubic feet during the twelve month period ending December 31, 2003. Generally, we have not entered into such arrangements in the past. Reserves and production estimates are believed to be sufficient to cover these commitments. A shortfall of commitments has not been an issue historically. We also have a gas-balancing agreement with TCO Interstate Pipeline. This agreement is in accordance with the Council of Petroleum Accountants Societies (COPAS) definition of producer imbalances, whereby the operator controls the physical production and delivery of gas to a transporter. Contracted quantities of gas rarely equal physical deliveries. As the operator, CONSOL Energy is responsible for monitoring this imbalance and requesting adjustments to contracted volumes as circumstances warrant. The imbalance agreement is managed internally using the sales method of accounting. The sales method recognizes revenue when the gas is taken and paid for by the purchaser. The imbalance amounts, for both volumes and dollars, were insignificant at December 31, 2002.

 

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The hedging strategy and information regarding derivative instruments used are outlined in item 7A, “Qualitative and Quantitative Disclosures About Market Risk”, and in Note 25 to the audited financial statements.

 

Distribution

 

Our gas operations in Virginia have built separate gathering systems in their gas fields to deliver gas to market. While each gathering system begins at the individual wellhead, gas from wells is transported to market in each case by the Cardinal States Gathering Company’s major gathering system. Cardinal States Gathering Company is a wholly owned subsidiary which operates two major gathering systems. The first gathering system is a 50-mile, 16-inch gathering system that is capable of transporting 100 million cubic feet of gas per day. This gathering system has processing and compression facilities and connects with a Columbia Transmission pipeline located in Mingo County, West Virginia. The second gathering system is a 30-mile, 20-inch gathering system capable of transporting 150 million cubic feet of gas per day. This gathering system also connects with a Columbia Transmission gathering system in Wyoming County, West Virginia.

 

Gas Reserves

 

CONSOL Energy’s gas reserves are either owned or leased. The following table shows our estimated proved developed and proved undeveloped reserves. Reserve information is gross, and includes 100% of the reserves for Pocahontas Gas Partnership as of December 31, 2002, and December 31, 2001, and 50% of the reserves for Pocahontas Gas Partnership as of June 30, 2001, and June 30, 2000. CONSOL Energy owned a 50% interest in Pocahontas until August 2001, when CONSOL Energy acquired the remaining 50% interest. Gross reserves are 100% of gas volumes, not net of 1/8 royalty ownership. Proved developed and proved undeveloped gas reserves are reserves that could be commercially recovered under current economic conditions, operating methods and government regulations.

 

    

GAS Reserves

    

(millions of cubic feet)


    

As of

December 31,


  

As of June 30,


    

2002


  

2001


  

2001


  

2000


Estimated proved developed reserves

  

374,098

  

413,234

  

261,426

  

178,690

Estimated proved undeveloped reserves

  

729,115

  

762,998

  

519,081

  

568,123

Total estimated proved developed and undeveloped reserves

  

1,103,213

  

1,176,232

  

780,507

  

746,813

 

Discounted Future Net Cash Flows

 

The following table shows, for CONSOL Energy’s gross estimated proved developed and undeveloped reserves, its estimated future net cash flows and total standardized measure of discounted, at 10%, future net cash flows (net of income taxes). Information as of December 31, 2001, has been restated from $433,224 for future net cash flows and $218,365 for total standardized measure of discounted future net cash flows previously included in our reports due to revisions in development costs for that period.

 

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Discounted Future Net Cash Flows


    

($ in thousands)

    

As of December 31,


  

As of June 30,


    

2002


  

2001


  

2001


  

2000


Future net cash flows

  

$

2,037,696

  

$

901,343

  

$

551,607

  

$

1,150,826

Total standardized measure of discounted future net cash flows

  

$

735,181

  

$

345,826

  

$

189,156

  

$

494,581

 

Competition

 

CONSOL Energy’s gas operations primarily compete regionally in the northeastern United States. Competition throughout the country is regionalized. CONSOL Energy believes that the gas market is highly fragmented and not dominated by any single producer. CONSOL Energy believes that several of its competitors have devoted far greater resources than it has to gas exploration and development. CONSOL Energy believes that competition within its market is based primarily on price and the proximity of gas fields to customers.

 

Other

 

CONSOL Energy provides other services both to its own operations and to others. These include terminal services (including break bulk, general cargo and warehouse services), river and dock services, industrial supply services, coal waste disposal services, land resource services, research and development services and power generation.

 

Terminal Services

 

More than 131 million tons of coal have been shipped through CONSOL Energy’s exporting terminal in the Port of Baltimore during the terminal’s 20 years of operation. The terminal can either store coal or load coal directly into vessels from rail cars. It is also one of the few terminals in the United States served by two railroads, Norfolk Southern and CSX Transportation. In the twelve months ended December 31, 2002, 3.8 million tons of coal were shipped through the terminal. Approximately 75% of the tonnage shipped was produced by our coal mines.

 

On August 14, 2002, CONSOL Energy, through its subsidiary CNX Marine Terminals Inc., began operations as a break bulk, general cargo and warehouse provider in Baltimore for shipments of metal, forest products and other bulk cargo.

 

River and Dock Services

 

CONSOL Energy’s river operation, located in Elizabeth, Pennsylvania, transports coal from our mines with river loadout facilities along the Monongahela and Ohio Rivers in northern West Virginia and southwestern Pennsylvania to customers along these rivers. The river operation employs five company-owned towboats, six harbor boats and nearly 300 barges. In the twelve months ended December 31, 2002, our river vessels transported 15.1 million tons of our coal.

 

CONSOL Energy provides dock services at Kellogg Dock, located on the Mississippi River in southern Illinois, and Alicia Dock, located on the Monongahela River in Fayette County, Pennsylvania, north of the Dilworth mine. CONSOL Energy transfers coal from rail cars to barges for customers that receive coal on the river system.

 

Coal Waste Disposal Services

 

CONSOL Energy operates an ash disposal facility on a 61-acre site in northern West Virginia to handle ash residues for coal customers that are unable to dispose of ash on-site at their generating facilities. This facility became operational in early 1994. The ash disposal facility can process 200 tons of material per hour. CONSOL Energy has a long-term contract with a cogeneration facility to supply coal and take the residual fly ash and bottom ash. Bottom ash is sold locally for road construction and other purposes.

 

Industrial Supply Services

 

Fairmont Supply Company, a CONSOL Energy subsidiary, is a general-line distributor of mining and industrial supplies in the United States. Fairmont Supply has 12 customer service centers nationwide. Fairmont Supply also provides integrated supply procurement and management services. Integrated supply procurement is a materials management strategy that utilizes a single, full-line distributor to minimize total cost in the maintenance, repair and operating supply chain. Fairmont Supply offers value-added services including on-site stores management and procurement strategies.

 

Fairmont Supply provides mine supplies to CONSOL Energy’s mining operations. Approximately 53% of Fairmont Supply’s sales in the twelve months ended December 31, 2002, were made to CONSOL Energy’s mines.

 

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Land Resources

 

CONSOL Energy is developing property assets previously used primarily to support its coal operations or which currently are not utilized. CONSOL Energy expects to increase the value of its property assets by:

 

  ·   developing surface properties for commercial uses other than coal mining or gas development when the location of the property is suitable;

 

  ·   deriving royalty income from coal, oil and gas reserves CONSOL Energy owns but does not intend to develop;

 

  ·   deriving income from the sustainable harvesting of timber on land CONSOL Energy owns; and

 

  ·   deriving income from the rental of surface property for agricultural and non-agricultural uses.

 

CONSOL Energy’s objective is to improve the return on these assets without detracting from its core businesses and without significant additional capital investment.

 

Research and Development

 

We maintain a research and development department which provides technical support to coal, gas, land and administrative functions. In addition to the research and technical support work done for us, the department has engaged in a number of partnerships with federal and state government agencies, and other private companies, that provide additional funding to advance our technology agenda. Costs related to research and development are expensed as incurred. These costs were $5.6 million for the twelve months ended December 31, 2002, $2.3 million for the six months ended December 31, 2001, and $5.3 million and $8.0 million for the twelve months ended June 30, 2001 and 2000, respectively.

 

Power Generation

 

In March 2002, we entered into a joint venture with Allegheny Energy Supply Company, LLC, an affiliate of one of our largest coal customers, to build an 88-megawatt, gas-fired electric generating facility. This facility was completed in June 2002, and is used for meeting peak load demands. The facility is in southwest Virginia and uses coalbed methane gas that we produce. In the twelve months ended December 31, 2002, the facility operated for a total of 34,540 megawatt hours and did not have a significant effect on earnings in 2002.

 

Employee and Labor Relations

 

At December 31, 2002, CONSOL Energy had 6,074 employees, 2,175 of whom were represented by the United Mine Workers of America and covered by the terms of the National Bituminous Coal Wage Agreement of 2002 which will expire on December 31, 2006. This agreement was negotiated with the United Mine Workers of America by the Bituminous Coal Operators’ Association on behalf of its members, which include several of CONSOL Energy’s subsidiaries.

 

Regulations

 

The coal mining and gas industries are subject to regulation by federal, state and local authorities on matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, the reclamation and restoration of properties after mining or gas operations are completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects of mining and gas operations on groundwater quality and availability. In addition, the utility industry is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for CONSOL Energy’s coal. The possibility exists that new legislation or regulations may be adopted which would have a significant impact on CONSOL Energy’s mining or gas operations or its customers’ ability to use coal or gas and may require CONSOL Energy or its customers to change their operations significantly or incur substantial costs.

 

Numerous governmental permits and approvals are required for mining and gas operations. CONSOL Energy is, or may be, required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal or gas may have upon the environment and public and employee health and safety. All requirements imposed by such authorities may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. Future legislation and administrative regulations may emphasize the protection of the environment, health and safety and, as a consequence, the activities of CONSOL Energy may be more closely regulated. Such legislation and regulations, as well as future interpretations of existing laws, may require substantial increases in equipment and operating costs to CONSOL Energy and delays, interruptions or a termination of operations, the extent of which cannot be predicted.

 

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While it is not possible to quantify the costs of compliance with all applicable federal and state laws, those costs have been and are expected to continue to be significant. CONSOL Energy made capital expenditures for environmental control facilities of approximately $1.4 million for the twelve months ended December 31, 2002, $4.8 million for the six months ended December 31, 2001, $2.9 million for the twelve months ended June 30, 2001, and $1.6 million for the twelve months ended June 30, 2000. CONSOL Energy expects to have capital expenditures of $1.8 million for 2003 for environmental control facilities. These costs are in addition to reclamation and mine closing costs. Compliance with these laws has substantially increased the cost of coal mining and gas production, but is, in general, a cost common to all domestic coal and gas producers.

 

Mine Health and Safety Laws

 

Stringent health and safety standards were imposed by federal legislation when the federal Coal Mine Safety and Health Act of 1969 was adopted. The federal Coal Mine Safety and Health Act of 1977, which significantly expanded the enforcement of safety and health standards of the Mine Safety and Health Act of 1969, imposes safety and health standards on all mining operations. Regulations are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. The federal Coal Mine Safety and Health Administration monitors compliance with these federal laws and regulations. In addition, as part of the Mine Safety and Health Act of 1969 and the Mine Safety and Health Act of 1977, the Black Lung Benefits Act requires payments of benefits to disabled coal miners with black lung and to certain survivors of miners who die from black lung.

 

The states in which CONSOL Energy operates have programs for mine safety and health regulation and enforcement. The combination of federal and state safety and health regulations in the coal mining industry is, perhaps, the most comprehensive system for protection of employee safety and health affecting any industry. Most aspects of mine operations, particularly underground mine operations, are subject to extensive regulation. This regulation has a significant effect on CONSOL Energy’s operating costs. However, CONSOL Energy’s competitors in all of the areas in which it operates are subject to the same regulation.

 

Black Lung Legislation

 

Under federal black lung benefits legislation, each coal mine operator is required to make payments of black lung benefits or contributions to:

 

  ·   current and former coal miners totally disabled from black lung disease;

 

  ·   certain survivors of a miner who dies from black lung disease or pneumoconiosis; and

 

  ·   a trust fund for the payment of benefits and medical expenses to claimants whose last mine employment was before January 1, 1970, where no responsible coal mine operator has been identified for claims (where a miner’s last coal employment was after December 31, 1969), or where the responsible coal mine operator has defaulted on the payment of such benefits.

 

In addition to the federal legislation, we are also liable under various state statutes for black lung claims. Our black lung benefit liabilities, including the current portions, totaled approximately $462 million at December 31, 2002. These obligations are partially funded.

 

In recent years, legislation on black lung reform has been introduced in, but not enacted by, Congress. It is possible that this legislation will be reintroduced for consideration by Congress. If any of the proposals included in this or similar legislation is passed, the number of claimants who are awarded benefits could significantly increase. Any such changes in black lung legislation, if approved, may adversely affect our business, financial condition and results of operations.

 

The United States Department of Labor issued a final rule, effective January 19, 2001, amending the regulations implementing the federal black lung laws. The amendments give greater weight to the opinion of the claimant’s treating physician, expand the definition of black lung disease and limit the amount of medical evidence that can be submitted by claimants and respondents. The amendments also alter administrative procedures for the adjudication of claims, which, according to the Department of Labor, results in streamlined procedures that are less formal, less adversarial and easier for participants to understand. These and other changes to the black lung regulations could significantly increase our exposure to black lung benefits liabilities. Experience to date related to these changes is not sufficient to determine the impact of these changes. The National Mining Association, an industry association of which CONSOL Energy is a member, challenged the amendments in the United States District Court for the District of Columbia. On August 9, 2001, the Court issued an opinion upholding the United States Department of Labor’s rules in their entirety. The National Mining Association appealed this decision to the United States Court of Appeals. On June 14, 2002, the Court of Appeals issued a decision that, with minor exception, affirmed the rules. However, the decision left many contested issues open for interpretation. Consequently, we anticipate increased litigation over the next two to three years until the various federal District Courts have had an opportunity to rule on these issues.

 

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Workers’ Compensation

 

CONSOL Energy is required to compensate employees for work-related injuries. Our workers’ compensation liabilities, including the current portion, were $317 million at December 31, 2002. These obligations are unfunded. The amount we expensed in the twelve months ended December 31, 2002, was $61 million, while the related cash payment for this liability was $79 million. This includes a one-time payment of $22 million for West Virginia State Administration Fees which was primarily related to contractors who defaulted on contributions. In addition, several states in which we operate consider changes in workers’ compensation laws from time to time. Such changes, if enacted, could adversely affect CONSOL Energy.

 

Retiree Health Benefits Legislation

 

The Coal Industry Retiree Health Benefit Act of 1992 requires CONSOL Energy to make payments to fund the cost of health benefits for our and other coal industry retirees. Based on available information, at December 31, 2002, CONSOL Energy’s obligation is estimated at approximately $658 million. We made payments and expensed such health benefits of $35 million in the twelve months ended December 31, 2002.

 

Environmental Laws

 

CONSOL Energy is subject to various federal environmental laws, including

 

  ·   the Surface Mining Control and Reclamation Act of 1977,

 

  ·   the Clean Air Act,

 

  ·   the Clean Water Act,

 

  ·   the Toxic Substance Control Act,

 

  ·   the Comprehensive Environmental Response, Compensation and Liability Act, and

 

  ·   the Resource Conservation and Recovery Act, as well as state laws of similar scope in each state in which CONSOL Energy operates.

 

These environmental laws require reporting, permitting and/or approval of many aspects of coal mining and gas operations. Both federal and state inspectors regularly visit mines and other facilities to ensure compliance. CONSOL Energy has ongoing compliance and permitting programs to ensure compliance with such environmental laws.

 

Given the retroactive nature of certain environmental laws, CONSOL Energy has incurred and may in the future incur liabilities in connection with properties and facilities currently or previously owned or operated as well as sites to which CONSOL Energy or its subsidiaries sent waste materials.

 

Surface Mining Control and Reclamation Act

 

The Surface Mining Control and Reclamation Act establishes operational, reclamation and closure standards for all aspects of surface mining as well as most aspects of deep mining. The Act requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of mining activities. Permits for all mining operations must be obtained from the Federal Office of Surface Mining Reclamation and Enforcement or, where state regulatory agencies have adopted federally approved state programs under the Act, the appropriate state regulatory authority. All states in which CONSOL Energy’s active mining operations are located have achieved primary jurisdiction for enforcement of the Act through approved state programs.

 

The Surface Mining Control and Reclamation Act and similar state statutes, among other things, require that mined property be restored in accordance with specified standards and approved reclamation plans. The mine operator must submit a bond or otherwise secure the performance of these reclamation obligations. The earliest a reclamation bond can be released is five years after reclamation has been achieved. All states impose on mine operators the responsibility for repairing or compensating for damage occurring on the surface as a result of mine subsidence, a possible consequence of longwall mining. In addition, the Abandoned Mine Reclamation Fund, which is part of the Surface Mining Control and Reclamation Act, imposes a tax on all current mining operations, the proceeds of which are used to restore unreclaimed mines closed before 1977. The maximum tax is $.35 per ton on surface-mined coal and $.15 per ton on underground-mined coal.

 

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Through December 31, 2002, CONSOL Energy accrued for the costs of reclaiming the mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary, over the estimated recoverable tons of the property. The establishment of liability for the current disturbance and final mine closure reclamation is based upon permit requirements and requires various estimates and assumptions, principally associated with costs and production levels. Our reclamation and mine-closing liabilities, including the current portion, were $391 million at December 31, 2002. Our future operating results would be adversely affected if these accruals are determined to be insufficient. These obligations are unfunded. The amount that was expensed for the twelve months ended December 31, 2002 was $16 million, while the related cash payment for such liability during the same period was $24 million.

 

In January 2003, CONSOL Energy will adopt Statement of Financial Accounting Standards No. 143 (SFAS 143) to account for the costs related to the closure of mines and gas wells and the reclamation of the land upon exhaustion of coal and gas reserves. This statement requires the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimate asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Asset retirement obligations primarily relate to the closure of mines and gas wells and the reclamation of the land upon exhaustion of coal and gas reserves. We are anticipating the effect of this change to be a gain of $5 million, net of a tax cost of $3 million. At the time of adoption, total assets, net of accumulated depreciation, will increase approximately $59 million, and total liabilities will increase approximately $51 million. The amounts recorded upon adoption are dependent upon a number of variables, including the estimated future retirement costs, estimated proved reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rate.

 

Under the Surface Mining Control and Reclamation Act, responsibility for unabated violations, unpaid civil penalties and unpaid reclamation fees of independent contract mine operators can be imputed to other companies which are deemed, according to the regulations, to have “owned” or “controlled” the contract mine operator. Sanctions against the “owner” or “controller” are quite severe and can include being blocked from receiving new permits and revocation of any permits that have been issued since the time of the violations or, in the case of civil penalties and reclamation fees, since the time such amounts became due.

 

Clean Air Act

 

The federal Clean Air Act and similar state laws and regulations, which regulate emissions into the air, affect coal mining, gas and processing operations primarily through permitting and/or emissions control requirements. In addition, the United States Environmental Protection Agency has issued certain, and is considering further, regulations relating to fugitive dust and coal combustion emissions which could restrict CONSOL Energy’s ability to develop new mines or require CONSOL Energy to modify its operations. In July 1997, the United States Environmental Protection Agency adopted new, more stringent National Ambient Air Quality Standards for particulate matter which may require some states to change existing implementation plans. Because coal mining operations and plants burning coal emit particulate matter, CONSOL Energy’s mining operations and utility customers are likely to be directly affected when the revisions to the National Ambient Air Quality Standards are implemented by the states. Regulations may restrict CONSOL Energy’s ability to develop new mines or could require CONSOL Energy to modify its existing operations, and may have a material adverse effect on CONSOL Energy’s financial condition and results of operations.

 

The Clean Air Act also indirectly affects coal mining operations by extensively regulating the air emissions of coal fueled electric power generating plants. Coal contains impurities, such as sulfur, mercury, chlorine and other regulated constituents, many of which are released into the air when coal is burned. New environmental regulations governing emissions from coal-fired electric generating plants could reduce demand for coal as a fuel source and affect the volume of our sales. For example, the federal Clean Air Act places limits on sulfur dioxide emissions from electric power plants. In order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), blend high sulfur coal with low sulfur coal or switch to low sulfur coal or other fuels. The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines. Switching to other fuels may require expensive modification of existing plants. Because higher sulfur coal currently accounts for a significant portion of our sales, the extent to which power generators switch to lower sulfur coal or other low-sulfur fuel could materially affect us if we cannot offset the cost of sulfur removal by lowering the costs of delivery of our higher sulfur coals on an energy equivalent basis.

 

Other new and proposed reductions in emissions of mercury, nitrogen oxides, particulate matter or various greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including switching to other fuels. These new and proposed reductions will make it more costly to operate coal-fired plants and could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. For example, the United States Environmental Protection Agency (EPA) is requiring reduction of nitrogen oxide emissions in 22 eastern states and the District of Columbia and will require reduction of particulate matter emissions over the next several years for areas that do not meet air quality standards for fine particulates. EPA is also working on an implementation plan for the 8-hour ozone standard and this may require some customers to further reduce NOx emissions, a precursor of ozone. In addition, Congress and several states are now

 

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considering legislation to further control air emissions of multiple pollutants from electric generating facilities and other large emitters. To the extent that any new requirements affect our customers, this could adversely affect our operations and results.

 

A regional haze program initiated by the EPA to protect and to improve visibility at and around national parks, national wilderness areas and international parks may restrict the construction of new coal-fired power plants whose operation may impair visibility at and around federally protected areas and may require some existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions. These requirements could limit the demand for coal in some locations.

 

The Clean Air Act also imposes standards on sources of hazardous air pollutants. Although these standards have not yet been extended to coal mining operations, the EPA has announced that it will regulate hazardous air pollutants from coal-fired power plants. Under the Clean Air Act, coal-fired power plants will be required to control hazardous air pollution emissions by no later than 2009, which likely will require significant new investment in controls by power plant operators. These standards and future standards could have the effect of decreasing demand for coal.

 

The United States Department of Justice, on behalf of the EPA, has filed lawsuits against several investor-owned electric utilities and brought an administrative action against one government-owned utility for alleged violations of the Clean Air Act. These lawsuits could require the utilities to pay penalties, install pollution control equipment or undertake other emission reduction measures which could adversely impact their demand for coal.

 

Any reduction in coal’s share of the capacity for power generation could have a material adverse effect on CONSOL Energy’s business, financial condition and results of operations. The effect such regulations, or other requirements that may be imposed in the future, could have on the coal industry in general and on CONSOL Energy in particular cannot be predicted with certainty.

 

Framework Convention On Global Climate Change

 

The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change which is intended to limit or capture emissions of greenhouse gases such as carbon dioxide. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emissions targets for developed nations. Although the specific emissions targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. The United States Senate is not expected to ratify the emissions targets. President Bush has stated that he does not support the Kyoto Protocol and has proposed an alternative to reduce United States omissions of greenhouses gases. If the Koyoto Protocol or other comprehensive regulations focusing on greenhouse gas emissions are implemented by the United States, it could have the effect of restricting the use of coal. Other efforts to reduce emissions of greenhouse gases and federal initiatives to encourage the use of coalbed methane gas also may affect the use of coal as an energy source.

 

Clean Water Act

 

The federal Clean Water Act and corresponding state laws affect coal mining and gas operations by imposing restrictions on discharges into regulated effluent waters. Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters. CONSOL Energy believes it has obtained all permits required under the Clean Water Act and corresponding state laws and is in substantial compliance with such permits. However, there can be no assurance that new requirements under the Clean Water Act and corresponding state laws will not cause CONSOL Energy to incur significant additional costs that could adversely affect its operating results.

 

Comprehensive Environmental Response, Compensation and Liability Act (Superfund)

 

The Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and similar state laws create liabilities for the investigation and remediation of releases of hazardous substances into the environment and for damages to natural resources. Our current and former coal mining operations incur, and will continue to incur, expenditures associated with the investigation and remediation of facilities and environmental conditions, including underground storage tanks, solid and hazardous waste disposal and other matters under the Comprehensive Environmental Response, Compensation and Liability Act and similar state environmental laws. We also must comply with reporting requirements under the Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act.

 

From time to time, we have been the subject of administrative proceedings, litigation and investigations relating to environmental matters. We have been named as a potentially responsible party at Superfund sites in the past. We may become involved in future proceedings, litigation or investigations and incur liabilities that could be materially adverse to us.

 

The magnitude of the liability and the cost of complying with environmental laws cannot be predicted with certainty due to the lack of specific information available with respect to many sites, the potential for new or changed laws and regulations and for the development of new remediation technologies and the uncertainty regarding the timing of work with respect to particular sites. As a result, we may incur material liabilities or costs related to environmental matters in the future and such environmental

 

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liabilities or costs could adversely affect our results and financial condition. In addition, there can be no assurance that changes in laws or regulations would not affect the manner in which we are required to conduct our operations.

 

Resource Conservation and Recovery Act

 

The federal Resource Conservation and Recovery Act and corresponding state laws and regulations affect coal mining and gas operations by imposing requirements for the treatment, storage and disposal of hazardous wastes.

 

Federal Coal Leasing Amendments Act

 

Mining operations on federal lands in the Western United States are affected by regulations of the United States Department of the Interior. The Federal Coal Leasing Amendments Act of 1976 amended the Mineral Lands Leasing Act of 1920 which authorized the leasing of federal lands for coal mining. The Federal Coal Leasing Amendments Act increased the royalties payable to the United States Government for federal coal leases and required diligent development and continuous operations of leased reserves within a specified period of time. Regulations adopted by the United States Department of the Interior to implement such legislation could affect coal mining by CONSOL Energy from federal leases for operations developed on such leases.

 

Federal Regulation of the Sale and Transportation of Gas

 

Various aspects of CONSOL Energy’s gas operations are regulated by agencies of the Federal government. The Federal Energy Regulatory Commission regulates the transportation and sale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. In the past, the Federal government has regulated the prices at which gas could be sold. While “first sales” by producers of natural gas, and all sales of condensate and natural gas liquids can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead sales in the natural gas industry began with the enactment of the Natural Gas Policy Act in 1978. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all Natural Gas Act and Natural Gas Policy Act price and nonprice controls affecting wellhead sales of natural gas effective January 1, 1993.

 

Commencing in April 1992, the Federal Energy Regulatory Commission issued Order Nos. 636, 636-A, 636-B, 636-C and 636-D, which require interstate pipelines to provide transportation services separate, or “unbundled,” from the pipelines’ sales of gas. Also, Order No. 636 requires pipeline operators to provide open access transportation on a nondiscriminatory basis that is equal for all natural gas shippers. Although Order No. 636 does not directly regulate CONSOL Energy’s production activities, the Federal Energy Regulatory Commission has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry.

 

The courts have largely affirmed the significant features of Order No. 636 and numerous related orders pertaining to the individual pipelines, although certain appeals remain pending and the Federal Energy Regulatory Commission continues to review and modify its open access regulations. In particular, the Federal Energy Regulatory Commission has reviewed its transportation regulations, including how they operate in conjunction with state proposals for retail gas marketing restructuring, whether to eliminate cost-of-service rates for short-term transportation, whether to allocate all short-term capacity on the basis of competitive auctions, and whether changes to its long-term transportation policies may also be appropriate to avoid a market bias toward short-term contracts. In February 2000, the Federal Energy Regulatory Commission issued Order No. 637 amending certain regulations governing interstate natural gas pipeline companies in response to the development of more competitive markets for natural gas and natural gas transportation. The goal of Order No. 637 is to “fine tune” the open access regulations implemented by Order No. 636 to accommodate subsequent changes in the market. Key provisions of Order No. 637 include:

 

  (1)   waiving the price ceiling for short-term capacity release transactions until September 30, 2002, and, subject to review, a possible extension of the program at that time;

 

  (2)   permitting value-oriented peak/off-peak rates to better allocate revenue responsibility between short-term and long-term markets;

 

  (3)   permitting term-differentiated rates, in order to better allocate risks between shippers and the pipeline;

 

  (4)   revising the regulations related to scheduling procedures, capacity, segmentation, imbalance management, and penalties;

 

  (5)   retaining the right of first refusal and the five year matching cap for long-term shippers at maximum rates, but significantly narrowing the right of first refusal for customers that the Federal Energy Regulatory Commission does not deem to be captive; and

 

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  (6)   adopting new web site reporting requirements that include daily transactional data on all firm and interruptible contracts and daily reporting of scheduled quantities at points or segments.

 

The new reporting requirements became effective September 1, 2000. CONSOL Energy cannot predict what action the Federal Energy Regulatory Commission will take on these matters, nor can it accurately predict whether the Federal Energy Regulatory Commission’s actions will, over the long-term, achieve the goal of increasing competition in markets in which CONSOL Energy’s gas is sold.

 

The Federal Energy Regulatory Commission has also issued numerous orders confirming the sale and abandonment of natural gas gathering facilities previously owned by interstate pipelines and acknowledging that if the Federal Energy Regulatory Commission does not have jurisdiction over services provided by these facilities, then such facilities and services may be subject to regulation by state authorities in accordance with state law. A number of states have either enacted new laws or are considering the adequacy of existing laws affecting gathering rates and/or services. Other state regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. Thus, natural gas gathering may receive greater regulatory scrutiny of state agencies in the future. CONSOL Energy’s gathering operations could be adversely affected should they be subject in the future to increased state regulation of rates or services, although CONSOL Energy does not believe that it would be affected by such regulation any differently than other natural gas producers or gatherers. In addition, the Federal Energy Regulatory Commission’s approval of transfers of previously-regulated gathering systems to independent or pipeline affiliated gathering companies that are not subject to Federal Energy Regulatory Commission regulation may affect competition for gathering or natural gas marketing services in areas served by those systems and thus may affect both the costs and the nature of gathering services that will be available to interested producers or shippers in the future.

 

CONSOL Energy owns certain natural gas pipeline facilities that it believes meet the traditional tests which the Federal Energy Regulatory Commission has used to establish a pipeline’s status as a gatherer not subject to the Federal Energy Regulatory Commission jurisdiction. Whether on state or federal land, natural gas gathering may receive greater regulatory scrutiny in the post-Order No. 636 environment.

 

Additional proposals and proceedings that might affect the gas industry are pending before Congress, the Federal Energy Regulatory Commission, the Minerals Management Service, state commissions and the courts. CONSOL Energy cannot predict when or whether any such proposals may become effective. In the past, the natural gas industry has been heavily regulated. There is no assurance that the regulatory approach currently pursued by various agencies will continue indefinitely. Notwithstanding the foregoing, CONSOL Energy does not anticipate that compliance with existing federal, state and local laws, rules and regulations will have a material or significantly adverse effect upon the capital expenditures, earnings or competitive position of CONSOL Energy or its subsidiaries. No material portion of CONSOL Energy’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Federal government.

 

State Regulation of Gas Operations—United States

 

CONSOL Energy’s operations are also subject to regulation at the state and in some cases, county, municipal and local governmental levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. CONSOL Energy’s operations are also subject to various conservation laws and regulations. These include regulations that affect the size of drilling and spacing units or proration units and the density of wells which may be drilled and the unitization or pooling of gas properties. In addition, state conservation laws establish maximum rates of production from gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. These regulatory burdens may affect profitability, and CONSOL Energy is unable to predict the future cost or impact of complying with such regulations.

 

Available Information

 

CONSOL Energy maintains a website on the World Wide Web at www.consolenergy.com. CONSOL Energy makes available, free of charge, on its website its annual report on the Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), as soon as reasonably practicable after such reports are electronically filed with, or furnished to the SEC, and are also available at the SEC’s website at www.sec.gov.

 

Item 2. Properties.

 

See “Coal Operations” and “Gas Operations” in Item 1 of this 10-K for a description of CONSOL Energy’s properties.

 

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Table of Contents

 

Item 3. Legal Proceedings.

 

CONSOL Energy is subject to various lawsuits and claims with respect to matters such as personal injury, wrongful death, damage to property, exposure to hazardous substances, environmental remediation, employment and contract disputes, and other claims and actions arising out of the normal course of business.

 

One of CONSOL Energy’s subsidiaries, Fairmont Supply Company, which distributes industrial supplies, currently is defending against approximately 21,000 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia and Mississippi. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time and, in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. To date, payments by Fairmont with respect to asbestos cases have not been material. However, there cannot be any assurance that payments in the future with respect to pending or future asbestos cases will not be material to the financial position, results of operations or cash flows of CONSOL Energy.

 

CONSOL Energy has recognized a liability related to a waste disposal site for which a $5.0 million liability was accrued. CONSOL Energy paid $2.1 million for remediation of this waste disposal site, thereby reducing the liability to $2.9 million at December 31, 2002.

 

In the opinion of management, the ultimate liabilities resulting from pending lawsuits and claims will not materially affect its financial position, results of operations or cash flows.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

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Table of Contents

 

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

 

Common Stock Market Prices and Dividends

 

Our common stock is listed on the New York Stock Exchange. The following table sets forth for the periods indicated the range of high and low sales prices per share of our common stock as reported on the New York Stock Exchange and the cash dividends declared on the common stock for the periods indicated.

 

    

High


  

Low


    

Dividends


Fiscal Year 2001

                

Quarter Ended September 30, 2000

  

21.06

  

15.00

    

.28

Quarter Ended December 31, 2000

  

28.00

  

16.13

    

.28

Quarter Ended March 31, 2001

  

37.70

  

24.88

    

.28

Quarter Ended June 30, 2001

  

42.48

  

25.00

    

.28

Six Month Transition Period Ended December 31, 2001

                

Quarter Ended September 30, 2001

  

28.50

  

18.30

    

.28

Quarter Ended December 31, 2001

  

28.45

  

21.41

    

.28

Twelve Month Period Ended December 31, 2002

                

Quarter Ended March 31, 2002

  

27.49

  

21.19

    

.28

Quarter Ended June 30, 2002

  

28.32

  

21.25

    

.14

Quarter Ended September 30, 2002

  

21.54

  

9.80

    

.14

Quarter Ended December 31, 2002

  

17.90

  

10.65

    

.14

 

On March 12, 2003, there were approximately 11,000 holders of record of our common stock.

 

Our Board of Directors intends to continue its policy of paying quarterly dividends. However, the future declaration and payment of dividends and the amount of dividends will depend upon, among other things, general business conditions, our financial results, contractual and legal restrictions on our payment of dividends, our credit rating, our planned investments and such other factors as our Board of Directors deems relevant. Our credit facilities currently do not contain covenants restricting our ability to declare and pay dividends, except in the event of default.

 

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Table of Contents

 

EXECUTIVE OFFICERS

 

The following is a list of CONSOL Energy’s executive officers, their ages as of February 1, 2003 and their positions and offices held with CONSOL Energy.

 

Name


  

Age


  

Position


J. Brett Harvey

  

52

  

President and Chief Executive Officer and Director

Christoph Koether

  

44

  

Executive Vice President–Administration and Director

Peter B. Lilly

  

54

  

Chief Operating Officer-Coal

Ronald E. Smith

  

54

  

Executive Vice President–Engineering Services, Environmental Affairs&Exploration

William J. Lyons

  

54

  

Senior Vice President and Chief Financial Officer

Daniel L. Fassio

  

55

  

Vice President–General Counsel and Secretary

 

J. Brett Harvey has been President and Chief Executive Officer and a Director of CONSOL Energy since January 1998. Prior to joining CONSOL Energy, Mr. Harvey served as the President and Chief Executive Officer of PacifiCorp Energy Inc., a subsidiary of PacifiCorp, from March 1995 until January 1998. Mr. Harvey also was President and Chief Executive Officer of Interwest Mining Company from January 1993 until January 1998 and Vice President of PacifiCorp Fuels from November 1994 until January 1998. Mr. Harvey is a member of the Board of Directors of the National Mining Association, the National Coal Council and the Utah Mining Association.

 

Christoph Koether has been Executive Vice President–Administration since July 2001 and a Director of CONSOL Energy since February 2001. From 1998 until 2001, he held various positions within RWE Rheinbraun AG, including Vice President and Division Head-Corporate Planning and Controlling, and from 1996 to 1997, he was Vice President and Head of the Finance Department and Treasury. He has also been a board member and managing director of various subsidiaries of RWE Rheinbraun AG.

 

Peter B. Lilly has been Chief Operating Officer-Coal of CONSOL Energy since October 2002. Prior to joining CONSOL Energy, Mr. Lilly served as President and Chief Executive Officer of Triton Coal Company LLC and Vulcan Coal Holdings LLC from 1998 to 2002. Between 1991 and 1998, he served in various positions with Peabody Holding Company, Inc. –President and Chief Operating Officer from 1995 to 1998, Executive Vice President from 1994 to 1995, and as president of Eastern Associated Coal Corporation from 1991 to 1994. He is a former board member of both the National Coal Association and the American Mining Congress.

 

Ronald E. Smith has been Executive Vice President–Engineering Services, Environmental Affairs & Exploration of CONSOL Energy since April 1, 1992.

 

William J. Lyons has been Senior Vice President and Chief Financial Officer of CONSOL Energy since February 1, 2001. From January 1, 1995 to February 1, 2001, Mr. Lyons held the position of Vice President– Controller for CONSOL Energy.

 

Daniel L. Fassio has been Vice President, General Counsel and Secretary of CONSOL Energy since March 1994.

 

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Table of Contents

 

Item 6. Selected Financial Data.

 

The following table presents our selected consolidated financial and operating data for, and as of the end of, each of the periods indicated. The selected consolidated financial data for, and as of the end of, each of the twelve months ended December 31, 2002, June 30, 2001, June 30, 2000 and December 31, 1998, and the six months ended December 31, 2001 and June 30, 1999 are derived from our audited consolidated financial statements. The selected consolidated financial data for, and as of the end of, the twelve months ended December 31, 2000 and the six months ended December 31, 2000, are derived from our unaudited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of our financial position and operating results for these periods. The selected consolidated financial and operating data are not necessarily indicative of the results that may be expected for any future period. The selected consolidated financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the financial statements and related notes included in this report. In 1999, we changed our fiscal year from a calendar year to a fiscal year ended June 30. In 2001, we changed our fiscal year from a fiscal year ended June 30 to a fiscal year ended December 31 in order to coordinate reporting periods with our majority shareholder commencing with the fiscal year started January 1, 2002.

 

STATEMENT OF INCOME DATA

(In thousands except per share data)

  

Twelve Months Ended
December 31,

  

Six Months Ended
December 31,

  

Twelve Months Ended
June 30,

  

 
 

 

Six Months
Ended

June 30,

  

 
 
 
 

Twelve
Months
Ended
December 31,

    

2002


    

2001


    

2001


    

2000


  

2001


    

2000


    

1999


  

1998


           

(Unaudited)

           

(Unaudited)

                       

Revenue

                                                                 

Sales(1)

  

$

2,003,345

 

  

$

2,095,463

 

  

$

964,460

 

  

$

992,201

  

$

2,123,202

 

  

$

2,094,850

 

  

$

1,081,922

  

$

2,295,430

Freight(1)

  

 

134,416

 

  

 

159,029

 

  

 

70,314

 

  

 

72,225

  

 

160,940

 

  

 

165,934

 

  

 

80,487

  

 

230,041

Other income

  

 

45,837

 

  

 

64,526

 

  

 

31,223

 

  

 

37,154

  

 

70,457

 

  

 

64,359

 

  

 

28,560

  

 

54,562

    


  


  


  

  


  


  

  

Total revenue

  

 

2,183,598

 

  

 

2,319,018

 

  

 

1,065,997

 

  

 

1,101,580

  

 

2,354,599

 

  

 

2,325,143

 

  

 

1,190,969

  

 

2,580,033

Costs

                                                                 

Cost of goods sold and other operating charges

  

 

1,543,189

 

  

 

1,585,686

 

  

 

761,146

 

  

 

730,329

  

 

1,554,867

 

  

 

1,498,982

 

  

 

790,119

  

 

1,590,176

Freight expense

  

 

134,416

 

  

 

159,029

 

  

 

70,314

 

  

 

72,225

  

 

160,940

 

  

 

165,934

 

  

 

80,487

  

 

230,041

Selling, general and administrative expense

  

 

65,888

 

  

 

61,155

 

  

 

31,493

 

  

 

33,381

  

 

63,043

 

  

 

62,164

 

  

 

30,218

  

 

59,475

Depreciation, depletion amortization

  

 

262,873

 

  

 

243,588

 

  

 

120,039

 

  

 

119,723

  

 

243,272

 

  

 

249,877

 

  

 

121,237

  

 

238,584

Interest expense

  

 

46,213

 

  

 

43,356

 

  

 

16,564

 

  

 

30,806

  

 

57,598

 

  

 

55,289

 

  

 

30,504

  

 

48,138

Taxes other than income

  

 

172,479

 

  

 

160,954

 

  

 

80,659

 

  

 

77,771

  

 

158,066

 

  

 

174,272

 

  

 

98,244

  

 

201,137

Export sales excise tax resolution

  

 

(1,037

)

  

 

(118,120

)

  

 

5,402

 

  

 

  

 

(123,522

)

  

 

 

  

 

  

 

Restructuring costs

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

12,078

 

  

 

  

 

    


  


  


  

  


  


  

  

Total costs

  

 

2,224,021

 

  

 

2,135,648

 

  

 

1,085,617

 

  

 

1,064,235

  

 

2,114,264

 

  

 

2,218,596

 

  

 

1,150,809

  

 

2,367,551

    


  


  


  

  


  


  

  

Earnings (Loss) before income taxes

  

 

(40,423

)

  

 

183,370

 

  

 

(19,620

)

  

 

37,345

  

 

240,335

 

  

 

106,547

 

  

 

40,160

  

 

212,482

Income taxes (benefits)

  

 

(52,099

)

  

 

32,164

 

  

 

(20,679

)

  

 

3,842

  

 

56,685

 

  

 

(493

)

  

 

121

  

 

37,845

    


  


  


  

  


  


  

  

Net income

  

$

11,676

 

  

$

151,206

 

  

$

1,059

 

  

$

33,503

  

$

183,650

 

  

$

107,040

 

  

$

40,039

  

$

174,637

    


  


  


  

  


  


  

  

Earning per share:

                                                                 

Basic(2)

  

$

0.15

 

  

$

1.92

 

  

$

0.01

 

  

$

0.43

  

$

2.34

 

  

$

1.35

 

  

$

0.62

  

$

1.73

    


  


  


  

  


  


  

  

Dilutive(2)

  

$

0.15

 

  

$

1.91

 

  

$

0.01

 

  

$

0.43

  

$

2.33

 

  

$

1.35

 

  

$

0.62

  

$

1.73

    


  


  


  

  


  


  

  

Weighted average number of common shares outstanding:

                                                                 

Basic

  

 

78,728,560

 

  

 

78,671,821

 

  

 

78,699,732

 

  

 

78,584,204

  

 

78,613,580

 

  

 

79,499,576

 

  

 

64,784,685

  

 

100,820,599

    


  


  


  

  


  


  

  

Dilutive

  

 

78,834,023

 

  

 

78,964,557

 

  

 

78,920,046

 

  

 

78,666,391

  

 

78,817,935

 

  

 

79,501,326

 

  

 

64,784,685

  

 

100,820,599

    


  


  


  

  


  


  

  

Dividend per share

  

$

0.84

 

  

$

1.12

 

  

$

0.56

 

  

$

0.56

  

$

1.12

 

  

$

1.12

 

  

$

0.39

  

$

0.90

    


  


  


  

  


  


  

  

 

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Table of Contents

 

BALANCE SHEET DATA

  

At December 31,


    

At June 30,


    

At December 31,


 

(In thousands)

  

2002


    

2001


    

2001


    

2000


    

1999


    

1998


 

Working capital (deficiency)

  

$

(191,596

)

  

$

(70,505

)

  

$

(368,118

)

  

$

(375,074

)

  

$

(261,427

)

  

$

(602,428

)

Total assets

  

 

4,293,160

 

  

 

4,298,732

 

  

 

3,894,971

 

  

 

3,866,311

 

  

 

3,875,026

 

  

 

3,863,390

 

Short-term debt

  

 

204,545

 

  

 

77,869

 

  

 

360,063

 

  

 

464,310

 

  

 

345,525

 

  

 

551,719

 

Long-term debt (including current portion)

  

 

497,046

 

  

 

545,440

 

  

 

303,561

 

  

 

307,362

 

  

 

326,495

 

  

 

430,888

 

Total deferred credits and other liabilities

  

 

2,828,249

 

  

 

2,913,763

 

  

 

2,378,323

 

  

 

2,358,725

 

  

 

2,423,483

 

  

 

2,433,899

 

Stockholders’ equity (deficit)

  

 

162,047

 

  

 

271,559

 

  

 

351,647

 

  

 

254,179

 

  

 

254,725

 

  

 

(103,221

)

 

OTHER OPERATING DATA

  

Twelve Months Ended December 31,


    

Six Months Ended December 31,


    

Twelve Months Ended June 30,


    

Six Months Ended

June 30,


    

Twelve Months Ended December 31,


 
    

2002


    

2001


    

2001


    

2000


    

2001


    

2000


    

1999


    

1998


 

Coal

                                                                       

Tons sold (in thousands) (3)(4)

  

 

67,308

 

  

 

76,503

 

  

 

35,587

 

  

 

36,590

 

  

 

77,322

 

  

 

78,714

 

  

 

38,553

 

  

 

77,729

 

Tons produced (in thousands) (4)

  

 

66,230

 

  

 

73,705

 

  

 

34,355

 

  

 

32,508

 

  

 

71,858

 

  

 

73,073

 

  

 

38,244

 

  

 

75,769

 

Productivity (tons per manday)(4)

  

 

40.18

 

  

 

39.95

 

  

 

37.15

 

  

 

41.60

 

  

 

42.21

 

  

 

44.23

 

  

 

39.86

 

  

 

40.11

 

Average production cost ($ per ton produced)(4)

  

$

24.73

 

  

$

22.21

 

  

$

23.73

 

  

$

21.93

 

  

$

21.35

 

  

$

20.00

 

  

$

21.47

 

  

$

20.99

 

Average sales price of tons produced ($ per ton produced)(4)

  

$

26.76

 

  

$

24.66

 

  

$

25.02

 

  

$

23.41

 

  

$

23.93

 

  

$

23.66

 

  

$

25.12

 

  

$

26.41

 

Recoverable coal reserves (tons in millions)(4)(5)

  

 

4,275

 

  

 

4,365

 

  

 

4,365

 

  

 

4,372

 

  

 

4,411

 

  

 

4,461

 

  

 

4,705

 

  

 

4,755

 

Number of mining complexes (at period end)

  

 

22

 

  

 

27

 

  

 

27

 

  

 

23

 

  

 

23

 

  

 

22

 

  

 

24

 

  

 

25

 

Gas

                                                                       

Gross sales volume produced (in billion cubic feet)(4)

  

 

47.20

 

  

 

38.76

 

  

 

20.12

 

  

 

16.21

 

  

 

34.00

 

  

 

16.23

 

  

 

3.05

 

  

 

6.03

 

Average sale price ($ per mmbtu)(4)

  

$

3.22

 

  

$

4.10

 

  

$

2.67

 

  

$

4.80

 

  

$

5.27

 

  

$

3.06

 

  

$

2.07

 

  

$

2.34

 

Average costs ($ per mmbtu)(4)

  

$

2.34

 

  

$

2.63

 

  

$

2.35

 

  

$

2.32

 

  

$

2.58

 

  

$

1.80

 

  

$

2.31

 

  

$

2.09

 

Net estimated proved reserves (in billion cubic feet)(4)(6)

  

 

1,103

 

  

 

1,176

 

  

 

1,176

 

  

 

730

 

  

 

781

 

  

 

747

 

  

 

467

 

  

 

470

 

CASH FLOW STATEMENT DATA

  

Twelve Months Ended

December 31,


    

Six Months Ended

December 31,


    

Twelve Months Ended

June 30,


    

Six Months Ended

June 30,


    

Twelve Months Ended

December 31,


 

(In thousands)

  

2002


    

2001


    

2001


    

2000


    

2001


    

2000


    

1999


    

1998


 

Net cash provided by operating activities

  

$

329,556

 

  

$

347,356

 

  

$

93,084

 

  

$

181,568

 

  

$

435,839

 

  

$

295,028

 

  

$

84,995

 

  

$

395,313

 

Net cash used in investing activities

  

 

(339,936

)

  

 

(114,160

)

  

 

(11,598

)

  

 

(131,078

)

  

 

(233,321

)

  

 

(299,554

)

  

 

(100,790

)

  

 

(235,918

)

Net cash provided by (used in) financing activities

  

 

6,315

 

  

 

(228,184

)

  

 

(82,529

)

  

 

(48,419

)

  

 

(194,074

)

  

 

(10,852

)

  

 

8,069

 

  

 

(146,898

)

OTHER FINANCIAL DATA

                                                       

(In thousands)

                                                       

Capital expenditures

  

$

295,235

 

  

$

267,698

 

  

$

162,862

 

  

$

109,163

 

  

$

213,999

 

  

$

142,598

 

  

$

105,099

 

  

$

254,515

 

EBIT(7)

  

 

(1,230

)

  

 

194,330

 

  

 

(2,132

)

  

 

65,590

 

  

 

262,052

 

  

 

156,165

 

  

 

68,438

 

  

 

250,089

 

EBITDA(7)

  

 

261,643

 

  

 

437,918

 

  

 

117,907

 

  

 

185,313

 

  

 

505,324

 

  

 

406,042

 

  

 

189,675

 

  

 

488,673

 

Ratio of earnings to fixed

charges(8)

  

 

 

  

 

4.59

 

  

 

 

  

 

1.85

 

  

 

4.54

 

  

 

2.70

 

  

 

2.19

 

  

 

4.93

 

 

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Table of Contents

 

(1)   See Note 27 of Notes to Consolidated Financial Statements for sales and freight by operating segment.

 

(2)   Basic earnings per share are computed using weighted average shares outstanding. Differences in the weighted average number of shares outstanding for purposes of computing dilutive earnings per share are due to the inclusion of the weighted average dilutive effect of employee and non-employee director stock options granted, totaling 105,463 and 292,736 for the twelve months ended December 31, 2002 and 2001; 220,314 and 82,187 for the six months ended December 31, 2001 and 2000; and 204,335 and 1,750 for twelve months ended June 30, 2001 and 2000. There were no dilutive employee or non-employee director stock options for any of the previous periods presented.

 

(3)   Includes sales of coal produced by CONSOL Energy and purchased from third parties. Of the tons sold, CONSOL Energy purchased the following amount from third parties: 2.5 million tons in the twelve months ended December 31, 2002, 2.8 million tons in the twelve months ended December 31, 2001, 1.3 million tons in the six months ended December 31, 2001, 1.5 million tons in the six months ended December 31, 2000, 2.7 million tons in the twelve months ended June 30, 2001, 3.5 million tons in the twelve months ended June 30, 2000, 3.9 million tons in the twelve months ended June 30, 1999, 2.2 million tons in the six months ended June 30, 1999, and 3.2 million tons for the twelve months ended December 31, 1998. Sales of coal produced by equity affiliated were 1.6 million tons in the twelve months ended December 31, 2002, 1.6 million tons in the twelve months ended December 31, 2001, 0.9 million tons in the six months ended December 31, 2001 and 0.7 million tons in the twelve months ended June 30, 2001 that were produced by equity affiliates. No sales from equity affiliates occurred in previous periods presented.

 

(4)   For entities that are not wholly owned but in which CONSOL Energy owns at least 50% equity interest, includes a percentage of their production, sales or reserves equal to CONSOL Energy’s percentage equity ownership. For coal, Line Creek Mine and Glennies Creek Mine are reported as equity affiliates for the December 31, 2002 period. Line Creek Mine was also reported as an equity affiliate for the December 31, 2001 and June 30, 2001 periods. No other periods have coal equity affiliates. For gas, Pocahontas Gas Partnership accounts for the majority of the information reported as an equity affiliate for approximately eight months in the December 31, 2001 period and for the entire year of the previous periods presented.

 

(5)   Represents proved and probable reserves at period end.

 

(6)   Represents proved developed and undeveloped gas reserves at period end.

 

(7)   EBIT is defined as earnings before deducting net interest expense (interest expense less interest income) and income taxes. EBITDA is defined as earnings before deducting net interest expense (interest expense less interest income), income taxes and depreciation, depletion and amortization. Although EBIT and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles, management believes that they are useful to an investor in evaluating CONSOL Energy because they are widely used in the coal industry as measures to evaluate a company’s operating performance before debt expense and cash flow. Financial covenants in our credit facility include ratios based on EBITDA. EBIT and EBITDA do not purport to represent cash generated by operating activities and should not be considered in isolation or as substitute for measures of performance in accordance with generally accepted accounting principles. In addition, because EBIT and EBITDA are not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management’s discretionary use of funds depicted by EBIT and EBITDA may be limited by working capital, debt service and capital expenditure requirements, and by restrictions related to legal requirements, commitments and uncertainties. A reconcilement of EBIT and EBITDA to financial net income is as follows:

 

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Table of Contents

 

    

Twelve Months Ended December 31,


    

Six Months Ended December 31,


    

Twelve Months Ended June 30,


    

Six Months Ended June 30,


    

Twelve Months Ended December 31,


 

(In thousands)

  

2002


    

2001


    

2001


    

2000


    

2001


    

2000


    

1999


    

1998


 

Net Income

  

$

11,676

 

  

$

151,206

 

  

$

1,059

 

  

$

33,503

 

  

$

183,650

 

  

$

107,040

 

  

$

40,039

 

  

$

174,637

 

Add: Interest Expense

  

 

46,213

 

  

 

43,356

 

  

 

16,564

 

  

 

30,806

 

  

 

57,598

 

  

 

55,289

 

  

 

30,504

 

  

 

48,138

 

Less: Interest Income

  

 

(5,738

)

  

 

(5,990

)

  

 

(3,734

)

  

 

(2,561

)

  

 

(4,817

)

  

 

(5,671

)

  

 

(2,226

)

  

 

(10,531

)

Less: Interest Income included in Export Sales Excise Tax Resolution

  

 

(1,282

)

  

 

(26,406

)

  

 

(4,658

)

  

 

 

  

 

(31,064

)

  

 

 

  

 

 

  

 

 

Add: Income Taxes

  

 

(52,099

)

  

 

32,164

 

  

 

(20,679

)

  

 

3,842

 

  

 

56,685

 

  

 

(493

)

  

 

121

 

  

 

37,845

 

    


  


  


  


  


  


  


  


Earnings Before Interest and Taxes (EBIT)

  

 

(1,230

)

  

 

194,330

 

  

 

(2,132

)

  

 

65,590

 

  

 

262,052

 

  

 

156,165

 

  

 

68,438

 

  

 

250,089

 

Add: Depreciation, Depletion and Amortization

  

 

262,873

 

  

 

243,588

 

  

 

120,039

 

  

 

119,723

 

  

 

243,272

 

  

 

249,877

 

  

 

121,237

 

  

 

238,584

 

    


  


  


  


  


  


  


  


Earnings Before Interest, Taxes and Depreciation, Depletion and Amortization

  

$

261,643

 

  

$

437,918

 

  

$

117,907

 

  

$

185,313

 

  

$

505,324

 

  

$

406,042

 

  

$

189,675

 

  

$

488,673

 

    


  


  


  


  


  


  


  


(8)   For purposes of computing the ratio of earnings to fixed charges, earnings represent income from continuing operations before income taxes plus fixed charges. Fixed charges include (a) interest on indebtedness (whether expensed or capitalized), (b) amortization of debt discounts and premiums and capitalized expenses related to indebtedness and (c) the portion of rent expense we believe to be representative of interest. For the twelve months ended December 31, 2002, fixed charges exceeded earnings by $30.6 million. For the six months ended December 31, 2001, fixed charges exceeded earnings by $20.4 million.

 

Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

General

 

CONSOL Energy incurred a loss before income tax of $40.4 million and realized income tax benefits of $52.1 million, resulting in net income for 2002. CONSOL Energy’s net income was $12 million for the twelve month period ended December 31, 2002. This was a 92.3% decline from the net income of $151 million for the twelve month period ended December 31, 2001.

 

Total coal sales for the twelve months ended December 31, 2002 were 67.3 million tons, including our portion of sales by equity affiliates, of which 64.8 million tons were produced by CONSOL Energy operations, by our equity affiliates or sold from inventory of company produced coal, including coal sold from inventories and produced by equity affiliates. This compares with total coal sales of 76.5 million tons for the twelve months ended December 31, 2001, of which 73.7 million tons were produced by CONSOL Energy operations or sold from inventory of company produced coal including coal sold from inventories and produced by equity affiliates. Demand for coal was weak due to the continued sluggish United States economy and the lingering effect of higher than normal customer inventory levels. The decrease in tons sold was also due to the deferral of shipments by our customers during the year to later periods and reduced volumes from requirements contracts.

 

Production from CONSOL Energy operations, including our percentage of the production from equity affiliates, was 66.2 million tons during the twelve months ended December 31, 2002 and 73.7 million tons for the twelve months ended December 31, 2001. Lower production levels were the result of the announced plan to reduce production by seven to eight million tons from planned output for 2002 in order to match anticipated demand. The following mines were idled during the period to implement reduction:

 

Mine


  

Date Idled


  

Date Production Resumed


McElroy

  

  May 1, 2002

  

August 5, 2002

Blacksville #2

  

June 17, 2002

  

July 17, 2002

Robinson Run

  

June 17, 2002

  

July 18, 2002

Mine 84

  

June 17, 2002

  

July 22, 2002

Mahoning Valley

  

June 17, 2002

  

November 1, 2002

Humphrey

  

June 17, 2002

  

August 13, 2002

VP#8

  

June 17, 2002

  

July 15, 2002

Shoemaker

  

June 24, 2002

  

August 26, 2002

Rend Lake

  

  July 8, 2002

  

Anticipated to remain idle until market conditions support reopening

 

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Table of Contents

 

In addition, the Humphrey, Meigs, Windsor, Muskingum and Dilworth Mines closed permanently in the year ended December 31, 2002. The Loveridge Mine was idled on May 28, 2001 and development work began in the fourth quarter 2002.

 

Sales of coalbed methane gas, including our share of the sales from equity affiliates, increased 21.8% to 47.2 billion cubic feet in the 2002 period from 38.8 billion cubic feet in the 2001 period. The increased sales volume is primarily due to higher production and sales volumes as a result of the purchase of the remaining 50% interest in the Pocahontas Gas Partnership on August 22, 2001. Our average sales price for coalbed methane gas, including our portion of sales from equity affiliates, was $3.22 per million British thermal units in the 2002 period compared with $4.10 per million British thermal units in the 2001 period. The decrease in average sales price was primarily due to reduced demand for gas in the industrial sector and lower demand for gas during the winter heating season that resulted in higher levels of gas in storage in the beginning of the 2002 period compared to the 2001 period. Approximately 85% of our anticipated 2003 production of 52-54 billion cubic feet has been sold at a price of $4.01 per million British thermal unit.

 

In March 2002, our 50% joint venture with Allegheny Energy Supply Company, LLC, an affiliate of one of our largest coal customers, completed an 88-megawatt, gas-fired electricity generating facility which was placed into commercial service on June 25, 2002. The facility has operated for 34,540 megawatt hours and did not have a significant effect on earnings in the 2002 period.

 

Effective June 5, 2002, CONSOL Energy’s Board of Directors appointed PricewaterhouseCoopers LLP to serve as the Company’s independent accountant. PricewaterhouseCoopers LLP serves as the independent accountant for RWE AG, a multi-utility holding group headquartered in Essen, Germany, which owns approximately 74 percent of CONSOL Energy’s common stock. PricewaterhouseCoopers LLP replaced Ernst & Young LLP as the Company’s independent accountant.

 

CONSOL Energy continues to convert to a new integrated information technology system provided by SAP AG to support business processes. The new technology is expected to provide cost-effective strategic software alternatives to meet future core business needs. The system will continue to be implemented in stages through 2003 at an estimated total cost of $53 million, $32 million of which has already incurred.

 

Change in Fiscal Year

 

CONSOL Energy changed its fiscal year from a fiscal year ending June 30 to a calendar year ending December 31. CONSOL Energy had a transitional fiscal period ending December 31, 2001. CONSOL Energy’s first full fiscal year ending December 31 was the year that started January 1, 2002 and ended December 31, 2002. CONSOL Energy undertook this change in order to align its fiscal year with that of RWE AG, its majority shareholder.

 

Results of Operations

 

Twelve Months Ended December 31, 2002 compared with Twelve Months Ended December 31, 2001 (unaudited)

 

Net Income

 

CONSOL Energy’s net income for the twelve months ended December 31, 2002 was $12 million compared with $151 million for the twelve months ended December 31, 2001. Pre-tax income for the 2001 period was $183.4 million including $118.1 million related to the recognition of the export sales excise tax resolution. CONSOL Energy had a pre-tax loss of $40.4 million in the 2002 period. Lower net income for 2002 was also the result of a 9 million ton reduction in volumes of company produced coal sold. The decrease in tons sold was due primarily to lower demand for coal in the 2002 period. Demand was weak primarily due to the continued sluggish United States economy and the lingering effect of higher than normal customer inventory levels. The decrease in tons sold was also due to the deferral of shipments by our customers during the year to later periods and reduced volumes from requirements contracts. Decreases in net income also resulted from lower average sales prices per million British thermal unit of coalbed methane gas sold in the 2002 period compared to the 2001 period. The average sales price was $3.22 per million British thermal units for the year to date 2002 period, a $0.66, or 17.0% decrease compared to the $3.88 per million British thermal unit in the 2001 period. The decrease in average sales price was primarily due to reduced demand for gas in the industrial sector and lower demand for gas during the winter heating season that resulted in high levels of gas in storage. These decreases were offset, in part, by income tax benefits recognized in the 2002 period compared to tax expense recognized in the 2001 period. The income tax benefit was due mainly to a pre-tax loss for the 2002 period compared to pre-tax income in the 2001 period without a comparable reduction in percentage depletion tax benefits. Decreases in net income were also offset, in part, by higher volumes of gas sold as a result of the August 22, 2001 acquisition of the remaining 50% interest in Pocahontas Gas Partnership. Gas sales volumes were 46.9 billion cubic feet in the 2002 period, a 44.5%, or 14.5 billion cubic feet increase from the 2001 period. Average sales price per ton of company produced coal sold also increased which offset, in part, the reduction to net income. The average sales price for company produced coal was $26.80 in the 2002 period compared to $24.88 in the 2001 period. The increase of $1.92, or 7.7%, reflects the higher prices negotiated in 2001’s more favorable coal market.

 

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Table of Contents

 

Revenue

 

Sales decreased $92 million, or 4.4% to $2,003 million for the twelve months ended December 31, 2002 from $2,095 million for the twelve months ended December 31, 2001.

 

Revenues from the sale of company produced coal decreased $101 million, or 5.6%, to $1,694 million in the 2002 period from $1,795 million in the 2001 period. The decrease in company produced coal sales revenues was due mainly to a decrease in the volume of company produced coal sold. Produced coal sales volumes were 63 million tons in the 2002 period, a 9 million ton, or 12.4%, decline from the 72 million tons sold in the 2001 period. The decrease in tons sold was due primarily to lower demand for coal in the 2002 period. Demand was weak primarily due to the continued sluggish United States economy and the lingering effect of higher than normal customer inventory levels. The decrease in tons sold was also due to the deferral of shipments by our customers during the year to later periods and reduced volumes from requirements contracts. The decrease in tons sold was offset, in part, by increases in the average sales price per ton of company produced coal sold. The average sales price for company produced coal was $26.80 in the 2002 period compared to $24.88 in the 2001 period. The increase of $1.92, or 7.7%, reflects the higher prices negotiated in 2001’s more favorable coal market.

 

Revenues from the sale of industrial supplies decreased $22 million, or 25.0%, to $64 million in the 2002 period from $86 million in the 2001 primarily due to reduced sales volumes. During the fiscal year ended June 30, 2001, the physical assets and operations associated with 18 industrial and store management sites were sold. The sale did not have a material impact on CONSOL Energy’s financial position, results of operations or cash flow. Fairmont Supply continues to operate 12 service centers.

 

These decreases in revenues were partially offset by increased revenues from the sale of coalbed methane gas. Revenues from the sale of gas increased $25 million, or 20.2% to $147 million in the 2002 period from $122 million in the 2001 period. The increase was due mainly to higher volumes of gas sold as a result of the August 22, 2001 acquisition of the remaining 50% interest in Pocahontas Gas Partnership. Sales volumes were 46.9 billion cubic feet in the 2002 period, a 44.5%, or 14.5 billion cubic feet increase from the 2001 period. The increase in sales volumes were offset, in part, by lower average sales prices in the 2002 period compared to the 2001 period. The average sales price was $3.22 per million British thermal units for the year to date 2002 period, a $0.66, or 17.0% decrease compared to the $3.88 per million British thermal unit in the 2001 period. The decrease in average sales price was primarily due to reduced demand for gas in the industrial sector and lower demand for gas during the winter heating season that resulted in higher levels of gas in storage in the beginning of the 2002 period compared to the 2001 period.

 

Revenues from the sale of purchased coal increased $5 million, or 6.9%, to $83 million in the 2002 period from $78 million in the 2001 period primarily due to increased average sales prices. The average sales price per ton of purchased coal increased $5.39, or 19.2%, to $33.50 in the 2002 period compared to $28.12 in the 2001 period. The increase in price per ton reflects the higher prices negotiated in 2001’s more favorable coal market. This increase was offset, in part, by reduced sales volumes. Sales volumes decreased 0.3 million tons, or 10.3%, to 2.5 million tons in the 2002 period compared to 2.8 million tons in the 2001 period. The decrease in tons sold was due primarily to lower demand for coal in the 2002 period. Demand was weak primarily due to the continued sluggish United States economy and the lingering effect of higher than normal customer inventory levels.

 

Freight revenue, outside and related party, decreased $25 million, or 15.5%, to $134 million in the 2002 period from $159 million in the 2001 period. Freight revenue is based on weight of coal shipped, negotiated freight rates and method of transportation (e.g., rail, barge or truck) used for the customers to which CONSOL Energy contractually provides transportation services. Freight revenue is the amount billed to customers for transportation costs incurred.

 

Other income, which consists of interest income, gain or loss on the disposition of assets, equity in earnings of affiliates, service income, royalty income, rental income and miscellaneous income, was $46 million in the 2002 period compared to $65 million in the 2001 period. The decrease of $19 million, or 29.0%, was primarily due to the $21 million reduction in equity in earnings of affiliates. This was mainly due to the August 22, 2001 purchase of the remaining 50% interest in Pocahontas Gas Partnership and the remaining 25% interest in the Cardinal States Gathering Company. As a result of the acquisition, CONSOL Energy owns 100% of these entities and began to account for them as fully consolidated subsidiaries. Before the acquisition, CONSOL Energy accounted for these companies using the equity method. Other income also decreased by $5 million as a result of various transactions that occurred throughout both periods, none of which was individually material. These decreases in other income was offset, in part, by a $7 million income adjustment related to a coal contract settlement CONSOL Energy received in the 2002 period.

 

Costs

 

Cost of Goods Sold and Other Operating Charges decreased $43 million, or 2.7%, to $1,543 million in the 2002 period from $1,586 million in the 2001 period.

 

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Table of Contents

 

Cost of goods sold for company produced coal decreased $42 million, or 3.4% to $1,197 million in the 2002 period from $1,239 million in the 2001 period. The decrease was primarily due to a 12.4% decrease in the volume of company produced coal sold. The decrease in tons sold was due primarily to lower demand for coal in the 2002 period. Demand was weak primarily due to the continued sluggish United States economy, and the lingering effect of higher than normal customer inventory levels. The decrease in tons sold was also due to the deferral of shipments by our customers during the year to later periods and reduced volumes from requirements contracts. The reduced cost of goods sold and other charges related to volume, was offset, in part, by a 10.3% increase in the cost per ton sold of company produced coal. The increase in cost primarily relates to employee benefit costs and supply costs. The rise in employee benefit costs is primarily due to increased medical costs and increased post employment benefit costs. Post employment benefit costs are calculated actuarially and have increased due to changes in assumptions, including discount rate and mortality tables used in this calculation. (See “Critical Accounting Policies” for a discussion of Other Post Employment Benefits.)

 

Cost of goods sold for industrial supplies decreased $23 million, or 24.0%, to $70 million in the 2002 period from $93 million in the 2001 period. The decrease in costs is related to reduced sales volumes resulting from the sale of 18 industrial and store management sites that took place in the 2001 period. Fairmont Supply continues to operate 12 service centers.

 

Coal property holding costs decreased $9 million, or 66.0%, to $5 million in the 2002 period from $14 million in the 2001 period. The decrease was primarily due to leasehold surrenders that occurred in the 2001 period.

 

These decreases in cost of goods sold and other costs were offset, in part, by increased cost of goods sold for gas operations. Gas operations cost of goods sold increased $9 million, or 15.8%, to $65 million in the 2002 period from $56 million in the 2001 period. The increase was due mainly to a 44.5% increase in the volume of gas sold as a result of the August 22, 2001 acquisition of the remaining 50% interest in Pocahontas Gas Partnership. The increase in volume was offset, in part, by a $0.35, or 19.9% reduction in the cost per million British thermal units sold. The average cost per million British thermal units sold was $1.40 in the 2002 period compared to $1.75 in the 2001 period. The decrease was primarily due to a decrease in the cost of gob well drilling and lower royalty expense. Gob wells are drilled in previously mined areas of underground coal mines. Royalty expenses decreased primarily due to the 17.1% decrease in average sales price per British thermal unit in the 2002 period compared to the 2001 period.

 

Cost of goods sold for closed and idled mine costs increased $14 million, or 21.7%, to $79 million in the 2002 period from $65 million in the 2001 period. The increase is primarily due to $32 million related to locations that were closed or idled during a portion of the 2002 period that were in operation during the 2001 period. This increase was offset, in part, by a decrease of $18 million related to mine closing and reclamation liability adjustments as a result of updated engineering survey adjustments for closed and idled locations. Survey adjustments resulted in $16 million of expense recognized in the 2001 period compared to $2 million of income in the 2002 period.

 

Cost of goods sold for purchased coal increased $4 million, or 5.4%, to $80 million in the 2002 period from $76 million in the 2001 period. The increased costs were primarily due to an increase of $4.79, or 17.5%, in the average cost per ton of purchased coal, offset, in part, by a decrease of 0.3 million tons, or 10.3%, decrease in the volume of purchased tons sold. The average cost per ton of purchased coal was $32.16 in the 2002 period compared to $27.37 in the 2001 period.

 

Miscellaneous cost of goods sold and other operating charges increased $4 million, or 7.9%, to $47 million in the 2002 period from $43 million in the 2001 period. The increase is due mainly to $14 million of equipment removal cost in the 2002 period compared to $9 million in the 2001 period. The increase in the 2002 period was also due to $4 million of contribution expense related to the donation of property to The Conservation Fund and $2 million of expense to recognize an allowance for doubtful accounts related to trade receivables. Bank fees also increased $2 million in the 2002 period related to the renegotiation of our revolving credit facility. The new facility replaces the previous agreement, which expired on September 20, 2002 and allows for an aggregate of $485 million of commercial paper principal and letters of credit to be issued. Miscellaneous cost of goods sold and other operating charges also increased $9 million due to various miscellaneous transactions that occurred throughout both periods, none of which were individually material. These increases in cost of goods sold and other charges were offset, in part, by an $18 million reduction in incentive compensation expense. Expense for this item was reduced in the 2002 period because performance targets for 2002 were not achieved.

 

Freight expense decreased $25 million, or 15.5%, to $134 million in the 2002 period from $159 million in the 2001 period. Freight expense is based on weight of coal shipped, negotiated freight rates and method of transportation (e.g., rail, barge or truck) used for the customers that CONSOL Energy contractually provides transportation. Freight expense is billed to customers and the revenue from such billings equals the transportation expense.

 

Selling, general and administrative expenses increased $5 million, or 7.7%, to $66 million in the 2002 period from $61 million in the 2001 period. Administrative expenses increased $4 million due to additional wages, salaries and other costs related to executive severance which occurred in the 2002 period and increased medical costs in the 2002 period. An increase of $2 million was primarily due to expenses for training, licensing fees and professional consulting related to the conversion to a new integrated information

 

33


Table of Contents

technology system provided by SAP AG to support business processes. Implementation of the system will be completed in 2003 at an estimated total cost of $53 million, a portion of which is to be capitalized. These increases were offset, in part, by a $1 million decrease in selling costs due to the reduction of sales employees at Fairmont Supply related to the sale of 18 industrial and store management sites that took place in the 2001 period. Fairmont Supply continues to operate 12 service centers.

 

Depreciation, depletion and amortization expense increased $19 million, or 7.9%, to $263 million in the 2002 period compared to the $244 million in the 2001 period. The increase was primarily due to the August 22, 2001 acquisition of the remaining 50% interest in Pocahontas Gas Partnership and the remaining 25% interest in the Cardinal States Gathering Company. In the 2002 period, these entities were reported as fully consolidated. In the 2001 period, these entities were reported on the equity basis. Depreciation and amortization also increased due to more coal assets being placed in service in the 2002 period. These increases were offset, in part, by lower financial depletion related to the reduced production levels in the 2002 period compared to the 2001 period.

 

Interest expense increased $3 million, or 6.6%, to $46 million in the 2002 period compared to $43 million in the 2001 period. This was due primarily to $16 million of additional interest expense related to the March 7, 2002 issuance of $250 million of 7.875% Notes due in 2012. The interest on the notes is payable March 1 and September 1 of each year commencing September 1, 2002. This increase was offset, in part, by a $9 million reduction in interest expense related to commercial paper. The reduction was due primarily to a $13 million reduction in the average levels of commercial paper outstanding during the 2002 period compared to the 2001 period, along with a decrease of 2.3% per annum in average interest rates in the period to period comparison. Interest expense was also reduced $4 million due to the reduction of long-term debt through scheduled payments.

 

Taxes other than income increased $11 million, or 7.2%, to $172 million in the 2002 period compared to $161 million in the 2001 period. The increase was due primarily to increased black lung excise taxes, real estate and personal property taxes and state reclamation fee taxes in the 2002 period compared to the 2001 period. In the 2001 period, due to certain black lung excise taxes being declared unconstitutional, $11 million of prior year accruals, which were not paid and were no longer owed, were reversed. The increase in certain taxes was offset by $4 million due to the reduction of 7 million tons of production in the 2002 period compared to the 2001 period. Real estate and personal property taxes increased $8 million in the 2002 period compared to the 2001 period. This increase was due to $3 million of additional taxes related to the properties owned by Windsor Coal Company, Southern Ohio Coal Company, Central Ohio Coal Company, Pocahontas Gas Partnership and Cardinal States Gathering Company which were acquired in 2001. Real estate and personal property taxes also increased $1 million due to expanded permitting at our mining locations. The remaining $4 million increase in real estate and personal property taxes was related to several transactions throughout the 2002 and 2001 periods, none of which were individually material. These increases in taxes other than income were offset, in part, by a $3 million reduction in payroll taxes. The reduction in payroll taxes is primarily due to reduced employee counts as a result of several mines being idled during the 2002 period. Taxes other than income also decreased $1 million as a result of various transactions throughout the 2002 and 2001 periods, none of which were individually material.

 

CONSOL Energy is no longer required to pay certain excise taxes on export coal sales. We have filed claims with the Internal Revenue Service seeking refunds for these excise taxes that were determined to be unconstitutional and were paid during the period 1991 through 1999. During the 2001 period, we recognized $92 million of pre-tax earnings net of other charges and $26 million of interest income related to these claims. During the 2002 period, we recognized $1 million of interest income related to these claims. In the 2002 period, $4 million has been collected on these claims. A $93 million receivable remains in Other Receivables at December 31, 2002.

 

Income Taxes

 

Income taxes represent a $52 million benefit in the 2002 period compared to $32 million of expense in the 2001 period. The decrease in tax expense was due mainly to a pre-tax loss of $40 million in the 2002 period compared to pre-tax income of $183 million in the 2001 period without a comparable reduction in percentage depletion tax benefits. Our effective tax rate is sensitive to changes in annual profitability and percentage depletion. The effective rate was 128.9% in the 2002 period compared to 17.5% in the 2001 period. Income taxes were also reduced due to adjusting the provision for income taxes at the time the returns are filed. These adjustments decreased income tax expense by $4 million in the 2002 period and increased income tax expense $1 million for the 2001 period. In the 2002 period, CONSOL Energy also received a $2 million federal income tax benefit from a final agreement resolving disputed federal income tax items for the years 1995 to 1997.

 

Six Months Ended December 31, 2001 compared with Six Months Ended December 31, 2000 (unaudited)

 

Net Income

 

CONSOL Energy’s net income for the six months ended December 31, 2001 was $1 million compared with $34 million for the six months ended December 31, 2000. The decrease of $33 million was primarily due to lower prices for natural gas caused by general market declines and higher cost per ton of produced coal mined caused principally by adverse mining conditions and

 

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mechanical problems. The effects of lower prices for natural gas and higher coal production costs were offset, in part, by a reduction in income tax expense due to a pre tax loss in the 2001 transitional period along with changes in percentage depletion allowances and higher volumes of gas sold.

 

Revenue

 

Sales decreased $28 million, or 2.8% to $964 million for the six months ended December 31, 2001 from $992 million for the six months ended December 31, 2000.

 

Revenues from the sale of coalbed methane gas and gathering fees decreased $8 million, or 13.7% to $48 million in the 2001 transitional period from $56 million in the 2000 six month period. This decrease was due mainly to a 44.2% decrease in average sales price for the period. Average sales price for the 2001 transitional period was $2.61 per million British thermal unit compared to $4.68 per million British thermal unit for the six months ended December 31, 2000. The decrease in sales price was offset, in part, by higher volumes as a result of the August 22, 2001 acquisition of the remaining 50% interest in Pocahontas Gas Partnership. Sales volumes were 18.6 billion cubic feet in the 2001 transitional period, an increase of 6.5 billion cubic feet, or 53.4% from the 2000 six month period.

 

Revenues from the sale of industrial supplies decreased $30 million, or 46.5%, to $34 million in the 2001 transitional period from $64 million in the 2000 six month period. The decrease was due primarily to the sale of the physical assets, inventory and operations associated with 18 industrial and store management sites during the 2000 six month period. The sale did not have a material impact on CONSOL Energy’s financial position, results of operations or cash flow.

 

These decreased revenues were partially offset by increased revenues from the sale of company produced coal. Revenues from the sale of company produced coal increased $14 million, or 1.7%, to $836 million in the 2001 transitional period from $822 million in the 2000 six month period. The increase in produced coal sales revenues was due mainly to an increase of $1.62, or 6.9%, in the average sales price per ton sold. The average sales price was $25.07 in the 2001 transitional period compared to $23.45 in the 2000 six month period. The increase in average sales price was due primarily to demand increases and low inventory levels at coal producers. The increase in average sales price was partially offset by a 2 million ton, or 4.8%, decrease in the volume of produced tons sold in the 2001 transitional period compared to the 2000 six month period. Produced coal sales volumes were 33 million tons in the 2001 transitional period compared to 35 million tons in the 2000 six month period. The decreased sales volumes were due primarily to the decline in production as a result of the suspension of longwall production at Mine 84 early in July 2001. Mine 84 restarted longwall production in early December 2001 at production levels equal to full production levels in the months before production problems were encountered. This start was approximately one month earlier than originally projected. Production shortages were encountered at several other CONSOL Energy mines due to mechanical and geological difficulties. These production declines were offset by the production at several of the mines acquired from American Electric Power on July 2, 2001.

 

Revenues from the sale of purchased coal decreased $4 million, or 7.7%, to $40 million in the 2001 transitional period from $51 million in the 2000 six month period. Sales volumes decreased 11.9% to 1.3 million tons in the 2001 transitional period from 1.5 million tons in the 2000 six month period. The decreased volumes were partially offset by a 4.8% increase in the price per ton of purchased coal sold. The average sales price per ton of purchased coal was $29.84 in the 2001 transitional period compared to $28.49 in the 2000 six month period.

 

Freight revenue, outside and related party, decreased $2 million, or 2.6%, to $70 million in the 2001 transitional period from $72 million in the 2000 six month period. Freight revenue is the amount billed to customers for transportation costs incurred.

 

Other income, which consists of interest income, gain or loss on the disposition of assets, equity in earnings of affiliates, service income, royalty income, rental income and miscellaneous income, was $31 million in the 2001 transitional period compared to $37 million in the 2000 six month period. The decrease of $6 million, or 16.0%, was primarily due to the reduction in equity in earnings of affiliates. The reduction in equity in earnings of affiliates was primarily due to the August 22, 2001 purchase of the remaining 50% interest in Pocahontas Gas Partnership and the remaining 25% interest in the Cardinal States Gathering Company. As a result of the acquisition, CONSOL Energy owns 100% of these entities and began to account for them as fully consolidated subsidiaries. Before the acquisition, CONSOL Energy accounted for these companies using the equity method.

 

Costs

 

Cost of Goods Sold and Other Operating Charges increased $31 million, or 4.2%, to $761 million in the 2001 transitional period from $730 million in the 2000 six month period.

 

Cost of goods sold for company produced coal increased $28 million, or 4.8% to $623 million in the 2001 transitional period from $595 million in the 2000 six month period. The increase was primarily due to a 10.1% increase in the cost per ton sold of company produced coal, offset slightly by a 4.8% decrease in the volume of tons of company produced coal sold. The increased

 

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cost per ton produced is primarily due to a decline in productivity as measured in tons produced per manday. Tons produced per manday were 37.6 in the 2001 transitional period compared to 41.6 in the 2000 six month period. The decline in productivity is mainly due to several mines experiencing mechanical and geological difficulties in the 2001 transitional period.

 

Cost of goods sold for gas operations increased $9 million, or 51.7%, to $27 million in the 2001 transitional period from $18 million in the 2000 six month period. The increase in gas costs was due primarily to 53.4% higher volume of gas sold as a result of the acquisition of the remaining 50% interest in Pocahontas Gas Partnership on August 22, 2001. Sales volumes were 18.6 billion cubic feet in the 2001 transitional period compared to 12.1 billion cubic feet in the 2000 six month period. The cost per million British thermal units sold remained stable at $1.50 in the 2001 transitional period compared to $1.51 in the 2000 six month period.

 

Cost of goods sold for purchased coal remained consistent at $40 million in the 2001 transitional period compared to the 2000 six month period.

 

Cost of goods sold for closed and idled mine costs increased $13 million to $29 million in the 2001 transitional period from $16 million in the 2000 six month period. The increase is due primarily to a $10 million income adjustment for mine closing and perpetual care liabilities being recognized in the 2000 six month period. The adjustment was the result of updated engineering studies and cost projections for closed and idled locations. The increase was also due to additional costs related to the closing or idling of Loveridge, Meigs #31 and Mine 84 in the 2001 transitional period compared to the 2000 six month period.

 

Cost of goods sold for industrial supplies decreased $28 million, or 44.2%, to $36 million in the 2001 transitional period from $64 million in the 2000 six month period. The decrease in costs is related to reduced sales volumes resulting from the sale of 18 industrial and store management sites.

 

Freight expense decreased $2 million, or 2.7%, to $70 million in the 2001 transitional period from $72 million in the 2000 six month period. Freight expense is billed to customers and the revenue from such billings equals the transportation expense.

 

Selling, general and administrative expenses decreased $2 million, or 5.7%, to $31 million in the 2001 transitional period from $33 million in the 2000 six month period. The decrease was due primarily to decreased professional consulting fees. Professional consulting fees were reduced due to the completion of the review of business processes and information technology systems supporting those processes that took place in the 2000 period.

 

Depreciation, depletion and amortization expense remained stable at $120 million for the 2001 transitional period and the 2000 six month period.

 

Interest expense decreased by $14 million, or 46.2%, to $17 million in the 2001 transitional period compared to $31 million in the 2000 six month period. The decrease was due primarily to lower average debt levels outstanding during the 2001 transitional period compared to the 2000 six month period, along with a decrease of 3.6% per annum in average interest rates reflecting more favorable interest rates. Lower average debt levels resulted from the cash received in the acquisition of the Windsor Coal Company, Southern Ohio Coal Company and Central Ohio Coal Company from American Electric Power being used to reduce the outstanding amount of commercial paper in July 2001. Thereafter, we increased the outstanding amount of commercial paper by the issuance of approximately $155 million of commercial paper beginning in August 2001 to finance the acquisition of the remaining 50% interest in Pocahontas Gas Partnership and the remaining 25% interest in the Cardinal States Gathering Company. Also, in December 2001, approximately $18 million of commercial paper was issued to finance the acquisition of a 50% joint venture in Glennies Creek Mine. Interest expense is expected to increase during 2002 as a result of the refinancing of short term debt with long-term notes with the interest rate of 7.875% per annum.

 

Taxes other than income increased $3 million, or 3.7%, to $81 million in the 2001 transitional period compared to $78 million in the 2000 six month period. The increase was due primarily to increased excise taxes, severance taxes and payroll taxes in the 2001 transitional period. These costs increased primarily due to the acquisition of the Windsor Coal Company, Southern Ohio Coal Company and Central Ohio Coal Company from American Electric Power.

 

CONSOL Energy is no longer required to pay certain excise taxes on export coal sales. We have filed claims with the Internal Revenue Service seeking refunds for these excise taxes that were determined to be unconstitutional and were paid during the period 1991 through 1999. During the 2001 transitional period, we recognized a $5 million reduction to the expected interest receivable amount recognized in the twelve months ended June 30, 2001 due to the change in the estimate of recoverable amounts.

 

Income Taxes

 

Income taxes were a $21 million benefit in the 2001 transitional period compared to $4 million of expense in the 2000 six month period. The decrease of $25 million was due mainly to a pre-tax loss in the 2001 transitional period with little loss of percentage depletion tax benefits. Our effective tax rate is sensitive to changes in annual profitability and percentage depletion.

 

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Twelve Months Ended June 30, 2001 compared with Twelve Months Ended June 30, 2000

 

Net Income

 

CONSOL Energy’s net income for the year ended June 30, 2001 was $184 million compared with $107 million for the year ended June 30, 2000. The increase of $77 million was primarily due to the resolution of claims by CONSOL Energy related to export sales excise taxes that were declared unconstitutional. Also, net income increased due to increased gas sales volumes and prices, a reversal of accruals for export sales excise taxes which are no longer owed, and the completion of the restructuring program. These increases to net income were partially offset by increased income tax expense primarily due to higher pretax earnings and loss of percentage depletion benefits, reduced revenues from coal sales primarily due to reduced sales volumes, and higher production costs due mainly to adverse geological conditions at Mine 84.

 

Revenue

 

Sales increased $28 million, or 1.4%, to $2,123 million for the 2001 period from $2,095 million for the 2000 period.

 

Revenues from the sale of coalbed methane gas and gathering fees increased $82 million to $130 million in the 2001 period from $48 million in the 2000 period. Average sales prices increased 69.3% to $5.18 per MMbtu for the 2001 period compared to $3.06 per MMbtu for the 2000 period. The increase was also due to higher volumes as a result of the acquisition of Buchanan Production Company and Oakwood Gathering, Inc. on February 25, 2000 and the inclusion of their results for the entire 2001 period.

 

Revenues from the sale of produced coal decreased by $5 million, or 0.3%, to $1,781 million in the 2001 period from $1,786 million in the 2000 period. Produced Coal sales volumes were 73.8 million tons in the 2001 period, a decrease of 1.4 million tons, or 1.9%, from the 75.2 million tons sold in the 2000 period. This was primarily due to lower production at Mine 84 resulting from adverse geological conditions in the 2001 period. In the quarter ended December 31, 2000 and continuing throughout the remainder of the fiscal year ended June 30, 2001, Mine 84 encountered a sandstone intrusion in the coal seam that ran across several longwall coal panels. Because sandstone is harder than coal, mining advance rates were slowed for both longwall and continuous mining machines. Production for Mine 84 was 2.2 million tons in the 2001 period compared to 5.7 million tons for the 2000 period. Production in the quarter ended June 30, 2001 was 0.6 million tons compared to 0.3 million tons in the quarter ended March 31, 2001. Average sales prices increased 1.6% to $24.12 per ton for the 2001 period from $23.74 per ton for the 2000 period. The increase in average sales price was due primarily to demand increases and low inventory levels at both our mines and at our customers’ power stations.

 

Revenues from the sale of purchased coal decreased by $22 million, or 21.4%, to $81 million in the 2001 period from $103 million in the 2000 period. Sales volumes of Purchased Coal were 2.7 million tons in the 2001 period, a decrease of 0.8 million tons, or 21.2%, compared to the 3.5 million tons sold in the 2000 period. The decrease in tons sold primarily reflects a renegotiated contract that allows company-produced coal to be shipped in the 2001 period instead of coal purchased from third parties which was required to be shipped under the contract in the 2000 period. Average sales prices of coal that we purchased remained consistent.

 

Industrial supplies sales decreased $25 million, or 17.7%, to $116 million in the 2001 period from $141 million in the 2000 period due to reduced sales volumes primarily related to sales to various chemical plants. During the 2001 period, the physical assets, inventory and operations associated with 18 industrial and store management sites of Fairmont Supply Company were sold. The sale did not have a material impact on financial position, results of operations or cash flow. Fairmont Supply Company continues to operate 12 customer service locations nationwide.

 

Freight revenue, outside and related party, which represents amounts billed to customers in a sale transaction related to shipping and handling costs, decreased 3.0% to $161 million in the 2001 period from $166 million in the 2000 period. Freight revenue is the amount billed to customers that equals the expense of the transportation.

 

Other income, which consists of interest income, gain on the disposition of assets, service income, royalty income, rental income, equity in earnings of affiliates and miscellaneous income, increased 9.5% to $70 million in the 2001 period from $64 million in the 2000 period. The increase of $6 million was primarily due to an increase in the equity in earnings of affiliates related to gas, offset in part by a decrease in the gain on disposition of assets and royalty income. Equity in earnings of affiliates related to gas increased primarily due to an increase in volumes sold and sales prices. The gain on sale of assets principally relates to the sale of certain in place coal reserves. CONSOL Energy continually manages its coal reserves and from time-to-time sells non-strategic reserves.

 

Costs

 

Cost of goods sold and other operating charges increased 3.7% to $1,555 million in the 2001 period compared to $1,499 million in the 2000 period.

 

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Cost of goods sold for produced coal was $1,207 million for the 2001 period, an increase of $73 million, or 6.4%, from $1,134 in the 2000 period. The increased cost per ton produced is primarily due to adverse geological conditions at Mine 84. Tons per manday decreased 4.6% to 42.2 tons in the 2001 period compared to 44.2 tons in the 2000 period primarily reflecting the adverse geological conditions at Mine 84.

 

Industrial Supplies cost of goods sold decreased 20.2% to $115 million in the 2001 period from $145 million in the 2000 period. The $30 million decrease was due to reduced sales volumes.

 

Purchased coal costs decreased 24.4% to $76 million in the 2001 period from $100 million in the 2000 period. The $24 million decrease was due to a 21.2% decrease in tons sold. The decrease in tons sold primarily reflects a renegotiated contract that allows company-produced coal to be shipped in the 2001 period instead of coal purchased from third parties which was required to be shipped under the contract in the 2000 period.

 

Gas costs increased 108.1% to $47 million in the 2001 period from $22 million in the 2000 period. The $25 million increase was primarily due to higher volumes as a result of the acquisition of Buchanan Production Company and MCNIC Oakwood Gathering Inc. in February 2000. Average cost per million Btu was $1.88 in the 2001 period, a $0.15 increase, or 8.4%, compared to the 2000 period. Average cost per million Btu has increased due primarily to an increase in royalty expense, which is related to the increase in the average sales price of a million Btu sold.

 

Cost of goods sold for closed and idle mine costs increased 21.5% to $60 million in the 2001 period from $49 million in the 2000 period. The $11 million increase was primarily due to the increased costs related to the preparation for the reopening of Loveridge Mine in the 2001 period in order to mine the remaining longwall panel. The longwall panel was mined out and Loveridge was again idled. Idle mine costs were then incurred to recover, refurbish and redeploy the longwall to another CONSOL Energy mine. Closed and idle mine costs also increased due to engineering survey adjustments related to mine closing and reclamation. In the 2000 period, we incurred costs related to the initial idling or closing of the Powhatan, VP#8 and Ohio #11 Mines that were not repeated during the 2001 period.

 

Costs also increased $16 million due to the approval of a new incentive compensation program for eligible full-time employees. This program is designed to increase compensation payable to eligible employees when CONSOL Energy reaches predetermined earnings targets and the employees reach predetermined performance targets.

 

Freight expense decreased 3.0% to $161 million in the 2001 period from $166 million in the 2000 period. Freight expense is billed to customers and the revenues from such billings equals the transportation expense.

 

Selling, general and administrative expenses increased 1.4% to $63 million in the 2001 period compared to $62 million in the 2000 period. The increase of $1 million was primarily due to increased professional consulting fees associated with the review of business processes and information technology systems supporting those processes, offset in part by salary cost savings from the Voluntary Separation Incentive Program implemented in the last half of the fiscal year ended June 30, 2000.

 

Depreciation, depletion and amortization expense decreased 2.6% to $243 million in the 2001 period compared to $250 million in the 2000 period. The decrease of $7 million was primarily due to reduced depreciation and depletion expense as a result of the scheduled closing of the Powhatan mine due to economically depleted reserves. Depletion and amortization expense was also reduced due to lower production tons in the 2001 period and items becoming fully amortized in the 2000 period. These decreases were offset, in part, by increased depreciation expense related to assets placed in service after the 2000 period and additional depreciation expense on assets received in the acquisition of Buchanan Production Company and MCNIC Oakwood Gathering Inc.

 

Interest expense increased 4.2% to $58 million for the 2001 period compared to $55 million for the 2000 period. The increase of $3 million was due primarily to higher average debt levels outstanding during the 2001 period compared to the 2000 period, along with an increase of 0.2% in average interest rates. Higher debt levels resulted from the issuance of commercial paper to finance the purchase of Buchanan Production Company, MCNIC Oakwood Gathering Inc. and a MCN subsidiary that owns a 50% interest in Cardinal States Gathering Company in February 2000, and the purchase of a 50% joint venture interest in Line Creek mine on December 31, 2000.

 

Taxes other than income decreased 9.3% to $158 million for the 2001 period compared to $174 million for the 2000 period. The decrease of $16 million was due primarily to reduced excise taxes in the 2001 period. As discussed in Note 7 of the Consolidated Financial Statements, CONSOL Energy is no longer required to pay certain excise taxes on export coal sales and, therefore, is no longer accruing for this expense. Due to these taxes on export coal sales being declared unconstitutional, prior year accruals of $11 million which were not paid and are no longer owed, were reversed. The decrease was partially offset by increased state severance taxes due to higher sales prices and increased property taxes due to increased assessments.

 

CONSOL Energy has filed claims with the Internal Revenue Service seeking refunds for these unconstitutional excise taxes that were paid during the period 1991 through 1999. During the 2001 period, CONSOL Energy recognized $93 million of pretax earnings net of other charges and $31 million of inte