UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2004
or
For the transition period from to
Commission File Number: 001-14901
CONSOL ENERGY INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1800 Washington Road,
Pittsburgh, Pennsylvania 15241
(Address of principal executive offices, including zip code)
(412) 831-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class
Shares outstanding as of July 29, 2004
Common stock, $0.01 par value
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
OTHER INFORMATION
ITEM 6.
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
June 30,
Six Months Ended
Sales—Outside
Sales—Related Parties
Freight—Outside
Freight—Related Parties
Other Income
Total Revenue and Other Income
Cost of Goods Sold and Other Operating Charges
Freight Expense
Selling, General and Administrative Expense
Depreciation, Depletion and Amortization
Interest Expense
Taxes Other Than Income
Export Sales Excise Tax Resolution
Total Costs
Earnings Before Income Taxes
Income Tax Expense (Benefit)
Earnings Before Cumulative Effect of Change in Accounting Principle
Cumulative Effect of Changes in Accounting for Mine Closing, Reclamation and Gas Well Closing Costs, net of Income Taxes of $3,035
Cumulative Effect of Changes in Accounting for Workers’ Compensation Liability, net of Income Taxes of $53,080
Net Income
Basic Earnings Per Share
Dilutive Earnings Per Share
Weighted Average Number of
Common Shares Outstanding:
Basic
Dilutive
Dividends Paid Per Share
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS
Current Assets:
Cash and Cash Equivalents
Accounts and Notes Receivable:
Trade
Other Receivables
Inventories
Deferred Income Taxes
Recoverable Income Taxes
Prepaid Expenses
Total Current Assets
Property, Plant and Equipment:
Property, Plant and Equipment
Less—Accumulated Depreciation, Depletion and Amortization
Total Property, Plant and Equipment—Net
Other Assets:
Investment in Affiliates
Restricted Cash
Other
Total Other Assets
TOTAL ASSETS
Current Liabilities:
Accounts Payable
Short-Term Notes Payable
Current Portion of Long-Term Debt
Other Accrued Liabilities
Total Current Liabilities
Total Long-Term Debt
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions
Pneumoconiosis Benefits
Mine Closing
Workers’ Compensation
Deferred Revenue
Salary Retirement
Reclamation
Total Deferred Credits and Other Liabilities
Stockholders’ Equity:
Common Stock, $.01 par value; 500,000,000 Shares Authorized, 91,267,558 Issued; and 90,213,689 Outstanding at June 30, 2004, and 89,861,900 Outstanding at December 31, 2003
Preferred Stock, 15,000,000 Shares Authorized; None Issued and Outstanding
Capital in Excess of Par Value
Retained Earnings (Deficit)
Other Comprehensive Loss
Common Stock in Treasury, at Cost—1,053,869 Shares at June 30, 2004 and 1,405,658 Shares at December 31, 2003
Total Stockholders’ Equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Capital inExcess
of ParValue
ComprehensiveIncome (Loss)
Total
Stockholders’Equity
Balance—December 31, 2003
Treasury Rate Lock (Net of $27 tax)
Interest Rate Swap Contract (Net of ($514) tax)
Gas Cash Flow Hedge (Net of $6,332 tax)
Comprehensive Income (Loss)
Issuance of Restricted Stock Units under the Equity Incentive Plan (194,807 units)
Stock-Based Compensation
Treasury Stock Issued (351,789 shares)
Dividends ($.28 per share)
Balance—June 30, 2004
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Cumulative Effect of Change in Accounting Principle, net of tax
Compensation from Restricted Stock Unit Grants
Gain on the Sale of Assets
Amortization of Mineral Leases
Equity in Earnings of Affiliates
Changes in Operating Assets:
Accounts Receivable Securitization
Accounts and Notes Receivable
Changes in Other Assets
Changes in Operating Liabilities:
Other Operating Liabilities
Changes in Other Liabilities
Net Cash Provided by Operating Activities
Investing Activities:
Capital Expenditures
Additions to Mineral Leases
Investment in Equity Affiliates
Proceeds from Sales of Assets
Net Cash Used in Investing Activities
Financing Activities:
Payments on Commercial Paper
Payments on Miscellaneous Borrowings
Payments on Revolver
Payments on Long Term Notes
Proceeds from Long Term Notes
Dividends Paid
Withdrawal from Restricted Cash
Issuance of Treasury Stock
Net Cash Provided by (Used in) Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1—BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals, as well as the cumulative effect of changes in accounting for workers’ compensation and mine closing, reclamation and gas well closing) considered necessary for a fair presentation have been included. Operating results for the three-month period and six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for future periods.
The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all the footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2003 included in CONSOL Energy Inc.’s (CONSOL Energy) Form 10-K.
Certain reclassifications of the prior year’s data have been made to conform to the six months ended June 30, 2004 classifications, with no effect on previously reported net income or stockholders’ equity. The reclassifications include classifying leased coal interest and advance mining royalties, previously reported separately on the balance sheet as intangible assets, as a component of property, plant and equipment in accordance with Emerging Issues Task Force Issue No. 04-03, “Whether Mineral Rights Are Tangible or Intangible Assets.”
Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the reporting period. Diluted earnings per share are computed similarly to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 1,120,553 shares and 1,124,553 shares of common stock were outstanding for the three and six month period ended June 30, 2004, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 1,089,393 shares and 1,729,780 shares of common stock were outstanding for the three and six month period ended June 30, 2003, respectively, but were not included in the computation of diluted earnings per share because the options were antidilutive.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The computations for basic and diluted earnings per share are as follows:
For the
Three Months
Ended June 30,
Six Months
Earnings before cumulative effect of change in accounting
Cumulative effect of accounting change
Average shares of common stock Outstanding:
Effect of stock options
Diluted
Earnings per share:
Basic before cumulative effect
Basic after cumulative effect
Diluted before cumulative effect
Diluted after cumulative effect
NOTE 2—DISPOSITIONS:
In June 2004, CONSOL Energy finalized working capital items and remaining liability transfers related to the sale of its Canadian coal assets and related port facilities. The initial sale was completed in February 2003. The finalization of these items resulted in CONSOL Energy making a cash payment of $4,167 and recording a pre-tax gain of $3,290.
In February 2004, CONSOL Energy sold the stock in its wholly owned subsidiary CNX Australia Pty Limited to certain affiliates of AMCI, Inc. for $27,500 ($11,000 of cash and $16,500 of Notes Receivable). Certain affiliates of AMCI, Inc. also assumed $21,190 of debt and the associated interest rate swaps and foreign currency hedges that a subsidiary of CNX Australia Pty Limited had. CNX Australia Pty Limited, through its wholly owned subsidiary CONSOL Energy Australia Pty Limited, owned a 50% interest in the Glennies Creek Mine in New South Wales, Australia with its joint venture partner Maitland Main Collieries Pty Limited, an affiliate of AMCI, Inc. The sale resulted in a pre-tax gain of $14,374.
NOTE 3—STOCK-BASED COMPENSATION:
CONSOL Energy has implemented the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment of SFAS 123” (SFAS No. 148). CONSOL Energy continues to measure compensation expense for its stock-based compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” as amended. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise
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price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if CONSOL Energy had applied the fair value recognition provisions of SFAS No. 123 and 148, to stock-based employee compensation:
Net income, as reported
Add: stock-based compensation expense for restricted stock units
Deduct: Total stock-based employee compensation expense determined under Black-Scholes option pricing model and stock-based compensation expense for restricted stock units
Pro forma net income
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
The pro forma adjustments in the current period are not necessarily indicative of future period pro forma adjustments as the assumptions used to determine fair value can vary significantly and the number of future shares to be issued under these plans is unknown.
Restricted Stock Unit Awards are grants that entitle the holder to receive shares of common stock as the award vests. A total of 194,807 restricted stock units were granted during the six months ended June 30, 2004, vesting over a weighted average period of 3.57 years. Each restricted stock unit represents one share of common stock. The shares represented by these restricted stock units had a market value of $30.78 per share (based upon the closing share price) at date of grant. Compensation expense will be recognized over the vesting period of the units.
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NOTE 4—COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS NET PERIODIC BENEFIT COSTS:
Components of net periodic costs (benefits) for the three and six months ended June 30 are as follows:
Ended
Service cost
Interest cost
Expected return on plan assets
Amortization costs
Curtailment gain
Net periodic benefit cost
CONSOL Energy previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $57,414 to its pension plan in 2004. As of June 30, 2004, $849 of contributions has been made. CONSOL Energy presently anticipates contributing an additional $56,565 to fund its pension plan in 2004 for a total of $57,414.
CONSOL Energy has recognized the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the six months ended June 30, 2004 in accordance with FASB Staff Position No. FAS 106-b, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” Implementation of the Act resulted in a reduction of our postretirement benefit costs of $9,553 and $12,072 for the three and six months ended June 30, 2004, and a reduction of our postretirement benefit obligation of $182,256.
As previously disclosed in its financial statements for the year ended December 31, 2003, CONSOL Energy does not expect to contribute to the other post employment benefit plan in 2004. We intend to pay benefit claims as they become due. As of June 30, 2004, $60,314 of other post employment benefits has been paid.
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NOTE 5—COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR WORKERS’ COMPENSATION:
Three MonthsEnded
Amortization of actuarial gain
Legal and administrative costs
Net periodic (benefit)cost
As previously disclosed in its financial statements for the year ended December 31, 2003, CONSOL Energy does not expect to contribute to the CWP plan in 2004. We intend to pay benefit claims as they become due. For the six months ended June 30, 2004, $6,353 of CWP benefits have been paid.
CONSOL Energy’s workers’ compensation liabilities are unfunded, and benefit claims are paid as they become due. For the six months ended June 30, 2004, $24,801 of workers’ compensation benefits have been paid.
CONSOL Energy also has expensed $6,145 for the six months ended June 30, 2004 for various state administrative fees and insurance bond premiums. The state administrative fees are paid to various states for the right to self-insure workers’ compensation claims.
Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Additionally, the workers’ compensation liability is recorded on a discounted basis, which has been actuarially determined using various assumptions, including a discount rate of 6% and a future health care trend rate of 10%, declining to 4.75% in 2010. CONSOL Energy believes this change was preferable since it aligns the accounting with the Company’s accounting for other long-term employee benefit obligations, which are recorded on a discounted basis. Additionally, it provides a better comparison with the Company’s industry peers, the majority of which record workers’ compensation liability on a discounted basis.
Effective January 1, 2004, as a result of the change, CONSOL Energy reduced its workers’ compensation liability by $136,453 and reduced its related deferred tax asset by $53,080. The cumulative effect adjustment recognized upon adoption was a gain of $83,373, net of a tax cost of approximately $53,080, and accordingly is reflected as a cumulative effect adjustment from a change in accounting. This cumulative effect adjustment is not included in the 2004 figures in the table above.
Prior to the change, CONSOL Energy recorded its workers’ compensation liability on an undiscounted basis. The liability represented the estimated liability for claims that had been filed with a third party administrator and an estimate representing an incurred but not reported claim liability. The total expense related
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to workers compensation for the three and six months ended June 30, 2003 was $16,093 and $32,831, respectively. Pro forma net income for the three and six months ended June 30, 2003 would have been $8,675 and $14,017, respectively, had the change in accounting for workers’ compensation costs occurred at the beginning of 2003. Pro forma net income per basic common share and pro forma net income per diluted common share for the three months and six months ended June 30, 2003 would have been $0.11 and $0.18, respectively.
NOTE 6—CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR MINE CLOSING, RECLAMATION AND GAS WELL CLOSING COSTS:
Effective January 1, 2003, CONSOL Energy adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). As a result of this statement, CONSOL Energy recognized additional liabilities of $51,692 for asset retirement obligations associated with the costs of mine closing, reclamation and gas well closing. In addition, CONSOL Energy capitalized asset retirement costs by increasing the carrying amount of related long-lived assets, net of the associated accumulated depreciation, by $59,495.
The cumulative effect adjustment recognized upon adoption of this statement was a gain of $4,768, net of a tax cost of approximately $3,035.
NOTE 7—RESTRUCTURING COSTS:
In December 2003, CONSOL Energy reduced corporate overhead costs by eliminating approximately 100 selling, general and administrative and other positions within the Company. The restructuring of the corporate overhead was a result of developments in CONSOL Energy’s business, including operating fewer mines than have been operated in the past, the sale of non-core business assets and de-emphasizing coal exports. At that time, restructuring charges of $3,606 were recognized representing estimated severance costs related to the workforce reduction. At December 31, 2003, approximately 75%, or $2,720, of the employee termination benefits related to the program had been paid. The remaining restructuring obligation is recorded as Other Accrued Liabilities. Cash payments for the three and six months ended June 30, 2004 were $220 and $826, respectively. There were no other adjustments made to the restructuring liability in the three or six months ended June 30, 2004. The remaining restructuring liability at June 30, 2004 was $60 and is expected to be paid by December 31, 2004.
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NOTE 8—INCOME TAXES:
The following is a reconciliation stated in dollars and as a percentage of pretax income, of the U. S. statutory federal income tax rate to CONSOL Energy’s effective tax rate:
For the Six Months Ended
Statutory U.S. federal income tax rate
Excess tax depletion
Effect from sale of Foreign Interest
Effect of Medicare Prescription Drug, Improvement and Modernization Act of 2003
Net Effect of state tax
Net Effect of foreign tax
Income Tax (Benefit) Expense / Effective Rate
The effective tax rate for the three and six months ended June 30, 2004 was calculated using the combination of an annual effective rate projection on recurring earnings and a discrete tax calculation for the impact of the sale of its wholly owned subsidiary CNX Australia Pty Limited. The effective rate is sensitive to changes in annual profitability, percentage depletion and the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In addition, the provision for income taxes is adjusted at the time the tax returns are filed to reflect changes in previously estimated amounts. These adjustments decreased income tax expense by $3,011 and $1,128 for the three months ended June 30, 2004 and 2003, respectively. These adjustments are included in Net Effect of foreign tax and Effect from sale of foreign interest for the three and six months ended June 30, 2004 and Other for the three and six months ended June 30, 2003.
NOTE 9—INVENTORIES:
The components of inventories consist of the following:
2004
December 31,
2003
Coal
Merchandise for resale
Supplies
Total Inventories
NOTE 10—ACCOUNTS RECEIVABLE SECURITIZATION
In April 2003, CONSOL Energy and certain of its U.S. subsidiaries entered into a trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries
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of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.
The receivables facility allows CONSOL Energy to receive, on a revolving basis, up to $125,000. The cost of funds is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $721 and $1,239 for the three and six months ended June 30, 2004, respectively. Costs associated with the receivables facility totaled $263 for the three and six months ended June 30, 2003, respectively. These costs have been recorded as financing fees, which are included in Cost of Goods Sold and Other Operating Charges in the consolidated statements of income. No servicing asset or liability has been recorded. The receivables facility expires in 2006.
At June 30, 2004 and December 31, 2003, eligible accounts receivable totaled approximately $119,500 and $108,600, respectively. There was no subordinated retained interest at June 30, 2004. The subordinated retained interest approximated $600 at December 31, 2003. Accounts receivable totaling $125,000 and $108,000 were removed from the consolidated balance sheet at June 30, 2004 and December 31, 2003, respectively. In accordance with the facility agreement, the Company is able to receive proceeds based upon total eligible accounts receivable at the previous month-end. Proceeds at June 30, 2004, determined by eligible accounts receivable at May 31, 2004, exceeded the eligible accounts receivable at June 30, 2004. The $5,500 of proceeds not supported by accounts receivable at June 30, 2004 is included in the $125,000 of accounts receivable, which was removed from the consolidated balance sheet at June 30, 2004. The $2,900 and $17,000 of additional proceeds received in the three and six months ended June 30, 2004 and the $50,000 of proceeds received in three and six months ended June 30, 2003 is included in cash flows from operating activities in the consolidated statement of cash flows.
NOTE 11—PROPERTY, PLANT AND EQUIPMENT:
Coal properties and surface lands
Mineral interests
Plant and equipment
Mine development
Airshafts
Less Accumulated depreciation, depletion and amortization
Net Property, Plant and Equipment
Leased coal interest and advance mining royalties, previously reported separately on the balance sheet as intangible assets, are reflected as mineral interests within property, plant and equipment in accordance with Emerging Issues Task Force Issue No. 04-03, “Whether Mineral Rights Are Tangible or Intangible Assets”.
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NOTE 12—DEBT:
On June 30, 2004, CONSOL Energy completed a $600,000 senior secured credit facility to replace an existing facility of $266,750. The agreement consists of a five-year $400,000 revolving credit facility and a six-year $200,000 Tranche B credit-linked deposit facility. Borrowings under the facility are secured by nearly all of the assets of the Company. Collateral has been provided to the banks and is shared equally and ratably with the holders of CONSOL Energy’s 7.875% bonds maturing in 2012 and CONSOL Energy’s subsidiary’s 8.25% medium-term notes maturing in 2007.
Funds may be borrowed for periods of 1 to 180 days depending on the interest rate method chosen by CONSOL Energy. Interest is based, at our option, upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread, which is dependent on our credit rating. Borrowings under the facilities will be used for general corporate purposes of CONSOL Energy and its subsidiaries, including working capital, capital expenditures and letter of credit needs. Previous cash collateralized letters of credit have been transferred to the Tranche B facility and the $190,000 of restricted cash has been released and used to pay down short-term debt.
The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450,000, $550,000 and $550,000 for the twelve months ended December 31, 2004, 2005 and 2006, respectively. For each fiscal year thereafter, the limit is $400,000. At June 30, 2004, the revolving credit facility had $26,573 of letters of credit outstanding, leaving $373,427 of capacity available for borrowings and the issuance of letters of credit. At June 30, 2004, the Tranche B credit-linked deposit facility had $200,000 of letters of credit outstanding and has reached the facility’s capacity.
NOTE 13—COMMITMENTS AND CONTINGENCIES:
CONSOL Energy has various purchase commitments for materials, supplies and items of permanent investment incidental to the ordinary conduct of business. Such commitments are not at prices in excess of current market values.
One of our subsidiaries, Fairmont Supply Company, which distributes industrial supplies, currently is named as a defendant in approximately 24,400 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, New Jersey and Mississippi. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the 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
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with respect to asbestos cases have not been material. However, there cannot be any assurance that payments in the future with respect to pending or future asbestos cases will not be material to the financial position, results of operations or cash flows of CONSOL Energy.
CONSOL Energy is subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes, and other claims and actions arising out of the normal course of business. In the opinion of management, the ultimate liabilities resulting from such pending lawsuits and claims will not materially affect the financial position, results of operations or cash flows of CONSOL Energy. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized an estimated liability for remediation of this site of which $2,703 remained as of March 31, 2004. In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. The transaction resulted in the reversal of the remaining liability and the recognition of $1,438 of income.
In January 2003, Mine 84, near Washington, Pennsylvania experienced a fire along several hundred feet of the conveyor belt servicing the longwall section of the mine. The fire was extinguished approximately two weeks later. On January 20, 2003, the mine resumed production on a limited basis with continuous mining machines, while repairs continued on the belt entry. The fire caused damage to the roof support system, conveyor belt and steel framework on which the belt travels. Repairs took several weeks to complete and total estimated costs are approximately $7,000, net of expected insurance recovery of approximately $2,800. Costs incurred in the six months ended June 30, 2003 were $6,500 and are primarily reflected in cost of goods sold and other charges, and the expected insurance recovery for damages is reflected in other receivables. No payments for damages incurred have been received by CONSOL Energy to date. Longwall coal production, which accounts for the majority of coal normally produced at the mine, resumed on February 10, 2003.
In February 2003, our Loveridge Mine experienced a fire near the bottom of the slope entry that is used to carry coal from the mine to the surface. The cost of extinguishing the fire was estimated to be approximately $20,000, net of expected insurance recovery of approximately $25,000. Costs to the Company are primarily reflected in the 2003 cost of goods sold and other charges, $7,650 of which is included in the six months ended June 30, 2003, and expected insurance recovery for damages is reflected in other receivables. Payments for damages of $13,000 have been received by CONSOL Energy through June 30, 2004. The remaining receivable is expected to be collected in the third quarter of 2004. In late December 2002, the mine began the process of developing a new underground area that would be mined with longwall mining equipment that was expected to be installed later in 2003. The fire delayed this installation until March of 2004.
CONSOL Energy has filed insurance claims related to the damage incurred by these fires including claims under its business interruption policy. The claims process is lengthy and its outcome cannot be predicted with certainty. No benefit for business interruption recovery have been recorded to date.
On October 21, 2003, a purported class action complaint was filed in the United States District Court for the Western District of Pennsylvania on behalf of Seth Moorhead against CONSOL Energy, J. Brett Harvey and William J. Lyons. On May 5, 2004, an amended complaint was filed after the court granted a motion by Gus A. Karozos to act as lead plaintiff. The amended complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act and that during the period between January 24, 2002, and July 18, 2002, the defendants issued false and misleading
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statements to the public that failed to disclose or misrepresented the following, among other things that: (a) CONSOL Energy utilized an aggressive approach regarding its spot market sales by reserving 20% of its production to that market, and that by increasing its exposure to the spot market, CONSOL Energy was subjecting itself to increased risk and uncertainty as the price and demand for coal could be volatile; (b) CONSOL Energy was experiencing difficulty selling the production that it had allocated to the spot market, and, nonetheless, CONSOL Energy maintained its production levels which caused its coal inventory to increase; (c) CONSOL Energy’s increasing coal inventory was causing its expenses to rise dramatically, thereby weakening the company’s financial condition; and (d) based on the foregoing, defendants’ positive statements regarding CONSOL Energy’s earnings and prospects were lacking in a reasonable basis at all times and therefore were materially false and misleading. The amended complaint asks the court to (1) award unspecified damages to plaintiff and the purported class members and (2) award reasonable costs and expenses incurred in connection with this action, including counsel fees and expert fees. One other purported class action complaint has been filed in the United States District Court for the Western District of Pennsylvania against CONSOL Energy and certain officers and directors. This complaint was filed on December 12, 2003 by William A. McMahen and the allegations are essentially the same as the Moorhead/Karozos complaint. None of the named defendants have been served with the McMahen complaint. CONSOL Energy management believes these claims are without merit, and, accordingly, the Company has not accrued any liability associated with these claims.
CONSOL Energy and certain of its subsidiaries have provided the following financial guarantees. CONSOL Energy Management believes that these guarantees will expire without being funded, and therefore, the commitments will not have a material adverse effect on financial condition. The fair values of all liabilities associated with these guarantees have been properly recorded and reported in the financial statements at June 30, 2004.
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Guarantee
Workers’ Compensation Surety Bonds (a)
Reclamation Surety Bonds (b)
Gas Sales Agreements (c)
1992 Benefit Plan (d)
Ohio Power Company (e)
Workers’ Compensation Letters of Credit (f)
Longwall Lease Agreements (g)
Ohio Valley Electric Corporation (h)
Ginger Hills Synfuels, LLC (i)
Gas Hedging Agreements (j)
Travelers Casualty & Surety Co. (k)
Miscellaneous Surety Bonds (l)
Environmental Liabilities Letters of Credit (m)
Zurich American Insurance (n)
West Penn Power Company (o)
Duke Energy Corporation (p)
Bank of Novia Scotia (q)
W.V. Workers’ Compensation Division (r)
Commonwealth of Kentucky (s)
Key Corp Leasing (t)
Ontario Power Generation, Inc. (u)
Court Bonds (v)
Hooks Industrial (w)
Reliant Energy (x)
Travelers Casualty & Surety Co. (y)
Centimark Corp. (z)
W. Va. Department of Environmental Protection (aa)
Orion Power (bb)
U. S. Department of Labor (cc)
Marathon Ashland Petroleum LLC (dd)
Illinois Industrial Commission (ee)
Orion Power (ff)
Highmark Life & Casualty (gg)
Travelers Casualty & Surety Company (hh)
Lumbermens Mutual (ii)
Allegheny Energy Supply Co. (jj)
LABAR Co. (kk)
Henry Berdine (ll)
Total Guarantees
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1. CNX Gas Company LLC, a subsidiary of CONSOL Energy, has an agreement with CONOCO/Phillips Inc. that guarantees the physical delivery of CNX Gas Company LLC production through December 31, 2005. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this sales agreement, up to $60,000.
2. CONSOL Energy has an agreement with Dominion Field Services to guarantee any unpaid obligations of CNX Gas Company LLC and Greene Energy, subsidiaries of CONSOL Energy, pursuant to their gas sales agreements with Dominion Field Services. The maximum undiscounted future payments required pursuant to the agreement to be made by these subsidiaries at June 30, 2004 are as follows: (a) CNX Gas Company LLC—$36,000, and (b) Greene Energy—$3,000.
3. CONSOL Energy has an agreement with AEP Energy Services to unconditionally guarantee the full and prompt payment of all obligations, up to $15,000, of CNX Gas Company LLC, a subsidiary of CONSOL Energy, arising from AEP Energy Services’ purchase, sale or exchange of energy services or energy related commodities with respect to the sales agreement between CNX Gas Company LLC and AEP Energy Services.
4. CONSOL Energy guarantees the delivery of specific quantities of gas by CNX Gas Company LLC through May 7, 2022. If our subsidiary fails to deliver the volume specified in the contract, CONSOL Energy is obligated to pay a deficiency charge, for each day delivery is not made, equal to the undelivered volumes times the daily price of gas.
5. CNX Gas Company LLC, a subsidiary of CONSOL Energy, has an agreement dated June 30, 2004 with Baltimore Gas and Electric Company (BGE) that guarantees the prompt and complete payment of all obligations and amounts owed to BGE related to the purchase and/or sale of natural gas. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, up to $3,000. The guaranty will continue in force until thirty days prior written notice is given by CONSOL Energy.
6. CONSOL Energy is the guarantor of the agreement dated May 26, 2004 between CNX Gas Company LLC and Equitable Energy, LLC, relating to the purchases and/or trades of natural gas and/or natural gas products, electric energy or capacity, financial derivatives or related contracts. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, up to $10,000. The guaranty will continue in force until thirty days prior written notice is given by CONSOL Energy.
7. CONSOL Energy is the guarantor of the agreement dated April 14, 2004 between CNX Gas Company LLC and Columbia Gas Transmission Corp., relating to the transportation of natural gas or other services rendered and to be rendered on present or future orders on credit from Columbia Gas Transmission Corp. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, at an amount of $535.50 per month from May 2004-October 2004, or $3,213. The guaranty shall continue in full force and effect for a term of one year from the effective date, and year-to-year thereafter unless terminated at any time by CONSOL Energy by providing sixty days prior written notice to Columbia Gas Transmission Corp.
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CONSOL Energy and its subsidiaries obtained the issuance of various letters of credit related to CONSOL Energy’s environmental liabilities. Should CONSOL Energy, or any of these subsidiaries, fail to perform the obligations related to these projects, the guarantee will draw on the letter of credit. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL
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Energy’s Senior Secured Loan Agreement. The individual guarantees are as follows: Pennsylvania Department of Protection $5,099; Pennsylvania Department of Transportation $5,000; Commonwealth of Kentucky $709; Commonwealth of Virginia $47.
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NOTE 14—FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair values of financial instruments:
Cash and cash equivalents:The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value due to the short maturity of these instruments.
Restricted Cash: The carrying amount reported in the balance sheets for restricted cash approximates its fair value. Restricted cash is invested in highly liquid securities to support requirements of long-term letters of credit.
Short-term notes payable: The carrying amount reported in the balance sheets for short-term notes payable approximates its fair value due to the short-term maturity of these instruments.
Current and Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses, based on CONSOL Energy’s current incremental borrowing rates for similar types of borrowing arrangements.
Capital Leases: At June 30, 2004, the carrying amount of capital leases approximates its fair value due to the short-term nature of the remaining obligations. At December 31, 2003, the fair values of capital leases are estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
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The carrying amounts and fair values of financial instruments, excluding derivative financial instruments disclosed in Item 3—Quantitative and Qualitative Disclosure About Market Risk, are as follows:
Cash and cash equivalents
Restricted cash
Short-term notes payable
Long-term debt
Capital Leases
NOTE 15—SEGMENT INFORMATION:
CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the three and six months ended June 30, 2004, the Northern Appalachian aggregated segment includes the following mines: Shoemaker, Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork and Mine 84. For the three and six months ended June 30, 2004, the Central Appalachian aggregated segment includes the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the three and six months ended June 30, 2004, the Metallurgical aggregated segment includes the following mines: Buchanan, Amonate and V.P. #8. The Other Coal segment includes the Company’s purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to individual mines. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energy’s All Other Classification is made up of the Company’s terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. The segment information presented for prior periods has been restated to be consistent with the information presented for the current period.
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Industry segment results for the three months ended June 30, 2004:
Sales—outside
Freight—outside
Intersegment transfers
Total Sales and Freight
Earnings (Loss) Before Income Taxes
Segment assets
Depreciation, depletion and amortization
Industry segment results for the three months ended June 30, 2003:
Total Sales andFreight
Depreciation, depletionand amortization
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Industry segment results for the six months ended June 30, 2004:
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Industry segment results for the six months ended June 30, 2003:
Sales—related party
Freight—relatedparty
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Reconciliation of Segment Information to Consolidated Amounts:
Earnings (Loss) Before Income Taxes:
Segment earnings before income taxes for total reportable business segments
Segment earnings (loss) before income taxes for all other businesses
Incentive compensation
Other post employee benefit curtailment gain
Interest income (expense), net and other non-operating activity
Total Assets:
Segment assets for total reportable business segments
Segment assets for all other businesses
Items excluded from segment assets:
Cash and other investments
Deferred tax assets
Recoverable income taxes
Intangible asset—overfunded pension plan
Bond issuance costs
Total Consolidated Assets
NOTE 16—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:
Effective September 30, 2003, CONSOL Energy executed Supplemental Indenture No. 2. This Supplemental Indenture revised the Guarantor Subsidiaries as defined in the First Supplemental Indenture to include additional subsidiaries as guarantors and remove one subsidiary as a guarantor. Accordingly, CONSOL Energy has revised prior year’s data to conform to the classifications effective at September 30, 2003.
The payment obligations under the $250,000 7.875 percent Notes due 2012 issued by CONSOL Energy in 2002 are fully and unconditionally guaranteed by several subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all of their subsidiaries. For example, these include deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.
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Income Statement for the Three Months Ended June 30, 2004:
Other Income (including equity earnings)
Intercompany Activity
Net Income (Loss)
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Balance Sheet for June 30, 2004:
Assets:
Less-Accumulated Depreciation, Depletion and Amortization
Property, Plant and Equipment—Net
Total Assets
Liabilities and Stockholders’ Equity:
Accounts Payable (Recoverable)-Related Parties
Long-Term Debt:
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
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Condensed Statement of Cash Flows
For the Three Months Ended June 30, 2004:
Net Cash (Used in) Provided by Operating Activities
Cash Flows from Investing Activities:
Other Investing Activities
Cash Flows from Financing Activities:
Payments on Short-Term Debt
Payments on Long-Term Notes
Other Financing Activities
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Income Statement for the Three Months Ended June 30, 2003:
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Balance Sheet for December 31, 2003:
31
For the Three Months Ended June 30, 2003:
Payments on Short-Term Borrowings
Net Cash (Used in) Provided by Financing Activities
32
Income Statement for the Six Months Ended June 30, 2004:
Earnings (Loss) before Cumulative Effect of Change in Accounting Principle
33
For the Six Months Ended June 30, 2004:
Net Cash Provided by (Used in) Investing Activities
34
Income Statement for the Six Month Ended June 30, 2003:
Cumulative Effect of Changes in Accounting for Mine Closing, Reclamation, and Gas Well Closing Costs, Net of Income Taxes of $3,035
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For the Six Months Ended June 30, 2003:
Net Cash Provided by (Used in) Operating Activities
Net Cash (Used in) Provided by Investing Activities
Proceeds from Long-Term Notes
NOTE 17—RECENT ACCOUNTING PRONOUNCEMENTS:
In March 2004, the FASB issued Emerging Issues Task Force Issue No. 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets” (EITF 04-2). In this Issue, the Task Force reached the consensus that mineral rights are tangible assets. This consensus differs from the requirements of Statement of Financial Accounting Standards No. 141, “Business Combinations” and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which classify mineral rights as intangible assets. Effective with the 2004 second quarter, CONSOL Energy has reclassified mineral rights as property, plant and equipment in accordance with EITF 04-2.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted by recently issued accounting guidance, CONSOL Energy has recognized the benefits of the Act as of March 8, 2004 by adjusting the three months ended March 31, 2004 net income by approximately $2,200. The benefits of the Act are also recognized as a reduction of other postemployment benefit costs in the three months ended June 30, 2004.
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In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entities activities, is entitled to receive a majority of the variable interest entities residual returns, or both. The interpretation also requires disclosures about variable interest entities that the company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 applied immediately to variable interest entities created after January 31, 2003. Effective December 2003, the FASB elected to defer the effective date until the first fiscal year or interim period that begins after March 15, 2004 for variable interest entities in which an enterprise acquired before February 1, 2003. As of June 30, 2004, management believes that CONSOL Energy does not have any variable interest entities, therefore, there is no impact from the adoption of this standard.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
CONSOL Energy had net income of $26 million for the three months ended June 30, 2004 compared to $11 million for the three months ended June 30, 2003. Net income for the 2004 period improved from the 2003 period due to increased sales volumes and increased average sales prices for both coal and gas. The increase in sales volumes and average sales prices was offset, in part, by higher cost of goods sold attributable to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to higher royalty expense. Royalty expense increased primarily due to the increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period.
Total coal sales for the three months ended June 30, 2004 were 17.3 million tons of which 16.7 million tons were produced by CONSOL Energy operations or sold from inventory of company produced coal. This compares with total coal sales of 16.0 million tons for the three months ended June 30, 2003, of which 15.4 million tons were produced by CONSOL Energy operations, by our equity affiliates or sold from inventory of company produced coal. The increase in tons sold was due primarily to increased production as a result of the reactivation of the Loveridge Mine and higher production at the Bailey Mine. These increases in production were offset, in part, by lower recovery ratios (portion of extracted coal versus rock) at Enlow Fork Mine and Buchanan Mine. Production increases were also offset, in part, due to Mine 84 encountering adverse geological conditions. Company produced inventory, including our portion of inventory at equity affiliates, was 1.0 million tons at June 30, 2004 and was 1.3 million tons at December 31, 2003. CONSOL Energy currently has obligations to deliver 99% of its projected 2004 production, subject to the right of customers to defer delivery.
Sales volumes of coalbed methane gas, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 10.0% to 13.6 billion cubic feet in the 2004 period compared with 12.4 billion cubic feet in the 2003 period. The increase in sales volumes is primarily due to higher production as a result of additional wells coming on line from the ongoing drilling program. Our average sales price for coalbed methane gas, including sales of equity affiliates, and including the effects of derivative transactions, increased 21.8% to $4.98 per thousand cubic feet in the 2004 period compared with $4.09 per thousand cubic feet in the 2003 period. Gas prices through the second quarter of 2004 were higher than levels during the second quarter of 2003 due to continued concerns about declining North American gas production, as well as increased oil prices and economic recovery increasing demand.
CONSOL Energy restated first quarter 2004 net income by approximately $2.2 million to reflect the recognition of the favorable effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as of March 8, 2004 in accordance with recently issued accounting guidance.
In July 2004, CONSOL Energy announced that it expects to reactivate the Emery Mine in Utah during the third quarter of 2004. The mine, which has been idle since September 2003, is expected to produce about 0.2 million tons during the remainder of 2004. This production level will retain the federal coal leases that constitute a part of the mine’s reserves. CONSOL Energy is currently discussing sales contracts with potential customers.
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On June 30, 2004, CONSOL Energy completed a $600 million senior secured credit facility to replace the existing $267 million facility. The new facility consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The revolving credit and Tranche B letter of credit facility will be used for general corporate purposes of CONSOL Energy and its subsidiaries, including working capital, capital expenditures and letter of credit needs. Cash collateralized letters of credit issued previously were transferred to the Tranche B facility and the $190 million of restricted cash was released and used to pay down short-term debt.
In June 2004, Moody’s Investor Service upgraded CONSOL Energy’s 7.875% notes due 2012 to Ba2 (12th lowest out of 21 rating categories). Moody’s Investor Service also upgraded CONSOL Energy’s subsidiary’s medium term notes to Ba2. Moody’s Investor Service also affirmed the Ba3 senior implied rating and the Ba2 rating on CONSOL Energy’s $600 million secured bank facility, which replaced the Company’s previous secured $267 million bank facility. The rating outlook is stable. Obligations which are rated “Ba” are considered to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. The modifier 2 indicates that the obligation ranks in the mid-range of its generic rating category. The modifier 3 indicates that the obligation ranks in the lower end of its generic rating category.
In July 2004, Standard and Poor’s upgraded CONSOL Energy’s 7.875% notes due 2012 to BB (12th lowest out of 22 rating categories). Also, in July 2004, Standard and Poor’s affirmed CONSOL Energy’s BB- corporate credit rating and confirmed a BB rating (12th lowest out of 22 rating categories) with a recovery rate of ‘1’ to CONSOL Energy’s $600 million secured bank facility, which replaced the Company’s previous secured $267 million bank facility. The outlook is stable. Standard and Poor’s defines an obligation rated ‘BB’ as less vulnerable to nonpayment than other speculative issues. However, the rating indicates that an obligor faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. The rating of BB with a recovery rating of ‘1’ indicates a high expectation of full recovery of principal in the event of a default.
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.
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Results of Operations
Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003
Net income changed primarily due to the following items (table in millions):
Coal Sales-Produced and Purchased
Produced Gas Sales
Purchased Gas Sales
Other Sales and Other Income
Coal Cost of Goods Sold—Produced and Purchased
Produced Gas Cost of Goods Sold
Purchased Gas Cost of Goods Sold
Other Cost of Goods Sold
Total Cost of Goods Sold
Earnings (Loss) before Income Taxes
Net income for the 2004 period improved from the 2003 period due to increased sales volumes and increased average sales prices for both coal and gas. The increase in sales volumes and average sales price was offset, in part, by higher cost of goods sold attributable to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to an increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period.
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Revenue
Revenue and other income increased due to the following items:
Sales
Produced Coal
Purchased Coal
Produced Gas
Purchased Gas
Industrial Supplies
Total Sales
Freight Revenue
The increase in Company produced coal sales revenue was due mainly to the increase in volumes sold and the increase in average sales price per ton during the 2004 period.
Period
Percentage
Change
Produced Tons Sold (in millions)
Average Sales Price Per Ton
The increase in tons sold is due primarily to the Loveridge Mine resuming production in March 2004 and increased production at the Bailey Mine. Loveridge experienced a fire in February 2003 while it was in the process of developing a new underground area that would be mined with longwall mining equipment. The fire delayed completion of the development until March 2004. The increased production at Loveridge was offset, in part, by lower production at Enlow Fork Mine and Buchanan Mine. Production increases were also offset, in part, due to Mine 84 encountering adverse geological conditions. The increase in average sales price primarily reflects stronger prices negotiated in the prior year and an overall improvement in prices in the eastern coal market for domestic utility, export utility and metallurgical products.
The decrease in Company purchased coal sales revenue was due to a decrease in sales volume and a decrease in average sales price per ton of purchased coal.
Purchased Tons Sold (in millions)
The reduced average sales price is primarily due to sales of purchased coal in 2004 at prices that were agreed to during periods of lower prices compared to the 2004 period. Lower sales revenues from Company purchased coal were also due to lower sales volumes in the 2004 period compared to the 2003 period.
The increase in gas sales revenue was primarily due to a higher average sales price per thousand cubic feet and increased volumes sold in the 2004 period compared to the 2003 period.
Produced Gas Sales Volumes (in billion gross cubic feet)
Average Sales Price Per thousand cubic feet (including effects of derivative transactions)
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We believe that the 2004 gas market price increases were largely driven by continued concerns about declining North American gas production, as well as increased oil prices and the economic recovery which resulted in greater electricity use in our principal markets. CONSOL Energy enters into various physical gas supply transactions with our gas marketers (gas sales transactions generally exceeding one year.) CONSOL Energy has also entered into various gas swap transactions that qualify as financial cash flow hedges. These gas swap transactions exist parallel to the underlying physical transactions. In the 2004 period, these cash flow hedges represented 30% of our produced sales volumes at an average price of $5.05 per thousand cubic feet. We intend these transactions to cover approximately 27% of our current 2004 estimated produced sales volumes at an average price of $5.02 per thousand cubic feet. CONSOL Energy sold 90% of its gas sales volumes in the three months ended June 30, 2004 under fixed price contracts at an average price of $4.93 per thousand cubic feet compared to 88% of its gas sales volumes under fixed price contracts in the three months ended June 30, 2003 at an average of $3.86 per thousand cubic feet. Higher sales volumes in the 2004 period were a result of wells coming on line from the ongoing drilling program, which allowed CONSOL Energy to take advantage of increased prices.
Due to the anticipated curtailment in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the Columbia Gas Transmission Corporation’s interstate gas pipeline, CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline. The firm transportation arrangement covers the May 2004 through October 2004 period and assures pipeline capacity of our projected production. In addition, in order to satisfy obligations to certain customers, we purchased from and sold to other gas suppliers, which increased our revenues and our costs.
Purchased Gas Sales Volumes (in billion gross cubic feet)
Average Sales Price Per thousand cubic feet
CONSOL Energy believes that it will be necessary to purchase firm transportation guarantees of capacity in the future as a result of increased capacity demands on the Columbia pipeline.
The increase in revenues from the sale of industrial supplies was primarily due to increased sales volumes.
Freight revenue, outside and related party, is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to which CONSOL Energy contractually provides transportation services. Freight revenue is the amount billed to customers for transportation costs incurred.
Other income consists of interest income, gain or loss on the disposition of assets, equity in earnings of affiliates, service income, royalty income, derivative gains and losses, rental income and miscellaneous income.
Dollar
Variance
Gain on sale of assets
Equity in loss of affiliates
Other miscellaneous
Total other income
The gain on sale of assets in the 2004 period is due to the June 2004 finalization of the working capital and other items related to the sale of its Canadian coal assets completed in February 2003. The finalization of these items resulted in a gain on sale of assets of approximately $3 million. The additional gain on sale of assets in the 2004 period is related to the sale of several previously closed operations. The 2003 period gain on sale of assets is primarily related to the expiration of a $5 million option granted to a third party to purchase property and the sale of surplus equipment.
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The equity losses of affiliates in the 2003 period primarily represent our share of Glennies Creek Mine operating losses. CONSOL Energy’s interests in Glennies Creek were sold in February 2004.
Other miscellaneous income in the 2003 period included a $3 million refund received from the federal government for prior claims related to harbor maintenance fees imposed by Federal statute that was subsequently declared unconstitutional.
Costs
Cost of Goods Sold and Other Charges
Closed and Idle Mines
Increased cost of goods sold and other charges for company produced coal was due mainly to a 9.2% increase in sales volumes and a 13.6% increase in cost per unit of produced coal sold.
Average Cost of Goods Sold and Other Charges Per Ton
Average cost of goods sold and other charges per ton for company produced coal increased in the 2004 period compared to the 2003 period. The increase in average cost per ton was due primarily to increased Combined Fund premiums related to a premium differential announced by the Social Security Administration for the past eleven plan years for beneficiaries assigned to CONSOL Energy. The increase is approximately $28 million for the plan year beginning October 1, 2003, of which approximately 75% has been expensed from October 1, 2003 through June 30, 2004. Approximately $7 million of expense was recognized in the three months ended June 30, 2004. CONSOL estimates the additional costs for plan years subsequent to October 1, 2003 will be approximately $2 million per year. Cost per ton for produced coal also increased due to higher maintenance, labor and supply costs per unit. Increased labor and supply costs were related to additional continuous miner shifts in the 2004 period. Among other things, continuous mining machines are used to mine the coal reserve in such a way that large, rectangular blocks of coal, called panels, are delineated underground in preparation for mining by larger more efficient longwall machines in mines equipped with these systems. Typically, mines attempt to delineate more than one panel in advance so that as the longwall machine completes the extraction of coal in one panel, it can move without delay to another prepared panel. Continuous mining machines are more labor intensive and use more supplies per ton of coal produced than longwall mining systems. Cost of goods sold and other charges also increased due to higher sales volumes of company produced coal in the 2004 period compared to the 2003 period. These increases in costs were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period.
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Purchased coal cost of goods sold and other charges decreased slightly in the 2004 period compared to the 2003 period.
The decrease in cost of goods sold and other charges for purchased coal is primarily due to lower volumes sold in the 2004 period compared to the 2003 period. The decreased costs due to volume was offset, in part, by the increased average cost of purchased coal. The increase in the average cost of purchased coal is primarily due to increased market price for coal, offset, in part, by purchasing some coal in the 2004 period under commitments made during the prior year when prices were lower. Due to the low volume of purchased coal sold in both periods, the decrease in average cost of goods sold and other charges per ton did not have a significant impact on the period-to-period comparison.
Gas cost of goods sold and other charges increased due to increased average cost per thousand cubic feet sold and increased volumes.
Gas Sales Volumes (in billion gross cubic feet)
Average Cost Per Thousand Cubic Feet
The increase in average cost per thousand cubic feet of gas sold was also attributable to approximately $0.08 increase per thousand cubic feet related the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to a $0.04 increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the 21.5% increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period. Gas cost of goods sold and other charges also increased due to the increased volumes sold in the 2004 period as discussed previously.
In addition, in order to satisfy obligations to certain customers, we purchased from and sold to other gas suppliers, which increased our revenues and our costs.
Average Cost Per thousand cubic feet
CONSOL Energy believes that it will be necessary to purchase firm transportation capacity in the future as a result of increased capacity demands on the Columbia pipeline.
Industrial supplies cost of goods sold increased primarily due to higher sales volumes.
Closed and idle mine cost was $20 million in the 2004 period compared to $15 million in the 2003 period. The $5 million increase in the 2004 period compared to the 2003 period was due primarily to mine closing, perpetual care water treatment and reclamation liability adjustments as a result of updated engineering survey adjustments. Survey adjustments resulted in $3 million of expense in the 2004 period for closed and idled locations. Closed and idle mine cost also increased approximately $1 million due to the interest component of
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workers’ compensation expense in the 2004 period. Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. The remaining $1 million increase was due to various miscellaneous transactions that occurred throughout both periods, none of which were individually material.
The decrease in miscellaneous cost of goods sold and other charges reflect the following items:
Buckeye landfill superfund site liability transfer
Miscellaneous other
In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized an estimated liability for remediation of this site. The Transfer and Indemnity transaction resulted in the reversal of the remaining liability and the recognition of approximately $1 million of income.
Incentive compensation expense increased in the 2004 period compared to the 2003 period due mainly to the level of earnings achieved in the 2004 period compared to expected 2004 annual results. The incentive compensation program is designed to increase compensation to eligible employees when CONSOL Energy reaches predetermined earnings targets and the employees reach predetermined performance targets.
Miscellaneous other costs decreased $4 million due to various transactions that occurred throughout both periods, none of which were individually material.
Freight expense is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to whom CONSOL Energy contractually provides transportation. Freight expense is billed to customers and the revenue from such billing equals the transportation expense.
Freight expense
Selling, general and administrative costs have decreased due to the following items:
Professional consulting and other purchased services
Wages and salaries
Other post employment benefits
Insurance
Total Selling, General and Administrative
Costs of professional consulting and other purchased services have decreased in the 2004 period primarily due to lower software support services, offset, in part, by additional services provided by various professional groups for services provided in relation to reviewing employee benefit plans and compensation packages provided by CONSOL Energy.
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Wages and salaries for selling, general and administrative employees have decreased primarily due to the December 2003 reduction of approximately 100 positions. The reduction program was primarily a result of the developments in CONSOL Energy’s business, including operating fewer mines than had been operated in the past, the sale of non-core businesses and de-emphasizing coal exports.
Costs related to other post employment benefits in the 2004 period have decreased from the 2003 period due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period.
Costs for insurance increased primarily due to director and officer insurance costs incurred in the 2004 period. CONSOL Energy officers and directors were previously insured under the RWE AG general liability policy. CONSOL Energy began to independently insure its directors and officers in June 2003.
Depreciation, depletion and amortization has remained unchanged in the 2004 period from the 2003 period.
Gas:
Production
Gathering
Total Gas
Total depreciation, depletion and amortization
The increase in coal depreciation, depletion and amortization was primarily attributable to higher units-of-production financial depletion related to higher production volumes in the 2004 period compared to the 2003 period.
The decrease in gas production depreciation, depletion and amortization was primarily due to gob gas production. Gob wells generally produce for less than twelve months. As a result of the short production life, costs of the wells are generally expensed instead of capitalized and then amortized. Gathering depreciation, depletion and amortization is recorded on the straight-line method and remained consistent in both periods.
Other depreciation, depletion and amortization increased primarily due to the depreciation related to the new integrated information technology system that is currently being used. All modules of the system have been implemented and are currently being amortized on a straight-line basis over seven years. All modules of the integrated information technology system were not completed in the 2003 period and therefore were not being amortized at that time.
Interest expense has remained unchanged in the 2004 period compared to the 2003 period.
Commercial paper and revolver
Total Interest Expense
Interest expense on commercial paper and the revolving credit facility increased in the 2004 period primarily due to an increase from 1.6% to 5.6% per annum in our average interest rate on the bank credit facility rather than on the commercial paper markets in the 2003 period of 1.6% per annum. As of July 2003, CONSOL Energy was no longer able to participate as a seller of commercial paper due to Standard and Poor’s lowering its rating.
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Other interest expense was reduced primarily due to the increase in the amount of interest capitalized in the 2004 period as a result of the higher level of capital projects funded from operating cash flows in the three months ended June 30, 2004.
Taxes other than income increased primarily due to the following items:
Production taxes:
Gas
Total Production Taxes
Other taxes:
Total Taxes Other Than Income
Increased coal production taxes are primarily due to higher black lung excise and severance taxes attributable to higher coal volumes and higher average sales price. Increased gas production taxes are primarily due to higher severance taxes related to increased gas production volumes and higher average sales prices.
Increased other taxes in the coal segment are due to higher payroll taxes related to an increase in the 2004 period labor costs compared to the 2003 period. The increased labor costs are primarily related to the late March 2004 start up of the Loveridge mine. This mine was idled throughout the 2003 period.
In the 2003 period, CONSOL Energy received refunds for claims and related interest for certain excise taxes on export sales. Upon receipt of these refunds, the estimate of the interest receivable was adjusted to the actual amount received resulting in an additional $0.6 million of income in the 2003 period. A $26 million receivable for the claims for the years 1991-1993 is still outstanding. There is no interest receivable related to the claims that are still outstanding.
Income Taxes
Tax Expense (Benefit)
Effective Income Tax Rate
CONSOL Energy’s effective tax rate is sensitive to changes to the relationship between pre-tax earnings and percentage depletion. The effective rate for the 2004 period was also impacted by the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. See “Note 8—Income Taxes” in Item 1, Condensed Financial Statement of this Form 10-Q.
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Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003
Gain on Sale of Glennies Creek
Cumulative Effect of Change in Accounting Principle
Net income for the 2004 period improved due to increased coal and gas production and increased average sales prices for both coal and gas. The higher net income was also due to the gain on sale of the stock of the Company’s wholly owned subsidiary, CNX Australia Pty Limited, to certain affiliates of AMCI, Inc. In addition, net income for the 2004 period improved due to the cumulative effect of change in accounting related to workers’ compensation. Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Prior to the change, the Company recorded its workers’ compensation liability on an undiscounted basis. Under the new method, the Company recorded its liability on a discounted basis, which has been actuarially determined using various assumptions, including discount rate and projected future cost trends. The increase in net income was reduced, in part, by higher cost of goods sold attributable, in part, to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due mainly to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to an increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the increase in average sales in the 2004 period compared to the 2003 period.
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Produced Coal—Related Party
Total Produced Coal
Freight Revenue—Related Party
Total Freight Revenue
The increase in tons sold is due primarily to the Loveridge Mine resuming production in March 2004 and improved production at the Bailey/Enlow complex. Loveridge experienced a fire in February 2003 while it was in the process of developing a new underground area that would be mined with longwall mining equipment. The fire delayed completion of the development until March 2004. Bailey/Enlow Complex production was improved in the 2004 period compared to the 2003 period due mainly to higher productivity at this complex. The increased production at Loveridge and Bailey/Enlow complex was offset, in part, by lower production at Buchanan Mine due to equipment problems and unfavorable geology. The increase in average sales price in 2004 primarily reflects higher prices negotiated in 2003 and an overall improvement in prices in the eastern coal market for domestic utility, export utility and metallurgical products.
The decrease in Company purchased coal sales revenue was due to lower sales volumes and lower average sales price per ton of purchased coal.
Decreased sales revenue from Company purchased coal was primarily due to lower sales volumes in the 2004 period compared to the 2003 period. Decreased sales revenues were also due to the reduced average sales price. Lower sales price per ton of Company purchased coal sold is primarily due to sales of purchased coal in 2004 at prices that were agreed to during periods of lower prices compared to the 2004 period.
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We believe that the 2004 gas market price increases were largely driven by continued concerns about declining North American gas production, as well as increased oil prices and economic recovery which resulted in greater electricity use in our principal markets. CONSOL Energy enters into various physical gas supply transactions with our gas marketers (gas sales transactions generally exceeding one year.) CONSOL Energy has also entered various gas swap transactions. The gas swap transactions qualify as financial cash flow hedges. The swap transactions exist parallel to the underlying physical transactions. In the 2004 period, these cash flow hedges represented 26% of our produced sales volumes at an average price of $5.22 per thousand cubic feet. We intend these transactions to cover approximately 27% of our current 2004 estimated produced sales volumes at an average price of $5.02 per thousand cubic feet. CONSOL Energy sold 86% of its gas sales volumes in the six months ended June 30, 2004 under fixed price contracts at an average price of $5.08 per thousand cubic feet compared to 88% of its gas sales volumes under fixed price sales contracts in the six months ended June 30, 2003 at an average of $4.03 per thousand cubic feet. Higher sales volumes were a result of wells coming on line from the ongoing drilling program, which allowed CONSOL Energy to take advantage of increased prices.
CONSOL Energy believes this type of transaction will continue as a result of increased capacity demands on the Columbia pipeline.
Harbor maintenance fees
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The increase in gain on sale of assets is due mainly to CONSOL Energy’s sale of stock in its wholly owned subsidiary CNX Australia Pty Limited to certain affiliates of AMCI, Inc. for $27.5 million. Certain affiliates of AMCI, Inc. also assumed approximately $21.2 million of debt, and associated interest rate swaps and foreign currency hedges. CNX Australia Pty Limited, through its wholly owned subsidiary CONSOL Energy Australia Pty Limited, owned a 50% interest in the Glennies Creek Mine in New South Wales, Australia with its joint venture partner Maitland Main Collieries Pty Limited, an affiliate of AMCI, Inc. The sale was completed on February 25, 2004 and resulted in a pre-tax gain of approximately $14.4 million. The additional gain on sale of assets in the 2004 period is related to the sale of several previously closed operations. The 2003 period gain on sale of assets is primarily related to the sale of surplus equipment and the expiration of a $5 million option granted to a third party to purchase property and the sale of surplus equipment.
The equity losses of affiliates is due mainly to the equity losses related to Glennies Creek Mine operating results prior to the sale that occurred in February 2004.
An additional $1 million decrease in other income was due to various transactions that occurred throughout both periods, none of which were individually material.
Increased cost of goods sold and other charges for company produced coal was due mainly to a 8.7% increase in cost per unit of produced coal sold and a 9.1% increase in sales volumes.
Average cost of goods sold and other charges per ton for company produced coal increased in the 2004 period compared to the 2003 period. The increase in average cost per ton was due primarily to increased Combined Fund premiums related to a premium differential announced by the Social Security Administration for the past eleven plan years for beneficiaries assigned to CONSOL Energy. The increase is approximately $28 million for the plan year beginning October 1, 2003, of which approximately 75% has been expensed from October 1, 2003 through June 30, 2004. Approximately $14 million of expense was recognized in the six months ended June 30, 2004. CONSOL estimates the additional cost for plan years subsequent to October 1, 2003 will be approximately $2 million per year. Cost per ton for produced coal also increased due to higher maintenance, labor and supply costs per unit. Increased labor and supply cost were related to additional continuous miner shifts in the 2004 period. Among other things, continuous mining machines are used to mine the coal reserve in such a way that large, rectangular blocks of coal, called panels, are delineated underground in preparation for mining by larger more efficient longwall machines in mines equipped with these systems. Typically, mines attempt to
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delineate more than one panel in advance so that as the longwall machine completes the extraction of coal in one panel, it can move without delay to another prepared panel. Continuous mining machines are more labor intensive and use more supplies per ton of coal produced than longwall mining systems. Cost of goods sold and other charges also increased due to higher sales volumes of company produced coal in the 2004 period compared to the 2003 period. These increases in costs were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period.
Purchased coal cost of goods sold and other charges decreased in the 2004 period compared to the 2003 period.
The decrease in cost of goods sold and other charges for purchased coal is primarily due to lower volumes sold in the 2004 period compared to the 2003 period. Due to the low volume of purchased coal sold in both periods, the decrease in average cost of goods sold and other charges per ton did not have a significant impact on the period-to-period comparison.
Gas cost of goods sold and other charges increased due to increased volumes and increased average cost per thousand cubic feet sold.
Produced gas cost of goods sold and other charges increased due to the increased volumes sold in the 2004 period as discussed previously. Produced gas average cost per thousand cubic feet of gas sold also increased. The increase in average cost per thousand cubic feet of gas sold was also attributable to an $0.11 increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the 21.5% increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period. Average cost per thousand cubic feet of gas sold also increased approximately $0.04 related to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production.
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Closed and idle mine cost was $36 million in the 2004 period compared to $30 million in the 2003 period. The increase in cost primarily reflects mine closing, perpetual care water treatment and reclamation liability adjustments as a result of updated engineering surveys. Survey adjustments resulted in $3 million of expense in the 2004 period for closed and idled locations. Closed and idle mine cost also increased approximately $2 million due to the interest component of workers’ compensation expense in the 2004 period. Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Closed and idled mine costs also increased $1 million due to costs related to the Emery mine in the 2004 period. This mine was operating in the 2003 period.
The decrease in miscellaneous cost of goods sold and other charges reflects the following items:
Loveridge fire
Mine Eighty-Four fire
Gas royalty dispute
Sales contract buy outs
In February 2003, 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 costs of extinguishing the fire were estimated to be approximately $7 million, net of expected insurance recovery, attributable to cost of goods sold and other charges as of June 30, 2003. In late December 2002, the mine had begun the process of developing a new underground area that would be mined with longwall mining equipment that was expected to be installed later in 2003. The fire delayed this installation until March 2004.
In January 2003, Eighty-Four Mine 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 were estimated to cost approximately $5 million, net of expected insurance recovery, attributable to cost of goods sold and other related charges. Longwall coal production, which accounts for the majority of coal normally produced at the mine resumed on February 10, 2003.
Miscellaneous cost of goods sold and other charges also decreased due to a $6 million payment made in the 2003 period of gas royalties in connection with a dispute between a subsidiary of CONSOL Energy and certain gas lessors.
Due to the restructuring that occurred in December 2003, a curtailment gain related to the other post employment benefit plan of approximately $3 million was recognized in the 2004 period. Due to CONSOL Energy’s measurement date being September 30, the gain was not able to be recognized in the financial statements until the quarter ended March 31, 2004.
In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized or estimated liability for remediation of this site. The Transfer and Indemnity transaction resulted in the reversal of the remaining liability and the recognition of approximately $1 million of income.
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In the 2004 period, agreements were made with several customers in order to release tons committed under lower priced contracts for sale to other customers at higher pricing.
Other cost of goods sold decreased $5 million due to various transactions that occurred throughout both periods, none of which were individually material.
Selling, general and administrative costs have remained stable in both periods due to the following items:
Other post-employment benefits
Costs of professional consulting and other purchased services have increased in the 2004 period primarily due to services provided to complete procedures related to the special investigation into matters alleged in an anonymous letter and to services provided in relation to reviewing employee benefit plans and compensation packages provided by CONSOL Energy. These increases were offset, in part, by lower software support services.
Costs for insurance increased primarily due to director and officer insurance costs incurred in the 2004 period. CONSOL Energy officers and directors were previously insured under the RWE AG general liability policy at lower corporate fees. CONSOL Energy began to independently insure its directors and officers in June 2003.
Wages and salaries for selling, general and administrative employees have decreased primarily due to the December 2003 reduction in workforce program. The reduction program was primarily focused on reducing the number of positions in the selling, general and administrative areas to better align with the Company’s current business strategy. The program reduced approximately 100 positions. These reductions were offset, in part, by the completion of the integrated information technology system provided by SAP AG in August 2003. Prior to the completion, wages and salaries for dedicated staff were capitalized as a component of the cost of the implementation project and are being amortized over seven years. The wages capitalized for the six months ended June 30, 2003 were approximately $2 million.
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Other selling, general and administrative costs increased $1 million due to various transactions that occurred throughout both periods, none of which are individually material.
The decrease in depreciation, depletion and amortization reflects the following items:
Coal depreciation, depletion and amortization remained stable in the 2004 period compared to the 2003 period. Coal units-of-production financial depletion expense increased in the period-to-period comparison due to higher production, but was offset, in part, due to mine equipment becoming fully depreciated.
Other depreciation, depletion and amortized increased primarily due to the depreciation related to the new integrated information technology system that is currently being used. All modules of the system have been implemented and are currently being amortized on a straight-line basis over seven years. All modules of the integrated information technology system were not completed in the 2003 period and therefore were not being amortized at that time.
Interest expense decreased in the 2004 period compared to the 2003 period.
Interest expense increased primarily due to an increase in the weighted average interest rate from 1.6% per annum in the 2003 period to 5.2% per annum in the 2004 period. As of July 2003, CONSOL Energy was no longer able to participate as a seller of commercial paper due to Standard and Poor’s lowering its rating of our long-term debt to BB+.
Other interest expense was reduced primarily due to the increase in the amount of interest capitalized in the current period as a result of the higher level of capital projects funded from operating cash flows in the six months ended June 30, 2004.
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Increased other taxes in the coal segment are due to higher payroll taxes related to an increase in the 2004 period labor costs compared to the 2003 period. The increased labor costs are primarily related to the late March 2004 start up of the Loveridge Mine. This mine was idled in the 2003 period.
In the 2003 period, CONSOL Energy received refunds for claims and related interest for certain excise taxes on export sales. Upon receipt of these refunds, the estimate of interest receivable was adjusted to the actual amount received resulting in an additional $0.6 million of income. A $26 million receivable for the claims for the years 1991-1993 is still outstanding. There is no interest receivable related to the claims that are still outstanding.
Cumulative Effect of Change in Accounting
Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Additionally, the workers’ compensation liability is recorded on a discounted basis, which has been actuarially determined using various assumptions, including a discount rate of 6% and a future health care trend rate of 10%, declining to 4.75% in 2010. CONSOL Energy believes this change was preferable since it aligns the accounting with the Company’s other long-term employee benefit obligations, which are recorded on a discounted basis. Additionally, it provides a better comparison with the Company’s industry peers, the majority of which record the workers’ compensation liability on a discounted basis.
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As a result of the change, CONSOL Energy reduced its workers’ compensation liability by $136 million and reduced its related deferred tax asset by $53 million. The cumulative effect adjustment recognized upon adoption was a gain of $83 million, net of a tax cost of approximately $53 million, and accordingly is reflected as a cumulative effect adjustment from a change in accounting.
Effective January 1, 2003, CONSOL Energy adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”, as required. CONSOL Energy reflected a gain of approximately $5 million, net of a tax cost of approximately $3 million. At the time of adoption, total assets, net of accumulated depreciation, increased approximately $59 million and total liabilities increased 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.
Previous accounting standards generally used the units-of-production method to match estimated retirement costs with the revenues generated by the producing assets. In contrast, SFAS No. 143 requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. The depreciation will generally be determined on a units-of-production basis, whereas the accretion to be recognized will escalate over the life of the producing assets, typically as production declines. Because of the long lives of the underlying producing assets, the impact on net income in the near term is not expected to be material.
Liquidity and Capital Resources
CONSOL Energy generally has satisfied its working capital requirements and funded its capital expenditures and debt service obligations from cash generated from operations and proceeds from borrowings. On June 30, 2004, CONSOL Energy completed a $600 million Senior Secured Loan Agreement to replace the existing $267 million facility. The new agreement consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The new facility is secured by nearly all of the assets of the company. CONSOL Energy’s 7.875 percent bonds that mature in 2012 and CONSOL Energy’s subsidiary’s 8.25 percent medium-term notes maturing in 2007 have been equally and ratably secured. The facility can be used for letters of credit and borrowings for general corporate purposes. As of June 30, 2004, cash collateralized letters of credit issued under the previous facility have been transferred to the Tranche B facility and the $190 million of restricted cash has been released and was used to pay short-term debt. At our option, interest on borrowings under the new facility is based upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread that is dependent on our credit rating. The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The revolving credit facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450.0 million for the twelve months ended December 31, 2004. At June 30, 2004, this facility had approximately $226.6 million letters of credit issued and had no borrowings outstanding under the new facility, leaving approximately $373.4 million of unused capacity.
In June 2004, Moody’s Investor Service affirmed the rating of Ba2 (12th lowest out of 21 rating categories) to the $600 million secured bank facility, which to replaced the Company’s secured $267 million bank facility. The rating outlook is stable. Obligations which are rated “Ba” are considered to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. The modifier 2 indicates that the obligation ranks in the middle of its generic rating category. In July 2004, Standard and Poor’s confirmed the BB rating (12th lowest out of 22 rating
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categories) with a recovery rate of ‘1’ to CONSOL Energy’s $600 million secured bank facility, which replaced the Company’s secured $267 million bank facility. Standard and Poor’s defines an obligation rated ‘BB’ as less vulnerable to nonpayment than other speculative issues. However, the rating indicates that an obligor faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. The recovery rating of ‘1’ indicates a high expectation of full recovery of principal in the event of a default.
In April 2003, CONSOL Energy and certain of its Subsidiaries entered into a receivables facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable that will provide, on a revolving basis, up to $125 million of short-term funding. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary, for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to CNX Funding Corporation. CNX Funding Corporation then sells, on a revolving basis, an undivided percentage interest in the pool of eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the trade receivables. CONSOL Energy has agreed to continue servicing the sold receivables for the financial institutions for a fee based upon market rates for similar services. The cost of funds are consistent with commercial paper rates plus a charge for administrative services paid to the financial institution. The receivables facility expires in 2006. At June 30, 2004, eligible accounts receivable total approximately $119.5 million and there was no subordinated retained interest. Accounts receivable totaling $125.0 million were removed from the consolidated balance sheet at June 30, 2004. In accordance with the facility agreement, the Company is able to receive proceeds based upon total eligible accounts receivable at the previous month-end. Proceeds at the end of the quarter, determined by eligible accounts receivable at May 31, 2004, exceeded the eligible accounts receivable at June 30, 2004. The excess proceeds of $5.5 million at June 30, 2004 are included in the accounts receivable balance of $125.0 million that was removed from the consolidated balance sheet. Related proceeds of $17.0 million are included in cash flows from operating activities in the consolidated statement of cash flows for the six months ended June 30, 2004.
CONSOL Energy believes that cash generated from operations and its borrowing capacity under its new credit facility will be sufficient to meet its working capital requirements, anticipated capital expenditures (other than major acquisitions), scheduled debt payments, anticipated dividend payments in 2004 and to provide required letters of credit. Nevertheless, the ability of CONSOL Energy to satisfy its working capital requirements, debt service obligations, to fund planned capital expenditures or pay dividends will depend upon its future operating performance, which will be affected by prevailing economic conditions in the coal and gas industries and other financial and business factors, some of which are beyond CONSOL Energy’s control.
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 contract nominations generally not exceeding one year). CONSOL Energy has also entered into various gas swap transactions that qualify as financial cash flow hedges, which exist parallel to the underlying physical transactions. The fair value of these contracts was a loss of $15.3 million (net of $9.8 million of deferred tax) at June 30, 2004 and expense of $0.1 million for the six months ended June 30, 2004.
CONSOL Energy frequently evaluates potential acquisitions. CONSOL Energy has funded acquisitions primarily with cash generated from operations and a variety of other sources, depending on the size of the transaction, including debt financing. There can be no assurance that additional capital resources, including debt financing, will be available to CONSOL Energy on terms which CONSOL Energy finds acceptable, or at all.
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Cash Flows (in millions) for the six months ended June 30
Cash flows provided by (used in) operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Cash flows from operating activities have decreased primarily due to the following items:
These decreases in operating cashflows were offset, in part, by; the collection of approximately $13 million in the six months ended June 30, 2004 related to the mine fires experienced in 2003. Accounts receivables from the expected insurance recoveries related to the two mines fires of approximately $18 million were recorded in the 2003 period. Operating cashflows also improved due to increased net income as previously discussed.
Net cash used in or provided by investing activities changed primarily due to the following items:
Net cash received from or used in financing activities changed primarily due to the following items;
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The following is a summary of our significant contractual obligations at June 30, 2004 (in thousands):
Payments due by Year
Within
1 Year
After
5 Years
Short-term Notes Payable
Long-term Debt
Capital Lease Obligations
Operating Lease Obligations
Total Contractual Obligations
Additionally, we have long-term liabilities relating to other post employment benefits, work-related injuries and illnesses, defined benefit pension plans, mine reclamation and closure, and other long-term liability costs. We estimate payments, net of any applicable trust reimbursements, related to these items at June 30, 2004 (in thousands) to be:
As discussed in “Critical Accounting Policies” and in the Notes to our Consolidated Financial Statements in Form 10-K, our determination of these long-term liabilities is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year. In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated. Moreover, in particular, for periods after 2004 our estimates may change from the amounts included in the table, and may change significantly, if our assumptions change to reflect changing conditions.
Debt
At June 30, 2004, CONSOL Energy had total long-term debt of $429 million outstanding, including current portion of long-term debt of $4 million. This long-term debt consisted of:
On June 30, 2004, CONSOL Energy completed a $600 million Senior Secured Loan Agreement to replace the existing $267 million facility. The new agreement consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The new facility is secured by nearly all of the assets of the company. Collateral has been provided to the banks and shared equally and ratably with
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the holders of CONSOL Energy’s 7.875% bonds that mature in 2012 and CONSOL Energy’s subsidiary’s 8.25% medium-term notes maturing in 2007. The facility can be used for letters of credit and borrowings for general corporate purposes. As of June 30, 2004, cash collateralized letters of credit issued under the previous facility have been transferred to the Tranche B facility and the $190 million of restricted cash was released and used to pay short-term debt. At our option, interest is based upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread that is dependent on our credit rating. The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The revolving credit facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450.0 million and $550.0 million for the twelve months ended December 31, 2004 and 2005, respectively. At June 30, 2004, this facility had approximately $226.6 million letters of credit issued and had no borrowings outstanding, leaving approximately $373.4 million of unused capacity.
Stockholders’ Equity and Dividends
CONSOL Energy had stockholders’ equity of $406 million at June 30, 2004 and $291 million at December 31, 2003. The increase is primarily attributable to net income for the six months ended June 30, 2004, offset, in part, by various cash flow hedges related to our gas business and the payment of dividends.
Dividend information for the current year to date is as follows:
The revolving credit facility does restrict CONSOL Energy’s ability to pay cash dividends. As long as CONSOL Energy has not achieved and maintained an Investment Grade rating, dividends payable on common stock cannot exceed $0.56 per share per fiscal year, provided the payment of dividends does not result in an event of default.
Additional comprehensive losses, primarily related to gas hedging transactions, of approximately $9 million were recognized in the six months ended June 30, 2004.
Off-Balance Sheet Transactions
CONSOL Energy does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on CONSOL Energy’s condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the notes to the consolidated financial statements.
Recent Accounting Pronouncements
In March 2004, the FASB issued Emerging Issues Task Force Issue No. 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets” (EITF 04-2). In this Issue, the Task Force reached the consensus that mineral rights are tangible assets. This consensus differs from the requirements of Statement of Financial Accounting Standards No. 141, “Business Combinations” and Statement of Financial Accounting Standards No. 142,
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“Goodwill and Other Intangible Assets” which classify mineral rights as intangible assets. Effective with the 2004 second quarter, CONSOL Energy has reclassified mineral rights as property, plant and equipment in accordance with EITF 04-2.
Forward-Looking Statements
We are including the following cautionary statement in this Report on Form 10-Q to make applicable and to 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 of us. With the exception of historical matters, the matters discussed in this Report on Form 10-Q 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-Q and, in CONSOL Energy’s Form 10-K filed with the Securities and Exchange Commission on March 12, 2004, and other periodic reports filed, these risks, uncertainties and contingencies include, but are not limited to, the following:
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in operations, CONSOL Energy is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding CONSOL Energy’s exposure to the risks of changing natural gas prices, interest rates and foreign exchange rates.
CONSOL Energy is exposed to market price risk in the normal course of selling natural gas production and to a lesser extent in the sale of coal. CONSOL Energy sells coal under both short-term and long-term contracts with fixed price and/or indexed price contracts that reflect market value. CONSOL Energy uses fixed-price contracts, collar-price contracts and derivative commodity instruments that qualify as cash-flow hedges under Statement of Financial Accounting Standards No. 133 to minimize exposure to market price volatility in the sale of natural gas. Our risk management policy strictly prohibits the use of derivatives for speculative positions.
CONSOL Energy has established risk management policies and procedures to strengthen the internal control environment of the marketing of commodities produced from its asset base. All of the derivative instruments are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility and cover underlying exposures. CONSOL Energy’s market risk strategy incorporates fundamental risk management tools to assess market price risk and establish a framework in which management can maintain a portfolio of transactions within pre-defined risk parameters.
The use of derivative instruments could materially affect CONSOL Energy’s results of operations depending on market prices. CONSOL Energy believes that the use of derivative instruments along with the risk assessment procedures and internal controls does not expose CONSOL Energy to material risk. However, we believe that use of these instruments will not have a material adverse effect on our financial position or liquidity.
For a summary of accounting policies related to derivative instruments, see Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report Form 10-K for the year ended December 31, 2003.
Sensitivity analyses of the incremental effects on pre-tax income for the six months ended June 30, 2004 of a hypothetical 10 percent and 25 percent change in natural gas prices for open derivative instruments as of June 30, 2004 are provided in the following table:
Natural Gas (a)
CONSOL Energy remains at risk for possible changes in the market value of these derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. The effect of this
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offset is not reflected in the sensitivity analyses. CONSOL Energy entered into derivative instruments to convert the market prices related to 2004 and 2005 anticipated sales of natural gas to fixed prices. The sensitivity analysis reflects an inverse relationship between increases in commodity prices and a benefit to earnings. The fair value of these contracts was a loss of $15.3 million (net of $9.8 million of deferred tax) at June 30, 2004 and expense of $0.1 million for the six months ended June 30, 2004. We continually evaluate the portfolio of derivative commodity instruments and adjust the strategy to anticipated market conditions and risks accordingly.
CONSOL Energy is exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review.
CONSOL Energy’s interest expense is sensitive to changes in the general level of interest rates in the United States. At June 30, 2004, CONSOL Energy had $429 million aggregate principal amount of debt outstanding under fixed-rate instruments. CONSOL Energy’s primary exposure to market risk for changes in interest rates relates to its revolving credit facility, under which there were no borrowings outstanding at June 30, 2004. On June 30, 2004, CONSOL Energy completed a $600 million senior secured loan facility to replace the existing $267 million facility. The new facility consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. CONSOL Energy’s $267 million revolving credit facility bore interest at a weighted average rate of 5.2% per annum during the six months ended June 30, 2004. Due to the level of borrowings against this facility in the six months ended June 30, 2004, a 100 basis-point increase in the average rate for CONSOL Energy’s revolving credit facility would not have significantly decreased net income for the period.
Almost all of CONSOL Energy’s transactions are denominated in U.S. dollars, and, as a result, it does not have material exposure to currency exchange-rate risks.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures. CONSOL Energy, under the supervision and with the participation of its management, including CONSOL Energy’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, CONSOL Energy’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by CONSOL Energy in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by CONSOL Energy in such reports is accumulated and communicated to CONSOL Energy’s management, including CONSOL Energy’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal controls over financial reporting. There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 2004 CONSOL Energy held its annual shareholder meeting for the purpose of (1) electing directors and (2) ratifying the retention of PricewaterhouseCoopers LLP as CONSOL Energy’s independent accountants for the year ending December 31, 2004.
Nominee
John Whitmire
J. Brett Harvey
James E. Altmeyer
Phillip W. Baxter
William E. Davis
Raj K. Gupta
Patricia A. Hammick
William P. Powell
Joseph T. Williams
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 5, 2004
By:
/s/ J. BRETTHARVEY
President Chief Executive Officer
(Duly Authorized Officer )
/s/ WILLIAM J. LYONS
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)
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Exhibit Index
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