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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 001-14901
----------
CONSOL Energy Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0337383
- ---------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1800 Washington Road, Pittsburgh, Pennsylvania 15241
----------------------------------------------------
(Address or principal executive offices)
(Zip Code)
(412) 831-4000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
As of August 8, 2002, there were 78,731,344 shares of Common Stock, $.01 par
value, outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Consolidated Statements of Income for the three months and six months
ended June 30, 2002 and 2001 ................................................. 1
Consolidated Balance Sheets at June 30, 2002
and December 31, 2001 ........................................................ 2
Consolidated Statements of Stockholders' Equity for the six
months ended June 30, 2002 ................................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 ................................................. 5
Notes to Consolidated Financial Statements ................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION ................................ 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ............................................................ 38
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................................ 39
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .................................... 39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .............................................. 39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................... 39
ITEM 5. OTHER INFORMATION ............................................................ 39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................. 40
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales - Outside $ 485,657 $ 556,928 $ 992,851 $ 1,130,341
Sales - Related Parties 815 3,717 819 7,232
Freight - Outside 33,699 53,681 70,131 85,654
Freight - Related Parties 549 2,399 549 3,061
Other Income 15,530 14,930 23,901 33,303
----------- ------------ ----------- -----------
Total Revenue 536,250 631,655 1,088,251 1,259,591
Cost of Goods Sold and Other
Operating Charges 366,095 409,695 730,997 831,110
Freight Expense 34,248 56,080 70,680 88,715
Selling, General and Administrative
Expense 17,195 15,375 33,852 29,662
Depreciation, Depletion and
Amortization 65,801 62,918 132,258 123,549
Interest Expense 11,848 12,130 21,985 26,792
Taxes Other Than Income 42,867 43,060 93,592 80,295
Export Sales Excise Tax Resolution (1,037) (28,230) (1,037) (123,522)
----------- ------------ ----------- -----------
Total Costs 537,017 571,028 1,082,327 1,056,601
----------- ------------ ----------- -----------
Earnings (Loss) Before Income Taxes (767) 60,627 5,924 202,990
Income Taxes (Benefits) (9,794) 11,280 (8,604) 52,843
----------- ------------ ----------- -----------
Net Income $ 9,027 $ 49,347 $ 14,528 $ 150,147
=========== ============ =========== ===========
Basic Earnings Per Share $ 0.11 $ 0.63 $ 0.18 $ 1.91
=========== ============ =========== ===========
Dilutive Earnings Per Share $ 0.11 $ 0.62 $ 0.18 $ 1.90
=========== ============ =========== ===========
Weighted Average Number of
Common Shares Outstanding:
Basic 78,722,778 78,670,017 78,714,967 78,643,444
=========== ============ =========== ===========
Dilutive 78,935,017 79,071,471 78,921,664 78,994,428
=========== ============ =========== ===========
Dividends Paid Per Share $ 0.28 $ 0.28 $ 0.56 $ 0.56
=========== ============ =========== ===========
The accompanying notes are an integral part of these financial statements.
1
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ----------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 10,214 $ 15,582
Accounts and Notes Receivable:
Trade 205,419 220,442
Related Parties 598 -
Other Receivables 132,968 123,347
Inventories 201,701 113,894
Deferred Income Taxes 55,490 54,708
Recoverable Income Taxes 9,739 -
Prepaid Expenses 44,395 42,274
--------------- ----------------
Total Current Assets 660,524 570,247
Property, Plant and Equipment:
Property, Plant and Equipment 5,598,786 5,413,960
Less - Accumulated Depreciation,
Depletion and Amortization 2,687,701 2,498,650
--------------- ----------------
Total Property, Plant and
Equipment - Net 2,911,085 2,915,310
Other Assets:
Deferred Income Taxes 539,421 520,906
Advance Mining Royalties 90,437 92,644
Investment in Affiliates 118,805 77,667
Other 120,458 120,813
--------------- ----------------
Total Other Assets 869,121 812,030
--------------- ----------------
Total Assets $ 4,440,730 $ 4,297,587
=============== ================
The accompanying notes are an integral part of these financial statements.
2
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 139,717 $ 171,923
Short-Term Notes Payable 291,212 77,869
Current Portion of Long-Term Debt 6,954 72,771
Accrued Income Taxes - 4,799
Other Accrued Liabilities 411,991 313,379
------------- -------------
Total Current Liabilities 849,874 640,741
Long-Term Debt:
Long-Term Debt 466,221 464,187
Capital Lease Obligations 6,504 8,482
------------- -------------
Total Long-Term Debt 472,725 472,669
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,432,132 1,417,567
Pneumoconiosis Benefits 460,150 459,776
Mine Closing 342,144 333,738
Workers' Compensation 258,637 269,075
Deferred Revenue 206,075 227,595
Reclamation 11,930 13,744
Other 163,859 191,123
------------- -------------
Total Deferred Credits and Other Liabilities 2,874,927 2,912,618
Stockholders' Equity:
Common Stock, $.01 par value;
500,000,000 Shares Authorized; 80,267,558 Issued; and
78,731,344 Outstanding at June 30, 2002, and
78,705,638 Outstanding at December 31, 2001 803 803
Preferred Stock, 15,000,000 Shares Authorized;
None Issued and Outstanding - -
Capital in Excess of Par Value 643,746 643,627
Retained Earnings (Deficit) (347,118) (317,566)
Other Comprehensive Loss (36,872) (37,659)
Common Stock in Treasury, at Cost - 1,536,214 Shares
at June 30, 2002, and 1,561,920 Shares at December 31, 2001 (17,355) (17,646)
------------- -------------
Total Stockholders' Equity 243,204 271,559
------------- -------------
Total Liabilities and Stockholders' Equity $ 4,440,730 $ 4,297,587
============= =============
The accompanying notes are an integral part of these financial statements.
3
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Other Total
Capital in Retained Compre- Stock-
Common Excess of Earnings hensive Treasury holders'
Stock Par Value (Deficit) Loss Stock Equity
----------- ------------ ----------- ----------- ------------ ------------
Balance -
December 31, 2001 $ 803 $ 643,627 $ (317,566) $ (37,659) $ (17,646) $ 271,559
----------- ------------ ---------- ----------- ----------- ------------
(Unaudited)
Net Income - - 14,528 - - 14,528
Treasury Rate Lock (net of $500 tax) - - - 787 - 787
Treasury Stock Issued
(25,706 shares) - 119 - - 291 410
Dividends ($.56 per share) - - (44,080) - - (44,080)
----------- ------------ ---------- ----------- ----------- ------------
Balance -
June 30, 2002 $ 803 $ 643,746 $ (347,118) $ (36,872) $ (17,355) $ 243,204
=========== ============ ========== =========== =========== ============
The accompanying notes are an integral part of these financial statements.
4
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
---------------------------
2002 2001
---------- -----------
Operating Activities:
Net Income $ 14,528 $ 150,147
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 132,258 123,549
Gain on the Sale of Assets (2,126) (5,290)
Amortization of Advance Mining Royalties 4,940 11,464
Deferred Income Taxes (19,797) 33,408
Equity in Earnings of Affiliates 2,589 (10,453)
Changes in Operating Assets:
Accounts and Notes Receivable 4,804 (111,923)
Inventories (87,807) 4,424
Prepaid Expenses (2,121) (6,089)
Changes in Other Assets 2,937 (24,398)
Changes in Operating Liabilities:
Accounts Payable (41,206) 17,450
Other Operating Liabilities 84,074 28,898
Changes in Other Liabilities (10,539) 41,810
Other (6,998) 1,119
---------- -----------
61,008 103,969
---------- -----------
Net Cash Provided by Operating Activities 75,536 254,116
---------- -----------
Investing Activities:
Capital Expenditures (149,774) (104,836)
Additions to Advance Mining Royalties (2,733) (2,715)
Acquisition of Line Creek Mine Joint Venture - (1,608)
Investment in Equity Affiliates (34,727) 9,381
Proceeds from Sales of Assets 3,366 (2,628)
---------- -----------
Net Cash Used in Investing Activities (183,868) (102,406)
---------- -----------
Financing Activities:
Payments on Commercial Paper (32,078) (99,877)
Payments on Miscellaneous Borrowings (1,973) (3,264)
Payments on Long Term Notes (66,000) -
Proceeds from Long Term Notes 246,310 -
Dividends Paid (44,054) (44,024)
Proceeds from Treasury Rate Lock 1,332 -
Payments for Bond Issuance Costs (957) -
Issuance of Treasury Stock 384 1,510
---------- -----------
Net Cash Provided by (Used in) Financing Activities 102,964 (145,655)
---------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (5,368) 6,055
Cash and Cash Equivalents at Beginning of Period 15,582 10,570
---------- -----------
Cash and Cash Equivalents at End of Period $ 10,214 $ 16,625
========== ===========
The accompanying notes are an integral part of these financial statements.
5
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
June 30, 2002 are not necessarily indicative of the results that may be expected
for future periods.
The balance sheet at December 31, 2001 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 transitional period ended December 31, 2001 included in CONSOL
Energy Inc.'s (CONSOL Energy) Form 10-K for the transition period ended December
31, 2001, as amended.
CONSOL Energy changed from a fiscal year ending June 30 to a fiscal year ending
December 31. CONSOL Energy had a transitional period ended December 31, 2001.
CONSOL Energy's first full year ending December 31 started January 1, 2002 and
ends December 31, 2002. CONSOL Energy made this change in order to align its
fiscal year with that of RWE A.G., which beneficially owns directly or through
subsidiaries approximately 74% of the common stock of CONSOL Energy.
Certain reclassifications of prior years' data have been made to conform to the
classification of data for the six months ended June 30, 2002.
NOTE 2 - ACQUISITION:
On December 7, 2001, in order to expand its international market share, CONSOL
Energy purchased for $17,950, a 50% interest in the Glennies Creek Mine, which
is currently under development in New South Wales, Australia. Glennies Creek
produces a high fluidity coking coal that will be sold primarily to steel makers
in the Asia-Pacific region. The acquisition has been accounted for as a
purchase, and accordingly, since the date of acquisition the operating results
of Glennies Creek Mine have been included in CONSOL Energy's consolidated
financial statements using the equity method of accounting. Net income and
earnings per share of CONSOL Energy, on a pro forma basis, after giving effect
to certain purchase accounting adjustments, would not materially change from
actual net income and earnings per share for the three months or the six months
ended June 30, 2001.
6
On August 22, 2001, in order to expand existing gas operations, CONSOL Energy
purchased the remaining 50% interest in the coalbed methane reserves and the
remaining 25% interest in the production and gathering assets in southwestern
Virginia of Pocahontas Gas Partnership and Cardinal States Gathering Company for
$155,312. Prior to the acquisition, CONSOL Energy owned 50% and 75%,
respectively, of these two entities. The acquisition has been accounted for as a
purchase and, accordingly, the operating results for the portion of Pocahontas
Gas Partnership and Cardinal States Gathering Company previously reported on the
equity method and the newly acquired portions have been included in CONSOL
Energy's operating results using full consolidation since the date of
acquisition. The pro forma results, assuming the acquisition of the interests in
these entities had occurred January 1, 2001, are estimated to be:
Pro forma
-------------------------------------------
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------------- --------------------
Revenues $650,244 $1,300,903
Net income $ 51,355 $ 156,150
Net income per common share:
Basic $ 0.65 $ 1.99
Dilutive $ 0.65 $ 1.98
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition of the interests in these entities had been
completed as of the beginning of the period presented, nor are they necessarily
indicative of future consolidated results.
On July 2, 2001, CONSOL Energy entered into agreements with American Electric
Power to supply coal to various American Electric Power coal-fired power plants.
CONSOL Energy purchased, for a nominal amount, the stock of Windsor Coal
Company, Southern Ohio Coal Company and Central Ohio Coal Company, subsidiaries
of American Electric Power which own mines in Ohio and West Virginia. Under the
agreements, CONSOL Energy will supply approximately 34 million tons of coal
through 2008. These tons will be supplied by the former American Electric Power
affiliated mines and by other CONSOL Energy mines. The former American Electric
Power affiliated mines all have limited economically mineable reserves. The
Meigs 31 mine of Southern Ohio Coal Company closed on October 24, 2001, the
Muskingum surface mine of Central Ohio Coal Company closed on December 14, 2001
and the Meigs 2 mine of Southern Ohio Coal Company closed on March 6, 2002.
CONSOL Energy will expand its McElroy and Robinson Run Mines to meet the new
supply agreement requirements as the former American Electric Power mines
deplete.
As part of this acquisition, CONSOL Energy assumed approximately $239,000 of
long-term liabilities related to employee and mine closure liabilities in this
acquisition, as well as other current liabilities. American Electric Power paid
CONSOL Energy $336,000 in cash. Subsequent to the acquisition, the cash included
as part of the acquisition was used by CONSOL Energy to reduce a portion of its
short-term debt. For income tax purposes, an election was made to treat the
stock acquisition as a purchase of assets. Therefore, an income tax liability
was recognized as part of the acquisition based upon the excess of the assets
received over the tax liabilities assumed. The acquisition has been accounted
for as a purchase and, accordingly, the operating results of
7
Windsor Coal Company, Southern Ohio Coal Company and Central Ohio Coal Company
have been included in CONSOL Energy's operating results since the date of
acquisition. The pro forma results, assuming the acquisition of the interests in
these entities had occurred January 1, 2001, are estimated to be:
Pro forma
-------------------------------------------
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
-------------------------------------------
Revenues $703,856 $1,418,400
Net income $ 51,780 $ 155,788
Net income per common share:
Basic $ 0.66 $ 1.98
Dilutive $ 0.65 $ 1.97
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition of the interests in these entities had been
completed as of the beginning of the period presented, nor are they necessarily
indicative of future consolidated results.
NOTE 3 - INCOME TAXES:
CONSOL Energy estimates the effective tax rate expected to be applicable for the
full fiscal year. This rate is used to provide for income taxes on a current
year-to-date basis. The effective tax rate is sensitive to changes in annual
profitability and percentage depletion. The following is the reconciliation
between the income tax expense (benefit) recognized in the Consolidated
Statements of Income and the income tax expense computed by applying the
statutory federal income tax rate to the earnings before income taxes:
For the Three
Months Ended
-------------------------------------------------------------
June 30,
-------------------------------------------------------------
2002 2001
-------------------------- ----------------------------
Amount Percent Amount Percent
----------- ----------- ------------ ------------
Statutory U. S. federal income tax rate $ (269) 35.0 % $ 21,219 35.0 %
Excess tax depletion (5,956) 776.6 (10,442) (17.2)
Nonconventional fuel tax credit - - (2,643) (4.4)
Net effect of state tax 894 (116.6) 5,216 8.6
Net effect of foreign tax 729 (95.0) (42) (0.1)
Prior year tax settlement (1,908) 248.8 - -
Other (3,284) 428.1 (2,028) (3.3)
Income Tax (Benefit)Expense/
---------- ----------- ----------- ------------
Effective Rate $ (9,794) 1,276.9 % $ 11,280 18.6 %
========== =========== =========== ============
8
For the Six
Months Ended
----------------------------------------------------------
June 30,
----------------------------------------------------------
2002 2001
------------------------- --------------------------
Amount Percent Amount Percent
------------ ---------- ------------- -----------
Statutory U. S. federal income tax rate $ 2,073 35.0 % $ 71,047 35.0 %
Excess tax depletion (7,945) (134.1) (20,977) (10.3)
Nonconventional fuel tax credit - - (4,493) (2.2)
Net effect of state tax 1,227 20.7 9,203 4.5
Net effect of foreign tax 1,290 21.8 385 0.2
Prior year tax settlement (1,908) (32.2) - -
Other (3,341) (56.4) (2,322) (1.2)
Income Tax (Benefit)Expense/
----------- ---------- ----------- ---------
Effective Rate $ (8,604) (145.2) % $ 52,843 26.0 %
=========== ========== =========== =========
The provision for income taxes is adjusted at the time the returns are filed.
These adjustments, of which the federal portion is included in the Other line
above, decreased income tax expense by $2,974 for the three months and six
months ended June 30, 2002. These adjustments decreased income tax expense by
$805 for the three months and six months ended June 30, 2001, respectively.
In the three months ended June 30, 2002, CONSOL Energy received a $1,908 federal
income tax benefit from a final agreement resolving disputed federal income tax
items for the years 1995 to 1997.
NOTE 4 - INVENTORIES:
The components of inventories consist of the following:
June 30, December 31,
2002 2001
-------------- --------------
Coal $ 131,107 $ 33,897
Merchandise for resale 21,461 21,816
Supplies 49,133 58,181
-------------- --------------
Total Inventories $ 201,701 $ 113,894
============== ==============
NOTE 5 - 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.
9
CONSOL Energy is subject to various lawsuits and claims with respect to such
matters as personal injury, wrongful death, damage to property, exposure to
hazardous substances, governmental regulations including environmental
remediation, employment and contract disputes, and other claims and actions
arising out of the normal course of business. CONSOL Energy provides for such
claims when available information indicates that it is probable that an asset
has been impaired or a liability has been incurred and the amount of the loss
can be reasonably estimated.
One of CONSOL Energy's subsidiaries, Fairmont Supply Company, which distributes
industrial supplies, currently is defending against approximately 23 thousand
asbestos claims in state courts in Pennsylvania, Ohio, West Virginia and
Mississippi. Because a very small percentage of products manufactured by third
parties and supplied by Fairmont in the past may have contained asbestos and
many of the pending claims are part of mass complaints filed by hundreds of
plaintiffs against a hundred or more defendants, it has been difficult for
Fairmont to determine how many of the cases actually involve valid claims or
plaintiffs who were actually exposed to asbestos-containing products supplied by
Fairmont. In addition, while Fairmont may be entitled to indemnity or
contribution in certain jurisdictions from manufacturers of identified products,
the availability of such indemnity or contribution is unclear at this time and,
in recent years, some of the manufacturers named as defendants in these actions
have sought protection from these claims under bankruptcy laws. Fairmont has no
insurance coverage with respect to these asbestos cases. To date, payments by
Fairmont with respect to asbestos cases have not been material. However, there
cannot be any assurance that payments in the future with respect to pending or
future asbestos cases will not be material to the financial position, results of
operations or cash flows of CONSOL Energy.
CONSOL Energy has recognized a liability related to a waste disposal site and
accrued $3,275 in Other Liabilities. CONSOL Energy cumulatively has paid $1,909
(no payments were made in the three months ended June 30, 2002 and $358 of
payments were made in the six months ended June 30, 2002) related to the
remediation of this waste disposal site and, accordingly, reduced the liability
to $1,366. 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.
NOTE 6 - SEGMENT INFORMATION:
CONSOL Energy has two reportable business segments: Coal and Gas. In the three
months ended June 30, 2002, CONSOL Energy implemented a new internal reporting
system. As a result, the measure of segment profit or loss has changed from
Pre-tax Operating Income (Loss) to Earnings (Loss) Before Income Taxes. Also,
some corporate charges that were previously reflected in the All Other segment
are now reported as Corporate items and reflected in the reconciliation between
Segment Earnings (Loss) Before Income Tax to total Earnings (Loss) Before Income
Tax.
CONSOL Energy has also changed its disclosure from reporting additions to
property, plant and equipment to reporting capital expenditures for property,
plant and equipment as shown on the cash flow statement. Previously, additions
to property, plant and equipment included certain non-cash increases.
10
Historical segment data has been reclassified to conform with these internal
reporting changes.
Industry segment results for the three months ended June 30, 2002:
Reportable Business Segments
---------------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
------------- ------------- ------------- -------------- -------------- ------------
Sales - outside $ 430,243 $ 35,020 $ 465,263 $ 20,394 $ - $ 485,657
Sales - related parties 815 - 815 - - 815
Freight - outside 33,663 - 33,663 36 - 33,699
Freight - related parties 549 - 549 - - 549
Intersegment transfers - 543 543 22,815 (23,358) -
------------- ------------- ------------- -------------- -------------- ------------
Total Sales and Freight $ 465,270 $ 35,563 $ 500,833 $ 43,245 $ (23,358) $ 520,720
============= ============= ============= ============== ============== ============
Earnings (Loss) Before
Income Taxes (A) $ 11,338 $ 8,323 $ 19,661 $ (6,975) $ (13,453) $ (767)
============= ============= ============= ============== ============== ============
Segment assets (B) $ 3,043,109 $ 548,084 $ 3,591,193 $ 210,223 $ 639,314 $ 4,440,730
============= ============= ============= ============== ============== ============
Depreciation, depletion and
amortization $ 54,773 $ 8,597 $ 63,370 $ 2,431 $ - $ 65,801
============= ============= ============= ============== ============== ============
Capital expenditures $ 64,925 $ 11,401 $ 76,326 $ 3,088 $ - $ 79,414
============= ============= ============= ============== ============== ============
(A) Includes equity in earnings (loss) of unconsolidated equity affiliates
of ($1,256), ($556) and ($217) for Coal, Gas and All Other,
respectively.
(B) Includes investments in unconsolidated equity affiliates of $78,067,
$11,259 and $29,479 for Coal, Gas and All Other, respectively. Also
included in the Coal segment is $71,581 of receivables related to the
Export Sales Excise Tax Resolution that was primarily recognized in the
twelve months ended June 30, 2001.
11
Industry segment results for the three months ended June 30, 2001:
Reportable Business Segments
---------------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
-------------- ------------ -------------- -------------- -------------- --------------
Sales - outside $ 501,003 $ 30,857 $ 531,860 $ 25,068 $ - $ 556,928
Sales - related parties 3,717 - 3,717 - - 3,717
Freight - outside 53,653 - 53,653 28 - 53,681
Freight - related parties 2,399 - 2,399 - - 2,399
Intersegment transfers - 713 713 24,679 (25,392) -
-------------- ------------ -------------- -------------- -------------- --------------
Total Sales and Freight $ 560,772 $ 31,570 $ 592,342 $ 49,775 $ (25,392) $ 616,725
============== ============ ============== ============== ============== ==============
Earnings (Loss) Before
Income Taxes (C) $ 73,521 $ 13,565 $ 87,086 $ (5,848) $ (20,611) 60,627
============== ============ ============== ============== ============== ==============
Segment assets (D) $ 3,001,398 $ 329,834 $ 3,331,232 $ 158,694 $ 404,988 $ 3,894,914
============== ============ ============== ============== ============== ==============
Depreciation, depletion and
amortization $ 55,773 $ 4,865 $ 60,638 $ 2,280 $ - $ 62,918
============== ============ ============== ============== ============== ==============
Capital expenditures $ 42,906 $ 9,693 $ 52,599 $ 2,142 $ - $ 54,741
============== ============ ============== =============== ============== ==============
(C) Includes equity in earnings (loss) of unconsolidated affiliates of
$521, $4,132 and ($344) for Coal, Gas and All Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $40,559,
$182,269 and $683 for Coal, Gas and All Other, respectively. Also
included in the Coal segment is $102,241 of receivables related to the
Export Sales Excise Tax Resolution.
12
Industry segment results for the six months ended June 30, 2002:
Reportable Business Segments
-------------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
------------- --------- ------------- ------------- -------------- --------------
Sales - outside $ 888,109 $ 62,712 $ 950,821 $ 42,030 $ - $ 992,851
Sales - related parties 819 - 819 - - 819
Freight - outside 70,001 - 70,001 130 - 70,131
Freight - related parties 549 - 549 - - 549
Intersegment transfers - 988 988 48,141 (49,129) -
------------- --------- ------------- ------------- ------------- --------------
Total Sales and Freight $ 959,478 $ 63,700 $ 1,023,178 $ 90,301 $ (49,129) $ 1,064,350
============= ========= ============= ============= ============= ==============
Earnings (Loss) Before
Income Taxes (E) $ 25,770 $ 11,832 $ 37,602 $ (8,114) $ (23,564) $ 5,924
============= ========= ============= ============= ============= ==============
Segment assets (F) $ 3,043,109 $ 548,084 $ 3,591,193 $ 210,223 $ 639,314 $ 4,440,730
============= ========= ============= ============= ============= ==============
Depreciation, depletion and
amortization $ 110,709 $ 16,759 $ 127,468 $ 4,790 $ - $ 132,258
============= ========= ============= ============= ============= ==============
Capital expenditures $ 116,152 $ 30,063 $ 146,215 $ 3,559 $ - $ 149,774
============= ========= ============== ============== ============== ===============
(E) Includes equity in earnings (loss) of unconsolidated equity affiliates
of ($1,258), ($930) and ($401) for Coal, Gas and All Other,
respectively.
(F) Includes investments in unconsolidated equity affiliates of $78,067,
$11,259 and $29,479 for Coal, Gas and All Other, respectively. Also
included in the Coal segment is $71,581 of receivables related to the
Export Sales Excise Tax Resolution.
13
Industry segment results for the six months ended June 30, 2001:
Reportable Business Segments
----------------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
------------- ------------ ------------- ------------- -------------- -------------
Sales - outside $ 995,815 $ 74,231 $ 1,070,046 $ 60,295 $ - $ 1,130,341
Sales - related parties 7,232 - 7,232 - - 7,232
Freight - outside 85,547 - 85,547 107 - 85,654
Freight - related parties 3,061 - 3,061 - - 3,061
Intersegment transfers - 1,835 1,835 50,669 (52,504) -
------------- ------------ ------------- ------------- -------------- -------------
Total Sales and Freight $ 1,091,655 $ 76,066 $ 1,167,721 $ 111,071 $ (52,504) $ 1,226,288
============= ============ ============= ============= ============== =============
Earnings (Loss) Before
Income Taxes (G) $ 174,470 $ 48,174 $ 222,644 $ (7,029) $ (12,625) $ 202,990
============= ============ ============= ============= ============== =============
Segment assets (H) $ 3,001,398 $ 329,834 $ 3,331,232 $ 158,694 $ 404,988 $ 3,894,914
============= ============ ============= ============= ============== =============
Depreciation, depletion and
amortization $ 111,813 $ 6,873 $ 118,686 $ 4,863 $ - $ 123,549
============= ============ ============= ============= ============== =============
Capital expenditures $ 80,008 $ 20,748 $ 100,756 $ 4,080 $ - $ 104,836
============= ============ ============= ============= ============== =============
(G) Includes equity in earnings (loss) of unconsolidated affiliates of
($256), $12,244 and ($1,535) for Coal, Gas and All Other, respectively.
(H) Includes investments in unconsolidated equity affiliates of $40,559,
$182,269 and $683 for Coal, Gas and All Other, respectively. Also
included in the Coal segment is $102,241 of receivables related to the
Export Sales Excise Tax resolution.
14
Reconciliation of Segment Information to Consolidated Amounts
Earnings (Loss) Before Income Taxes:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
----------------- -------------- --------------- -------------
Segment earnings before income taxes
for total reportable business segments $ 19,661 $ 87,086 $ 37,602 $ 222,644
Segment (loss) before income taxes
for all other businessses (6,975) (5,848) (8,114) (7,029)
Incentive compensation (3,046) (9,661) (3,378) (16,906)
Interest income (expense), net
and other non-operating activity (10,407) (10,950) (20,186) 4,281
------------ ----------- ---------- -----------
Earnings (Loss) Before Income Taxes $ (767) $ 60,627 $ 5,924 $ 202,990
============ =========== ========== ===========
Total Assets:
June 30,
-------------------------------
2002 2001
----------------- -------------
Segment assets for total reportable
business segments $ 3,591,193 $ 3,331,232
Segment assets for all other businesses 210,223 158,694
Items excluded from segment assets:
Cash and other investments 10,611 17,104
Export sales excise tax resolution
interest receivable 21,655 32,351
Deferred tax assets 594,911 355,533
Recoverable income taxes 9,739
Bond issuance costs 2,398
------------ -------------
Total Consolidated Assets $ 4,440,730 $ 3,894,914
============ =============
NOTE 7 - GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The payment obligations under the $250,000 7.875 percent Notes due 2012 issued
by CONSOL Energy 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 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.
15
Income Statement for Three Months Ended June 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ------------ -------------------------- -------------
Sales - Outside $ - $ 408,817 $ 76,840 $ - $ 485,657
Sales - Related Parties - 817 (2) - 815
Freight - Outside - 27,375 6,324 - 33,699
Freight - Related Parties - 549 - - 549
Other Income (including equity earnings) 18,039 (8,920) 27,143 (20,732) 15,530
--------- ------------ ---------- ----------- -------------
Total Revenue 18,039 428,638 110,305 20,732) 536,250
Cost of Goods Sold and Other
Operating Charges 5,882 334,978 65,549 (40,314) 366,095
Intercompany Activity 298 (27,725) (14,585) 42,012 -
Freight Expense - 27,924 6,324 - 34,248
Selling, General and
Administrative Expense - 13,871 3,324 - 17,195
Depreciation, Depletion and
Amortization 133 56,390 9,278 - 65,801
Interest Expense 6,527 4,564 757 - 11,848
Taxes Other Than Income 907 35,410 6,550 - 42,867
Export Sales Excise Tax Resolution - (1,037) - - (1,037)
--------- ------------ ---------- ----------- -------------
Total Costs 13,747 444,375 77,197 1,698 537,017
--------- ------------ ---------- ----------- -------------
Earnings (Loss) Before Income Taxes 4,292 (15,737) 33,108 (22,430) (767)
Income Taxes (Benefit) (4,735) (12,640) 7,581 - (9,794)
--------- ------------ ---------- ----------- -------------
Net Income (Loss) $ 9,027 $ (3,097) $ 25,527 $ (22,430) $ 9,027
========= ============ ========== ----------- =============
16
Balance Sheet for June 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Total
------------ ------------ ------------ -------------- ------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,560 $ 115 $ 6,539 $ - $ 10,214
Accounts and Notes Receivable:
Trade 72,829 105,772 26,818 - 205,419
Related Parties 598 - - - 598
Other 2,775 113,895 16,298 - 132,968
Inventories 174 188,007 13,520 - 201,701
Deferred Income Taxes 55,490 - - - 55,490
Recoverable Income Taxes 9,739 - - - 9,739
Prepaid Expenses 14,221 28,191 1,983 - 44,395
------------ ------------ ------------- ------------- ------------
Total Current Assets 159,386 435,980 65,158 - 660,524
Property, Plant and Equipment:
Property, Plant and Equipment 80,832 4,536,520 981,434 - 5,598,786
Less-Accumulated Depreciation,
Depletion and Amortization 39,813 2,592,422 55,466 - 2,687,701
------------ ------------ ------------ ------------- ------------
Property, Plant and Equipment - Net 41,019 1,944,098 925,968 - 2,911,085
Other Assets:
Deferred Income Taxes 539,421 - - - 539,421
Advanced Mining Royalties - 51,189 39,248 - 90,437
Investment in Affiliates 1,251,735 854,677 63,835 (2,051,442) 118,805
Other 3,118 27,178 90,162 - 120,458
------------ ------------ ------------ ------------- ------------
Total Other Assets 1,794,274 933,044 193,245 (2,051,442) 869,121
------------ ------------ ------------ ------------- ------------
Total Assets $ 1,994,679 $ 3,313,122 $ 1,184,371 $ (2,051,442) $ 4,440,730
============ ============ ============ ============= ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 65,878 $ 59,840 $ 13,999 $ - $ 139,717
Accounts Payable (Recoverable)-
Related Parties 935,532 (674,409) (261,350) 227 -
Short-Term Notes Payable 291,212 - - - 291,212
Current Portion of Long-Term Debt 100 6,219 635 - 6,954
Other Accrued Liabilities 62,872 282,659 66,460 - 411,991
------------ ------------ ------------- ------------- ------------
Total Current Liabilities 1,355,594 (325,691) (180,256) 227 849,874
Long-Term Debt:
Long-Term Debt 247,993 211,621 6,607 - 466,221
Capital Lease Obligations - 6,504 - - 6,504
------------ ------------ ------------ ------------- ------------
Total Long-Term Debt 247,993 218,125 6,607 - 472,725
Deferred Credits and Other Liabilities:
Postretirement Benefits Other
Than Pensions - 1,432,132 - - 1,432,132
Pneumoconiosis Benefits - 460,150 - - 460,150
Mine Closing - 195,704 146,440 - 342,144
Workers' Compensation 1,653 226,438 30,546 - 258,637
Deferred Revenue - 180,656 25,419 - 206,075
Reclamation - 7,010 4,920 - 11,930
Other 146,235 13,216 4,408 - 163,859
------------ ------------ ------------ ------------- ------------
Total Deferred Credits and Other
Liabilities 147,888 2,515,306 211,733 - 2,874,927
Stockholders' Equity 243,204 905,382 1,146,287 (2,051,669) 243,204
------------ ------------ ------------ ------------- ------------
Total Liabilities and Stockholders' Equity $ 1,994,679 $ 3,313,122 $ 1,184,371 $ (2,051,442) $ 4,440,730
============ ============ ============ ============= ============
17
Condensed Statement of Cash Flows
For the Three Months Ended June 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
---------- ---------- ----------- ------------- --------------
Net Cash (Used in) Provided
by Operating Activities $ (79,002) $ 100,884 $ 24,238 $ - $ 46,120
---------- ---------- ----------- ------------- --------------
Cash Flows from Investing Activities:
Capital Expenditures $ (4,019) $ (58,015) $ (17,380) $ - $ (79,414)
Investment in Equity Affiliates (19,678) - (9,641) - (29,319)
Other Investing Activities - 1,155 811 - 1,966
---------- ---------- ----------- ------------- --------------
Net Cash Used in Investing activities $ (23,697) $ (56,860) $ (26,210) $ - $ (106,767)
---------- ---------- ----------- ------------- --------------
Cash Flows from Financing Activities:
Proceeds from Short-Term
Borrowings $ 112,672 $ - $ - $ - $ 112,672
Payments on Long-Term Notes - (43,000) - - (43,000)
Dividends Paid (22,029) - - - (22,029)
Other Financing Activities (94) (986) - - (1,080)
---------- ----------- ----------- ------------- --------------
Net Cash Provided by (Used in)
Financing Activities $ 90,549 $ (43,986) $ - $ - $ 46,563
---------- ---------- ----------- ------------- --------------
Income Statement for Three Months Ended June 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
---------- ---------- ----------- ------------- --------------
Sales - Outside $ - $ 414,189 $ 142,739 $ - $ 556,928
Sales - Related Parties - 1,690 2,027 - 3,717
Freight - Outside - 8,852 44,829 - 53,681
Freight - Related Parties - 308 2,738 (647) 2,399
Other Income (including equity earnings) 47,524 42,753 (21,467) (53,880) 14,930
---------- ---------- ----------- ------------- --------------
Total Revenue 47,524 467,792 170,866 (54,527) 631,655
Cost of Goods Sold and Other
Operating Charges 17,763 353,907 72,527 (34,502) 409,695
Intercompany Activity (28,008) (10,423) 5,893 32,538 -
Freight Expense - 9,160 47,567 (647) 56,080
Selling, General and
Administrative Expense - 11,765 3,610 - 15,375
Depreciation, Depletion and
Amortization 472 45,034 17,412 - 62,918
Interest Expense 4,822 6,306 1,002 - 12,130
Taxes Other Than Income 1,186 55,849 (13,975) - 43,060
Export Sales Excise Tax Resolution - (28,274) 44 - (28,230)
---------- ---------- ----------- ------------- --------------
Total Costs (3,765) 443,324 134,080 (2,611) 571,028
---------- ---------- ----------- ------------- --------------
Earnings (Loss) Before Income Taxes 51,289 24,468 36,786 (51,916) 60,627
Income Taxes (Benefit) 1,942 (648) 9,986 - 11,280
---------- ---------- ----------- ------------- --------------
Net Income (Loss) $ 49,437 $ 25,116 $ 26,800 $ (51,916) $ 49,347
========== ========== =========== ============= ==============
18
Balance Sheet for December 31, 2001;
Non-
Parent Guarantor Guarantor Elimination Total
----------- ----------- ----------- ------------ -----------
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,723 $ 158 $ 11,701 $ - $ 15,582
Accounts and Notes Receivable:
Trade - 204,520 59,331 (43,409) 220,442
Other 1,577 108,784 12,986 - 123,347
Inventories 240 83,668 29,986 - 113,894
Deferred Income Taxes 54,708 - - - 54,708
Prepaid Expenses 3,142 30,667 8,465 - 42,274
----------- ----------- ----------- ------------ -----------
Total Current Assets 63,390 427,797 122,469 (43,409) 570,247
Property, Plant and Equipment:
Property, Plant and Equipment 51,581 4,055,229 1,307,150 - 5,413,960
Less-Accumulated Depreciation,
Depletion and Amortization 20,737 2,074,162 403,751 - 2,498,650
----------- ----------- ----------- ------------ -----------
Property, Plant and Equipment - Net 30,844 1,981,067 903,399 - 2,915,310
Other Assets:
Deferred Income Taxes 520,906 - - - 520,906
Advanced Mining Royalties 9 52,966 39,669 - 92,644
Investment in Affiliates 1,113,721 951,651 51,236 (2,038,941) 77,667
Other 754 74,451 45,608 - 120,813
----------- ----------- ----------- ------------ -----------
Total Other Assets 1,635,390 1,079,068 136,513 (2,038,941) 812,030
----------- ----------- ----------- ------------ -----------
Total Assets $ 1,729,624 $ 3,487,932 $ 1,162,381 $ (2,082,350) $ 4,297,587
=========== =========== =========== ============ ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 117,281 $ 6,139 $ 91,912 $ (43,409) $ 171,923
Accounts Payable (Recoverable)-
Related Parties 811,479 (374,435) (517,919) 80,875 -
Short-Term Notes Payable 77,869 - - - 77,869
Current Portion of Long-Term Debt 100 72,036 635 - 72,771
Accrued Income Taxes 4,799 - - - 4,799
Other Accrued Liabilities 31,753 208,637 72,989 - 313,379
----------- ----------- ----------- ------------ -----------
Total Current Liabilities 1,043,281 (87,623) (352,383) 37,466 640,741
Long-Term Debt:
Long-Term Debt 245,892 211,688 6,607 - 464,187
Capital Lease Obligations - 8,482 - - 8,482
----------- ----------- ----------- ------------ -----------
Total Long-Term Debt 245,892 220,170 6,607 - 472,669
Deferred Credits and Other Liabilities:
Postretirement Benefits Other
Than Pensions - 1,417,567 - - 1,417,567
Pneumoconiosis Benefits - 459,776 - - 459,776
Mine Closing - 198,700 135,038 - 333,738
Workers' Compensation 1,738 234,814 32,523 - 269,075
Deferred Revenue - 195,370 32,225 - 227,595
Reclamation - 7,715 6,029 - 13,744
Other 167,154 21,649 2,320 - 191,123
----------- ----------- ----------- ------------ -----------
Total Deferred Credits and
Other Liabilities 168,892 2,535,591 208,135 - 2,912,618
Stockholders' Equity 271,559 819,794 1,300,022 (2,119,816) 271,559
----------- ----------- ----------- ------------ -----------
Total Liabilities and Stockholders' Equity $ 1,729,624 $ 3,487,932 $ 1,162,381 $ (2,082,350) $ 4,297,587
=========== =========== =========== ============ ===========
19
Condensed Statement of Cash Flows
For the Three Months Ended June 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Net Cash Provided
by Operating Activities $ 70,996 $ 37,886 $ 15,666 $ - $ 124,548
----------- ----------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Capital Expenditures $ (951) $ (43,573) $ (10,217) $ - $ (54,741)
Acquisition of Line Creek Mine
Joint Venture - - (740) - (740)
Investment in Equity Affiliates 26 5,985 (2,597) - 3,414
Other Investing Activities 1,372 1,769 (59) - 3,082
----------- ----------- ----------- ----------- ------------
Net Cash Provided By (Used in)
Investing Activities $ 447 $ (35,819) $ (13,613) $ - $ (48,985)
----------- ----------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Payments on Short-Term Borrowings $ (51,184) $ - $ - $ - $ (51,184)
Dividends Paid (22,019) - - - (22,019)
Other Financing Activities 1,088 (2,118) - - (1,030)
----------- ----------- ----------- ----------- ------------
Net Cash Used in Investing Activities $ (72,115) $ (2,118) $ - $ - $ (74,233)
----------- ----------- ----------- ----------- ------------
Income Statement for the Six Months Ended June 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Sales - Outside $ - $ 837,050 $ 155,801 $ - $ 992,851
Sales - Related Parties - 819 - - 819
Freight - Outside - 55,370 14,761 - 70,131
Freight - Related Parties - 549 1,265 (1,265) 549
Other Income (including equity earnings) 26,317 (804) 21,647 (23,259) 23,901
----------- ----------- ----------- ----------- ------------
Total Revenue 26,317 892,984 193,474 (24,524) 1,088,251
Cost of Goods Sold and Other Operating Charges 8,533 665,614 136,085 (79,235) 730,997
Intercompany Activity (3,725) (54,588) (33,342) 91,655 -
Freight Expense - 55,919 16,026 (1,265) 70,680
Selling, General and Administrative Expense - 25,271 8,581 - 33,852
Depreciation, Depletion and Amortization 841 114,323 18,949 (1,855) 132,258
Interest Expense 10,079 10,492 1,414 - 21,985
Taxes Other Than Income 2,023 78,355 13,214 - 93,592
Export Sales Excise Tax Resolution - (1,037) - - (1,037)
----------- ----------- ----------- ----------- ------------
Total Costs 17,751 894,349 160,927 9,300 1,082,327
----------- ----------- ----------- ----------- ------------
Earnings (Loss) Before Income Taxes 8,566 (1,365) 32,547 (33,824) 5,924
Income Taxes (Benefit) (5,962) (10,123) 7,481 - (8,604)
----------- ----------- ----------- ----------- ------------
Net Income (Loss) $ 14,528 $ 8,758 $ 25,066 $ (33,824) $ 14,528
=========== =========== =========== =========== ============
20
Condensed Statement of Cash Flows
For the Six Months Ended June 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Net Cash (Used in) Provided
by Operating Activities $ (144,490) $ 174,289 $ 45,737 $ - $ 75,536
----------- ----------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Capital Expenditures $ (6,526) $ (106,965) $ (36,283) $ - $ (149,774)
Investment in Equity Affiliates (19,984) (50) (14,693) - (34,727)
Other Investing Activities - 556 77 - 633
----------- ----------- ----------- ----------- ------------
Net Cash Used in Investing Activities $ (26,510) $ (106,459) $ (50,899) $ - $ (183,868)
----------- ----------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Payments on Short-Term Borrowings $ (32,078) $ - $ - $ - $ (32,078)
Payments on Long-Term Notes - (66,000) - - (66,000)
Proceeds from Long-Term Notes 246,310 - - - 246,310
Dividends Paid (44,054) - - - (44,054)
Other Financing Activities 659 (1,873) - - (1,214)
----------- ----------- ----------- ----------- ------------
Net Cash Provided by (Used in)
Financing Activities $ 170,837 $ (67,873) $ - $ - $ 102,964
----------- ----------- ----------- ----------- ------------
Income Statement for the Six Months Ended June 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Sales - Outside $ - $ 830,438 $ 299,903 $ - $ 1,130,341
Sales - Related Parties - 3,100 4,132 - 7,232
Freight - Outside - 35,762 49,892 - 85,654
Freight - Related Parties - 970 2,738 (647) 3,061
Other Income (including equity earnings) 164,797 101,300 (56,738) (176,056) 33,303
----------- ----------- ----------- ----------- ------------
Total Revenue 164,797 971,570 299,927 (176,703) 1,259,591
Cost of Goods Sold and Other Operating Charges 26,877 730,856 141,577 (68,200) 831,110
Intercompany Activity (23,829) (60,084) 11,177 72,736 -
Freight Expense - 36,732 52,630 (647) 88,715
Selling, General and Administrative Expense - 23,968 5,694 - 29,662
Depreciation, Depletion and Amortization 951 96,759 27,694 (1,855) 123,549
Interest Expense 17,065 7,648 2,079 - 26,792
Taxes Other Than Income 2,536 86,681 (8,922) - 80,295
Export Sales Excise Tax Resolution - (115,886) (7,636) - (123,522)
----------- ----------- ----------- ----------- ------------
Total Costs 23,600 806,674 224,293 2,034 1,056,601
----------- ----------- ----------- ----------- ------------
Earnings (Loss) Before Income Taxes 141,197 164,896 75,634 (178,737) 202,990
Income Taxes (Benefit) (8,950) 40,463 21,330 - 52,843
----------- ----------- ----------- ----------- ------------
Net Income (Loss) $ 150,147 $ 124,433 $ 54,304 $ (178,737) $ 150,147
=========== =========== =========== =========== ============
21
Condensed Statement of Cash Flows
For the Six Months Ended June 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Net Cash (Used in) Provided
by Operating Activities $ (315,744) $ 525,829 $ 44,031 $ - $ 254,116
----------- ----------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Capital Expenditures $ (3,163) $ (74,291) $ (27,382) $ - $ (104,836)
Acquisition of Line Creek Mine
Joint Venture - - (1,608) - (1,608)
Investment in Equity Affiliates - 11,186 (1,805) - 9,381
Other Investing Activities 1,425 2,876 (9,644) - (5,343)
----------- ----------- ----------- ----------- ------------
Net Cash Used in Investing
Activities $ (1,738) $ (60,229) $ (40,439) $ - $ (102,406)
----------- ----------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from (Payments on) Short-Term
Borrownings $ 362,812 $ (462,689) $ - $ - $ (99,877)
Dividends Paid (44,024) - - - (44,024)
Other Financing Activities 1,409 (3,163) - - (1,754)
----------- ----------- ----------- ----------- ------------
Net Cash Provided by (Used in)
Financing Activities $ 320,197 $ (465,852) $ - $ - $ (145,655)
----------- ----------- ----------- ----------- ------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
General
Total coal sales for the three months ended June 30, 2002 were 16.4 million
tons, including a portion of sales by equity affiliates, of which 15.8 million
tons were produced by CONSOL Energy operations, by our equity affiliates or sold
from inventory of company produced coal. This compares with total coal sales of
20.4 million tons for the three months ended June 30, 2001, of which 19.7
million tons were produced by CONSOL Energy operations, by our equity affiliates
or sold from inventory of company produced coal. Demand for coal in the three
months ended June 30, 2002 was weak primarily due to the mild weather in the
Northeast and Southeast United States, delays in finalizing volumes and prices
for export metallurgical coal and the sluggish U.S. economy. Inventory of
company produced coal, including the portion of inventory at equity affiliates,
was 5.8 million tons at June 30, 2002, compared with 1.6 million tons at
December 31, 2001. Average sales prices for company produced coal have increased
6.7% to $26.60 per ton in the three months ended June 30, 2002 period from
$24.92 per ton in the three months ended June 30, 2001 period reflecting the
higher prices negotiated in a more favorable coal market in the last six months
of 2001.
Lower production levels during the quarter were the result of the previously
announced plan to reduce production by five to six million tons from planned
output during 2002 in order to match anticipated demand. McElroy Mine was idled
May 1, 2002. It resumed production on August 5,
22
2002. Blacksville #2, Robinson Run, Mine 84, Mahoning Valley, Humphrey and VP#8
mines were idled June 17, 2002. Blacksville #2 resumed production on July 17,
2002. Robinson Run resumed production July 8, 2002. Mine 84 resumed production
July 22, 2002. Mahoning Valley and Humphrey are being evaluated on a
week-to-week basis. The Humphrey and Dilworth mines will close permanently later
this year. Shoemaker and Rend Lake mines were idled in early July 2002 and we
currently anticipate that these mines will remain idle for several months.
Loveridge Mine remains idle and will continue to be evaluated to determine when
market conditions will support reopening.
Sales volumes of coalbed methane gas, including a percentage of the sales of
equity affiliates equal to our interest in these affiliates, increased 28.3% to
12.0 billion cubic feet in the three months ended June 30, 2002 compared with
9.3 billion cubic feet in the three months ended June 30, 2001. The increased
sales volumes are primarily due to increased volumes as a result of the
acquisition of the remaining 50% interest in Pocahontas Gas Partnership on
August 22, 2001, that we previously did not own. Our average sales price for
coalbed methane gas, including sales of equity affiliates, decreased 35.0% to
$3.05 per million British thermal units in the 2002 period compared with $4.69
per million British thermal units in the 2001 period. Gas prices through the
second quarter of 2002 were lower than levels during the second quarter of 2001
due to lower demand in the industrial sector and lower demand for gas during the
winter heating season which resulted in high levels of gas in storage during the
2002 period.
CONSOL Energy's Board of Directors announced that the dividend for the second
quarter, which will be paid in September 2002, will be reduced to $0.14 per
share from the dividend of $0.28 per share that had been paid in each quarter
since CONSOL Energy became a public company. The reduction was due to the
condition of the coal markets and the company's capital requirements. CONSOL
Energy also expects to reduce anticipated capital spending in the year ending
December 31, 2002 by more than $110 million from anticipated expenditures for
the year ending December 31, 2002. Expected capital expenditures will be reduced
mainly through project delays and utilization of leasing arrangements.
CONSOL Energy Board of Directors appointed PricewaterhouseCoopers LLP to serve
as the company's independent accountant, effective June 5, 2002.
PricewaterhouseCoopers LLP serves as independent accountant for RWE A.G., a
multi-utility holding group headquartered in Essen, Germany, which owns
approximately 74 percent of CONSOL Energy's common stock. PricewaterhouseCoopers
LLP replaced Ernst & Young LLP as the company's independent accountant.
In March 2002, our joint-venture with Allegheny Energy Supply Company, LLC, an
affiliate of one of our largest coal customers, to build an 88-megawatt,
gas-fired electric generating facility was completed and the facility was placed
into commercial service on June 25, 2002.
On July 15, 2002, Standard & Poor's revised its outlook on CONSOL Energy to
negative from stable based on poor coal industry conditions. Standard & Poor's
said that it has affirmed its triple-B plus and A-2 corporate credit ratings.
On August 2, 2002, Moody's Investor Service downgraded the senior unsecured debt
ratings of CONSOL Energy to Baa2. The rating outlook is negative. These rating
actions resulted from the adverse effect that the decline in coal tons sold and
the reduction in spot prices for uncommitted tons has had on earnings, cash flow
generation and debt protection measures in the year to date. The ratings actions
also reflect Moody's expectation that CONSOL's performance will remain
challenged for the balance of 2002 and into 2003. Moreover, Moody's expects that
despite recent actions taken to reduce capital expenditures and dividends, there
is likely to be a modest cash outflow in 2002 and into 2003.
23
Results of Operations
Three Months Ended June 30, 2002 Compared with Three Months
Ended June 30, 2001
Net Income
CONSOL Energy's net income for the three months ended June 30, 2002 was $9
million compared with $49 million for the three months ended June 30, 2001. The
decrease of $40 million, or 81.7%, primarily was due to reduced revenues from
sales of coal, offset, in part, by reduced cost of goods sold and other charges.
Sales revenue from coal was lower in the 2002 period compared to the 2001 period
primarily due to a 19.5% reduction in sales volumes of company produced coal.
The reductions in the cost of goods sold and other charges were also due
primarily to the reduced volume of coal sold. Net income for the three months
ended June 30, 2001 was also impacted by the $28 million income recognized in
the three months ended June 30, 2001, related to the export sales excise tax
resolution compared to the $1 million recognized in the three months ended June
30, 2002. The decrease in earnings was offset, in part, by income tax benefits
recognized in the three months ended June 30, 2002, compared to tax expense
recognized in the three months ended June 30, 2001. The decrease in tax expense
was due mainly to a pre-tax loss of $1 million for the 2002 period compared to
pre-tax earnings of $61 million in the 2001 period without a comparable
reduction in percentage depletion tax benefits. CONSOL Energy estimates the
effective tax rate expected to be applicable for the full fiscal year. The
effective tax rate is sensitive to changes in annual profitability and
percentage depletion. Income taxes were also reduced due to adjusting the
provision for income taxes at the time the returns are filed. These adjustments
decreased income tax expense by $3 million in the 2002 period and $1 million in
the 2001 period. In the 2002 period, CONSOL Energy received a $2 million federal
income tax benefit from a final agreement resolving disputed federal income tax
items for the years 1995 to 1997.
Revenue
Sales decreased $75 million, or 13.2% to $486 million for the 2002 period from
$561 million for the 2001 period.
Revenues from the sale of company produced coal decreased $68 million, or 14.1%,
to $412 million in the 2002 period from $480 million in the 2001 period. The
decrease in company produced coal revenue was due mainly to a decrease in the
tons sold. Company produced tons sold were 15.5 million tons in the 2002 period,
a 3.8 million ton, or 19.5%, decreased from the 2001 period. The decrease in
tons sold was due primarily to the deferral of shipments by our customers from
the second quarter of 2002 to later in the year and reduced volumes for
requirement contracts, both attributed to decreased demand as a result of the
mild weather and unscheduled power plant outages. Although sales volumes have
declined from the 2001 period, the average sales price per ton of company
produced coal sold increased. Average sales price per ton of company produced
coal increased 6.7% to $26.60 per ton for the 2002 period from $24.92 per ton
24
for the 2001 period. The increase in average sales price reflects the higher
prices negotiated in a more favorable coal market during the last six months of
2001.
Revenues from the sale of purchased coal decreased $5 million, or 23.7%, to $19
million in the 2002 period from $24 million in the 2001 period. The decrease was
primarily due to a 28.9% decrease in sales volumes. Sales volumes of purchased
coal were 0.5 million tons in the 2002 period compared to 0.8 million tons in
the 2001 period. The average sales price per ton of purchased coal increased
$2.29, or 7.2%, to $34.02 per ton for the 2002 period compared to $31.72 per ton
for the 2001 period. The increase in sales price per ton of purchased coal in
the 2002 period reflects higher prices negotiated in a more favorable coal
market during the last six months of 2001.
Industrial supply sales decreased $5 million, or 23.5%, to $16 million in the
2002 period from $21 million in the 2001 period primarily due to reduced sales
volumes. During the year ended June 30, 2001, the physical assets, inventory and
operations associated with 18 industrial and store management sites of Fairmont
Supply Company were sold. Fairmont Supply continues to operate 14 service
centers at June 30, 2002.
These decreases in coal and industrial supply revenues were partially offset by
the increase in sales of gas. Revenues from gas sales increased $4 million, or
13.5%, to $35 million in the 2002 period from $31 million in the 2001 period.
Sales volumes were 11.9 billion cubic feet in the 2002 period, an increase of
5.0 billion cubic feet from the 2001 period. The increase was due to higher
sales volumes as a result of the August 22, 2001 acquisition of the remaining
50% interest in the Pocahontas Gas Partnership. The increase in volumes sold was
offset, in part, by a reduction in demand and a reduction in the average sales
price per million British thermal units sold. The average sales price was $3.04
per million British thermal units in the 2002 period, a $1.63, or 34.9%,
decrease compared to $4.67 per million British thermal units in the 2001 period.
The decrease in demand and average sales price was primarily due to lower demand
for gas in the industrial sector and lower demand for gas during the winter
heating season as a result of milder weather that resulted in high levels of gas
in storage during the quarter.
Freight revenue, both outside and related party, decreased $22 million, or
38.9%, to $34 million in the 2002 period compared to $56 million in the 2001
period. Freight revenue is based on weight of coal shipped, negotiated freight
rates and method of transportation (e.g., rail, barge or truck) used for the
customers that CONSOL Energy contractually provides transportation. Freight
expense is billed to customers and the revenue from such billings equals the
transportation expense.
Other income, which consists of interest income, gain on the disposition of
assets, equity in earnings of affiliates, service income, royalty income, rental
income and miscellaneous income, increased $1 million, or 4.0%, to $16 million
in the 2002 period from $15 million in the 2001 period. The increase was
primarily due to $7 million of income related to a contract settlement which
occurred in the 2002 period. This income was offset, in part, by a reduction of
$6 million in equity in earnings of affiliates primarily due to the August 22,
2001 purchase of the remaining 50% interest in Pocahontas Gas Partnership and
the remaining 25% interest in Cardinal States Gathering Company. As a result of
the acquisition, CONSOL Energy owns 100% of these entities and began to account
for them as fully consolidated subsidiaries. Before the acquisition, CONSOL
Energy accounted for these companies using the equity method.
25
Costs
Cost of Goods Sold and Other Operating Charges decreased $44 million, or 10.6%,
to $366 million in the 2002 period compared to $410 million in the 2001 period.
Cost of goods sold and other charges for company produced coal was $286 million
in the 2002 period, a decrease of $22 million, or 7.4%, from $308 million in the
2001 period. This is due primarily to a 19.5% decrease in the volume of company
produced coal sold. The decrease in volume was offset, in part, by a 15.2%
increase in the cost per ton produced. The increase in cost per ton produced is
primarily due to increased labor and benefits costs. Increased labor costs are
primarily due to the decline in productivity at the mines in the 2002 period
compared to the 2001 period. The decline in productivity is a result of the
reduction in planned production to match anticipated demand for coal. Increased
benefit costs are primarily due to increased medical costs.
Industrial supplies cost of goods sold and other charges decreased $6 million,
or 26.7%, to $19 million in the 2002 period compared to $25 million in the 2001
period. The decrease was due to reduced sales.
Miscellaneous cost of goods sold and other charges decreased $10 million, or
41.6%, to $13 million in the 2002 period compared to $23 million in the 2001
period. The decrease is due to a reduction of $7 million related to the
incentive compensation program expense recognized in the 2002 period compared to
the 2001 period. The program is designed to increase compensation to eligible
employees when CONSOL Energy reaches predetermined earnings targets and the
employees reach predetermined performance targets. Expense for this plan was
reduced in the 2002 period due to quarterly performance targets for the three
months ended June 30, 2002, not being achieved. The decrease in miscellaneous
cost of goods sold and other charges is also due to a $4 million expense
adjustment in the 2001 period related to a liability for the salaried investment
plan. These decreases were offset, in part, by a $2 million expense adjustment
to recognize an allowance for doubtful accounts related to trade accounts
receivable in the 2002 period.
Purchased coal costs of goods sold and other charges decreased $5 million, or
19.3%, to $18 million in the 2002 period from $23 million in the 2001 period.
The decrease was primarily due to a 28.9% reduction in volume of purchased coal
sold. The cost per ton of purchased coal was $33.31 per ton in the 2002 period
compared to $29.36 per ton in the 2001 period.
Royalty costs decreased $3 million, or 20.5%, to $10 million in the 2002 period
compared to $13 million in the 2001 period. The decrease is due primarily to
reaching the maximum amount payable on a royalty contract which resulted in
decreased amounts being owed in the 2002 period compared to the 2001 period.
These decreases in cost of goods sold and other charges were offset, in part, by
increased costs for closed and idle mine costs. Closed and idle mine costs
increased $4 million, or 25.6%, to $19 million in the 2002 period compared to
$15 million in the 2001 period. The increase is due primarily to increases in
idle mine costs related to McElroy mine being idled in May and June of 2002. The
increase is also due to additional costs for Loveridge mine being idle for all
of the 2002 period compared with one month of idle time during the 2001 period.
Loveridge mine was reopened in March 2001 in order to mine the remaining
longwall panel and then was idled at the end of May 2001. Other changes in the
2001 period include $4 million of adjustments in
26
reclamation liabilities recognized in that period as a result of updated
engineering studies and cost projections for closed locations.
Gas operations cost of goods sold and other charges increased 3.4% to $16
million in the 2002 period from $15 million in the 2001 period. The increase of
$1 million was due mainly to increased sales volumes as a result of the
acquisition of the remaining 50% interest in Pocahontas Gas Partnership and the
remaining 25% interest in Cardinal States Gathering Company on August 22, 2001.
Freight expense decreased $22 million, or 38.9%, to $34 million in the 2002
period compared to $56 million in the 2001 period. Freight expense is based on
weight of coal shipped, negotiated freight rates and method of transportation
(e.g., rail, barge or truck) used for the customers that CONSOL Energy
contractually provides transportation. Freight expense is billed to customers
and the revenue from such billings equals the transportation expense.
Selling, general and administrative expenses increased 11.8% to $17 million in
the 2002 period compared to $15 million in the 2001 period. The increase of $2
million was primarily due to a $1 million increase in professional consulting
and training fees related to the conversion to a new integrated information
technology system provided by SAP AG to support business processes. The system
will be implemented in stages over the next three years at a total estimated
cost, a portion of which is to be capitalized, of $53 million. The increase is
also attributable to $1 million of professional consulting and training fees
related to the review of strategic planning processes.
Depreciation, depletion and amortization expense increased $3 million, or 4.6%,
to $66 million in the 2002 period compared to $63 million in the 2001 period.
The increase was primarily due to additional depreciation expense related to
assets placed in service after the 2001 period and additional depreciation
expense on assets owned by Pocahontas Gas Partnership and Cardinal States
Gathering Company, of which CONSOL Energy acquired the remaining 50% interest
and 25% interest in on August 22, 2001. This increase was offset, in part, by
lower depletion related to the reduced production levels in the 2002 period
compared to the 2001 period.
Interest expense remained stable at $12 million for the 2002 period compared to
the 2001 period. Interest expense remained stable due to a reduction of $124
million in the average debt levels of commercial paper outstanding during the
2002 period compared to the 2001 period, along with a decrease of 2.6% per annum
in average interest rates in the period to period comparison. This resulted in a
reduction of $3 million in interest expense related to commercial paper in the
2002 period compared to the 2001 period. Interest expense was also reduced $1
million due to the reduction of long term debt through scheduled payments. These
reductions were offset by the increased interest expense related to the March 7,
2002, issuance of $250 million of 7.875% Notes due in 2012. The interest on
notes is payable March 1 and September 1 of each year commencing September 1,
2002. Interest expense related to the issuance of these notes was $5 million in
the 2002 period.
Taxes other than income were at $43 million in the 2002 period and the 2001
period. Production taxes decreased $2 million, or 7.3%, to $25 million in the
2002 period compared to $27 million in the 2001 period. The reduction was due
mainly to lower severance tax accruals due to reduced production. This
decrease was offset by a $3 million, or 45.2%, increase in real estate and
personal property taxes. The increase was due mainly to the additional property
taxes related to
27
the properties owned by the Windsor Coal Company, Southern Ohio Coal Company,
and Central Ohio Coal Company which were acquired from American Electric Power
on July 2, 2001. The increased real estate and personal property taxes were also
due to increased property taxes at the Bailey and Enlow Fork mines, as well as
the Pocahontas Gas Partnership and Cardinal States Gathering Company, of which
CONSOL Energy acquired the remaining 50% and 25% interest in on August 22, 2001.
CONSOL Energy is no longer required to pay certain excise taxes on export sales.
We have filed claims with the Internal Revenue Service seeking refunds for these
excise taxes that were determined to be unconstitutional and were paid during
the period 1991 through 1999. During the 2002 period, we recognized $1 million
of interest income related to these claims. During the 2001 period, we
recognized $27 million of pre-tax earnings net of other charges and $1 million
of interest income related to these claims.
Income Taxes
Income tax benefits were $10 million in the 2002 period compared to $11 million
expense in the 2001 period. The decrease in tax expense was due mainly to a
pre-tax loss of $1 million for the 2002 period compared to pre-tax earnings of
$61 million in the 2001 period without a comparable loss in percentage depletion
tax benefits. CONSOL Energy estimates the effective tax rate expected to be
applicable for the full fiscal year. The effective tax rate is sensitive to
changes in annual profitability and percentage depletion. Income taxes were also
reduced due to adjusting the provision for income taxes at the time the returns
are filed. These adjustments decreased income tax expense by $3 million in the
2002 period and $1 million for the 2001 period. CONSOL Energy received a $2
million federal income tax benefit from a final agreement resolving disputed
federal income tax items for the years 1995 to 1997 that reduced income taxes in
the 2002 period.
Six Months Ended June 30, 2002 Compared with Six Months
Ended June 30, 2001
Net Income
CONSOL Energy's net income was $15 million for the six months ended June 30,
2002, compared to $150 million for the six months ended June 30, 2001. Net
income for the six months ended June 30, 2001 includes $124 million of income
recognized in that period related to the export sales excise tax resolution. The
decrease in net income from the six months ended June 30, 2001 was also due to
reduced revenues from sales of coal, offset, in part, by reduced cost of goods
sold and other charges. Sales revenue from coal was lower in the year to date
2002 period compared to the year to date 2001 period primarily due to a 12.2%
reduction in sales volumes of company produced coal. The reductions in the cost
of goods sold and other charges were also due primarily to the reduced volume of
coal sold. These decreases in earnings were offset, in part, by income tax
benefits recognized in the six months ended June 30, 2002, compared to tax
expense recognized in the six months ended June 30, 2001. The income tax benefit
was due mainly to lower pre-tax income for the year to date 2002 period compared
to the year to date 2001 period without a comparable reduction in percentage
depletion tax benefits. Our effective tax rate is sensitive to changes in annual
profitability and percentage depletion. Income taxes were also reduced due to
adjusting the provision for income taxes at the time the returns are filed.
These adjustments decreased income tax expense by $3 million in the year to date
2002 period and $1
28
million for the year to date 2001 period. CONSOL Energy received a $2 million
federal income tax benefit from a final agreement resolving disputed federal
income tax items for the years 1995 to 1997 that also reduced income taxes in
the year to date 2002 period.
Revenue
Sales decreased $144 million, or 12.7%, to $994 million for the year to date
2002 period from $1,138 million for the year to date 2001 period.
Revenues from the sale of company produced coal decreased $118 million, or
12.3%, to $841 million in the year to date 2002 period from $959 million in the
year to date 2001 period. The decrease in company produced coal revenue was due
mainly to a decrease in the tons sold. Company produced tons sold were 31.7
million tons in the year to date 2002 period, a 7.1 million ton, or 18.2%,
decrease from the year to date 2001 period. The decrease in tons sold was due
primarily to the deferral of shipments by our customers from the second quarter
of 2002 to later in the year and reduced volumes from requirement contracts,
both attributed to the mild weather and unscheduled power plant outages.
Although sales volumes have declined from the year to date 2001 period, the
average sales price per ton of company produced coal sold increased 7.3% to
$26.52 per ton for the year to date 2002 period from $24.73 per ton for the year
to date 2001 period. The increase in average sales price reflects the higher
prices negotiated in a more favorable coal market during the last six months of
2001.
Revenues from the sale of industrial supplies decreased $18 million, or 35.1%,
to $34 million in the year to date 2002 period from $52 million in the year to
date 2001 period primarily due to reduced sales volumes. During the year ended
June 30, 2001, the physical assets, inventory and operations associated with 18
industrial and store management sites of Fairmont Supply Company were sold.
Fairmont Supply continues to operate 14 service centers at June 30, 2002.
Revenues from the sale of gas decreased 15.5%, or $11 million, to $63 million in
the year to date 2002 period compared to $74 million in the year to date 2001
period. The decrease was primarily due to the decrease in average sales price.
The average sales price was $2.84 per million British thermal units for the year
to date 2002 period, a $2.80, or 49.7%, decrease compared to $5.64 per million
British thermal units for the year to date 2001 period. The decrease in average
sales price was primarily due to reduced demand for gas in the industrial sector
and lower demand for gas during the winter heating season that resulted in high
levels of gas in storage. The reduction in average sales price was offset, in
part, by higher volumes of gas sold as a result of the August 22, 2001
acquisition of the remaining 50% interest in Pocahontas Gas Partnership. Sales
volumes were 22.8 billion cubic feet in the year to date 2002 period, a 67.1%,
or 9.2 billion cubic feet increase from the year to date 2001 period.
These decreases in revenues were partially offset by increased revenues from the
sale of purchased coal. Revenues from the sale of purchased coal increased by $4
million, or 8.1%, to $48 million in the year to date 2002 period from $44
million in the year to date 2001 period. The average sales price per ton of
purchased coal increased 6.4% to $34.69 per ton for the year to date 2002 period
from $32.60 per ton for the year to date 2001 period. The increase in sales
price per ton of purchased coal in the 2002 period reflects higher prices
negotiated in a more favorable coal market during the last six months of 2001.
Sales volumes remained steady at 1.4 million tons in the year to date 2002
period compared to the year to date 2001 period.
29
Freight revenue, outside and related party, decreased $18 million, or 20.3%, to
$71 million for the year to date 2002 period from $89 million in the year to
date 2001 period. Freight revenue is based on weight of coal shipped, negotiated
freight rates and method of transportation (e.g., rail, barge or truck) used for
the customers to which CONSOL Energy contractually provides transportation
services. Freight revenue is the amount billed to customers for transportation
costs incurred.
Other income, which consists of interest income, gain or loss on the disposition
of assets, equity in earnings of affiliates, service income, royalty income,
rental income and miscellaneous income, was $24 million in the year to date 2002
period compared to $33 million in the year to date 2001 period. The decrease of
$9 million, or 28.2%, was primarily due to the reduction in equity in earnings
of affiliates. A reduction of $13 million in equity in earnings of affiliates
was primarily due to the August 22, 2001 purchase by CONSOL Energy of the 50%
interest in Pocahontas Gas Partnership and the 25% interest in Cardinal States
Gathering Company that CONSOL Energy did not own. As a result of the
acquisition, CONSOL Energy owns 100% of these entities and began to account for
them as fully consolidated subsidiaries. Before the acquisition, CONSOL Energy
accounted for these companies using the equity method. The decrease in other
income was also due to lower gain on sale of assets in the year to date 2002
period. The gain on sale of assets principally relates to the sale of certain in
place coal reserves. CONSOL Energy continually manages its coal reserves and
from time-to-time sells non-strategic reserves. These decreases in other income
were offset, in part, by a $7 million income adjustment related to a settlement
CONSOL Energy received, which occurred in the year to date 2002 period.
Costs
Cost of Goods Sold and Other Operating Charges decreased $100 million, or 12.1%,
to $731 million in the year to date 2002 period compared to $831 million in the
year to date 2001 period.
Cost of goods sold and other charges for company produced coal was $570 million
in the year to date 2002 period, a decrease of $47 million, or 7.5%, from $617
million in the year to date 2001 period. This is due primarily to an 18.2%
decrease in the volume of company produced coal sold. The decrease in volume was
offset, in part, by a 13.1% increase in the cost per ton produced. The increase
in cost per ton produced is primarily due to increased labor and benefit costs.
Increased labor costs are primarily related to the decline in productivity at
the mines in the 2002 period compared to the 2001 period. The decline in
productivity is a result of the reduction in planned production to match
anticipated demand for coal. Increased benefit costs are primarily due to
increased medical costs.
Industrial supply cost of goods sold and other charges decreased $20 million, or
35.0%, to $37 million in the year to date 2002 period compared to $57 million in
the year to date 2001 period. The decrease was due to reduced sales. During the
year ended June 30, 2001, the physical assets, inventory and operations
associated with 18 industrial and store management sites of Fairmont Supply
Company were sold. Fairmont Supply continues to operate 14 service centers at
June 30, 2002.
Cost of goods sold and other charges for closed and idle mine costs have
decreased $14 million, or 30.6%, to $31 million in the year to date 2002 period
from $45 million in the year to date 2001 period. The decrease is primarily due
to $16 million of adjustments in reclamation liabilities
30
recognized in the year to date 2001 period as a result of updated engineering
survey adjustments for closed and idled locations. The decrease in the 2002
period also reflects a $1 million reduction in costs at the idled Loveridge
mine. The 2001 period included $8 million in costs related to the preparation
for the reopening of Loveridge mine in the 2001 period in order to mine the
remaining longwall panel. These decreases were offset, in part, by a $7 million
increase in idle mine costs related to McElroy being idled in May and June of
2002.
Coal property holding costs decreased $10 million, or 85.1%, to $2 million in
the year to date 2002 period compared to $12 million in the year to date 2001
period. The decrease was primarily due to leasehold surrenders that occurred in
the 2001 period.
Miscellaneous cost of goods sold and other operating charges also decreased $9
million, or 26.9%, to $23 million in the year to date 2002 period compared to
$32 million in the year to date 2001 period. For the 2001 year to date period,
operating charges included $14 million related to incentive compensation program
expense. This plan is designed to increase compensation to eligible employees
when CONSOL Energy reaches predetermined earnings targets and the employees
reach predetermined performance targets. Expense for this plan was reduced in
the year to date 2002 period due to performance targets for the six months ended
June 30, 2002 not being achieved. Cost of goods sold and other charges also
included a $4 million expense adjustment in the year to date 2001 period related
to a liability for the salaried investment plan. Decreases in miscellaneous cost
of goods sold and other charges were offset, in part, by $4 million in the 2002
period due to the costs related to the termination of a sales contract in the
year to date 2001 period and a $2 million expense adjustment in the year to date
2002 period to recognize an allowance for doubtful accounts related to trade
accounts receivable.
These decreases in cost of goods sold and other charges in the year to date 2002
period were offset, in part, by increased costs for purchased coal. Purchased
coal cost of goods sold and other charges increased 9.1% to $46 million in the
2002 period from $42 million in the year to date 2001 period. The $4 million
increase was due mainly to an increase in the average cost per ton purchased.
The cost per ton of purchased coal was $33.36 per ton in the year to date 2002
period compared to $31.07 per ton in the year to date 2001 period. Volumes of
purchased coal sold remain steady at 1.4 million tons for both the year to date
2002 and 2001 periods.
Gas operations cost of goods sold increased $1 million, or 4.3%, to $30 million
in the year to date 2002 period from $29 million in the year to date 2001
period. The increase of $1 million was due mainly to a 67.1% increase in the
volume of gas sold. The increase in volume was offset, in part, by a 37.6%
reduction in the average cost per million British thermal units sold. Average
cost per million British thermal units was $1.33 in the year to date 2002 period
compared to $2.13 per million British thermal units in the year to date 2001
period.
Freight expense decreased $18 million, or 20.3%, to $71 million in the year to
date 2002 period from $89 million in the year to date 2001 period. Freight
expense is based on weight of coal shipped, negotiated freight rates and method
of transportation (e.g., rail, barge or truck) used for the customers that
CONSOL Energy contractually provides transportation. Freight expense is billed
to customers and the revenue from such billings equals the transportation
expense.
Selling, general and administrative expenses increased $4 million, or 14.1%, to
$34 million in the year to date 2002 period compared to $30 million in the year
to date 2001 period. An increase of
31
$2 million was primarily due to expenses for training and professional
consulting related to the conversion to a new integrated information technology
system provided by SAP AG to support business processes. The system will be
implemented in stages over the next three years at an estimated total cost, a
portion of which is to be capitalized, of $53 million. An increase of $1 million
in the year to date 2002 period was for professional consulting and training
fees related to the review of strategic planning processes.
Depreciation, depletion and amortization expense increased $8 million, or 7.1%,
to $132 million in the year to date 2002 period compared to $124 million in the
year to date 2001 period. The increase was primarily due to the August 22, 2001
acquisition of the remaining 50% interest in Pocahontas Gas Partnership and the
remaining 25% interest in the Cardinal States Gathering Company. In the 2002
period, these entities are reported as fully consolidated. In the 2001 period,
these entities were reported on an equity basis. This increase was offset, in
part, by lower financial depletion related to the reduced production levels in
the year to date 2002 period compared to the year to date 2001 period.
Interest expense decreased $5 million, or 17.9%, to $22 million for the year to
date 2002 period compared to $27 million for the year to date 2001 period.
Interest expense decreased primarily due to a $139 million reduction in the
average levels of commercial paper outstanding during the year to date 2002
period compared to the year to date 2001 period, along with a decrease of 3.3%
per annum in average interest rates in the period to period comparison. This
resulted in a reduction of $9 million in interest expense related to commercial
paper in the year to date 2002 period compared to the year to date 2001 period.
Interest expense was also reduced $1 million due to the reduction of long term
debt through scheduled payments. These reductions were offset, in part, by the
increased interest expense related to the March 7, 2002 issuance of $250 million
of 7.875% Notes due in 2012. The interest on notes is payable March 1 and
September 1 of each year commencing September 1, 2002. Interest expense related
to the issuance of these notes was $7 million in the year to date 2002 period.
Taxes other than income increased $14 million, or 16.6%, to $94 million for the
year to date 2002 period compared to $80 million for the year to date 2001
period. The increase was due primarily to increased blacklung excise taxes, real
estate and personal property taxes, and state reclamation fee taxes, in the year
to date 2002 period. Due to certain blacklung export excise taxes being declared
unconstitutional, $11 million of prior year accruals related to these taxes,
which were not paid and were no longer owed, were reversed in the year to date
2001 period. Real estate and personal property taxes have increased
approximately $4 million in the year to date 2002 period compared to the year to
date 2001 period. The increase is primarily due to the additional property taxes
related to the properties owned by Windsor Coal Company, Southern Ohio Coal
Company, Central Ohio Coal Company, Pocahontas Gas Partnership, and Cardinal
States Gathering Company which were acquired in the prior year. Bailey and Enlow
Fork mines also had increased property taxes. State reclamation fee taxes have
also increased approximately $1 million due to an increase in the rate per ton
owed on tons produced in West Virginia. The rate in the year to date 2002 period
is $0.14 per ton compared to $0.03 per ton in the 2001 period.
CONSOL Energy is no longer required to pay certain excise taxes on export coal
sales. We have filed claims with the Internal Revenue Service seeking refunds
for these excise taxes that were determined to be unconstitutional and were paid
during the period 1991 through 1999. During the year to date 2001 period, we
recognized $93 million of pre-tax earnings net of other charges
32
and $31 million of interest income related to these claims. During the year to
date 2002 period, we recognized $1 million of interest income related to these
claims.
Income Taxes
Income taxes were a benefit of $9 million in the year to date 2002 period
compared to expense of $53 million in the year to date 2001 period. The decrease
of $62 million was due mainly to lower pre-tax income without a comparable
reduction in percentage depletion tax benefits. CONSOL Energy estimates the
effective tax rate expected to be applicable for the full fiscal year. Our
effective tax rate is sensitive to changes in annual profitability and
percentage depletion. Income taxes were also reduced due to adjusting the
provision for income taxes at the time the returns are filed. These adjustments
decreased income tax expense by $3 million in the 2002 period and $1 million for
the 2001 period. CONSOL Energy received a $2 million federal income tax benefit
from a final agreement resolving disputed federal income tax items for the years
1995 to 1997 that reduced income taxes in the 2002 period.
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. The principal source of borrowing
is the issuance of commercial paper. CONSOL Energy commercial paper program
allows for the principal issuance of up to $400 million. At June 30, 2002,
CONSOL Energy had an aggregate principal amount of $291 million of commercial
paper outstanding. Our ability to issue commercial paper may be limited by a
covenant contained in our revolving credit facility which supports our
commercial paper program. The covenant requires that we maintain a ratio of
total indebtedness for borrowed money at the last day of each calendar quarter
to total earnings for the last four consecutive quarters (before interest,
income taxes, depreciation and amortization and excluding any extraordinary
gains or losses) of not more than 3.0 to 1.0. At June 30, 2002, such ratio was
2.7 to 1.0 based on total indebtedness of $745 million, and total earnings
(before interest, income taxes, depreciation and amortization and excluding any
extraordinary gains or losses) of $273.8 million ($50.3 million, $67.6 million,
$81.8 million and $74.1 million, for the quarters ended September 30, 2001,
December 31, 2001, March 31, 2002 and June 30, 2002, respectively). CONSOL
Energy believes that cash generated from operations and its borrowing capacity
will be sufficient to meet its working capital requirements, anticipated capital
expenditures (other than major acquisitions), scheduled debt payments and
anticipated dividend payments. Nevertheless, the ability of CONSOL Energy to
satisfy its 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
financial, business and other factors, some of which are beyond CONSOL Energy's
control.
On March 7, 2002, CONSOL Energy issued $250 million principal amount of 7.875%
notes due in 2012. The notes were issued at 99.174% of the principal amount and
CONSOL Energy received approximately $246 million of net proceeds. Interest on
the notes is payable March 1 and September 1 of each year commencing September
1, 2002. Payment of the principal and premium, if any, and interest on the notes
are guaranteed by several CONSOL Energy subsidiaries that incur or guarantee
certain indebtedness. The notes are senior unsecured obligations and will rank
equally with all other unsecured and unsubordinated indebtedness of the
guarantors. CONSOL Energy paid approximately $4 million for debt issuance costs
related to these notes. The debt issuance costs are being amortized using the
interest method. In connection with the issuance of these notes, CONSOL Energy
entered into a financial derivative contract that essentially fixed the
underlying treasury rate at 4.928%. This contract resulted in a net payment of
$1.3 million to CONSOL Energy. This receipt was treated as a cash flow hedge and
therefore, resulted in other comprehensive income of $0.8 million (net of $0.5
million deferred tax), which will be amortized to interest income over the life
of the notes using the interest method.
33
CONSOL Energy expects to reduce anticipated capital spending in the year ending
December 31, 2002 by more than $110 million from previously budgeted
expenditures for the year ending December 31, 2002. Expected capital
expenditures will be reduced mainly through project delays and utilization of
leasing arrangements. The amount we expend throughout the remainder of the year
ending December 31, 2002, depends on a number of factors, principally marketing
and operational conditions.
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.
Stockholders' Equity and Dividends
CONSOL Energy had stockholders' equity of $243 million at June 30, 2002, and
$272 million at December 31, 2001. The Board of Directors currently intends to
continue paying quarterly dividends on the common stock, although the quarterly
amount has been reduced to $0.14 per share. Dividend information for the current
fiscal year, to date, is as follows:
Declaration Date Amount Per Share Record Date Payment Date
---------------- ---------------- ----------- ------------
07/25/02 $0.14 08/09/02 09/03/02
04/25/02 $0.28 05/10/02 05/30/02
01/24/02 $0.28 02/11/02 02/28/02
Cash Flows
Net cash provided by operating activities was $76 million for the six months
ended June 30, 2002, compared to $254 million for the six months ended June 30,
2001. The change in net cash provided by operating activities is primarily due
to the decreases in net income and increases to inventories. These decreases
were offset, in part, by a decrease in accounts and notes receivables and
increases in other liabilities. The decrease in net income was primarily due to
$124 million of income recognized in the six months ended June 30, 2001 related
to the export sales excise tax resolution. The decrease was also due to reduced
revenues from sales of coal, offset, in part by reduced cost of goods sold and
other charges. Sales revenue from coal was lower in the six months ended June
30, 2002 compared to the six months ended June 30, 2001 primarily due to a 12.2%
reduction in sales volumes of company produced coal. The reductions in the cost
of goods sold and other charges were also due primarily to the reduced volume of
coal sold. These decreases in earnings were offset, in part, by income tax
benefits recognized in the six months ended June 30, 2002, compared to tax
expense recognized in the six months ended June 30, 2001. The decrease in tax
expense was due mainly to lower pre-tax income for the year to date 2002 period
compared to the year to date 2001 period with little loss of percentage
depletion tax benefits. Our effective tax rate is sensitive to changes in annual
profitability and percentage depletion. Income taxes were also reduced due to
adjusting the provision for income taxes at the time the returns are filed.
These adjustments decreased income tax expense by $3 million in the year to date
2002 period and $1 million for the year to date 2001 period. CONSOL Energy
received a $2 million federal income tax benefit from a final agreement
resolving disputed federal income tax items for the years 1995 to 1997 that also
reduced income taxes in the year to date 2002 period.
34
The increased inventory levels at June 30, 2002, compared to December 31, 2001,
is a result of decreased demand. Company produced coal inventories, excluding
our portion of equity affiliates, were 5.6 million tons at June 30, 2002,
compared to 1.5 million tons at December 31, 2001. Accounts and notes
receivables decreased primarily due to refunds on certain excise taxes that were
declared unconstitutional. Accounts and notes receivables included amounts
attributable to anticipated refunds for excise funds. Approximately $35 million
of these receivables have been collected in the 2002 period. Also, other
operating liabilities, accounts payable and other liabilities increased in the
2002 period due primarily to increases in the other post employment benefit
liabilities. The other post employment benefit liabilities increased over the
prior year primarily due to changes in medical trend rates and updated mortality
tables used in the actuarial calculation. This increase in liabilities was
offset, in part, by reduced accounts payable due primarily to the lower spending
due to the existing market conditions.
Net cash used in investing activities was $184 million in the year to date 2002
period compared to net cash used in investing activities of $102 million in the
year to date 2001 period. The change in net cash provided by investing
activities was primarily due to capital expenditures. Capital expenditures were
$150 million in the year to date 2002 period compared with $105 million in the
year to date 2001 period. Capital expenditures increased due mainly to the
expansion of the McElroy preparation plant and an additional longwall at this
mining complex. These additions are being completed in preparation of increased
shipments under the sales contract with American Electric Power signed in July
2001. We also acquired Windsor Coal Company, Southern Ohio Coal Company and
Central Ohio Coal Company from American Electric Power in July 2001. The mines
these companies control have been or will be closed and the contract satisfied
by coal mined from McElroy and other CONSOL Energy mines. The change was also
due to a use of cash for investments in equity affiliates of $35 million in the
year to date 2002 period compared to a $9 million source of cash in the year to
date 2001 period. This change was due mainly to cash received in the prior
period from the 50% interest in Pocahontas Gas Partnership and the 75% interest
in Cardinal States Gathering Company, which were accounted for as equity
affiliates up until the August 22, 2001, acquisition of the remaining portions.
The cash outflow in the 2002 period primarily represents the $20 million
payments for capital related to a joint-venture with Allegheny Energy Supply
Company, LLC, an affiliate of one of our largest coal customers, to build an
88-megawatt, gas-fired electric generating facility. The outflow also represents
payments made to our other equity affiliates, including the Australian joint
venture in Glennies Creek mine and the Canadian joint venture in Line Creek
mine, for capital and other expenditures.
Net cash provided by financing activities was $103 million in the year to date
2002 period compared with net cash used in financing activities of $146 million
in the year to date 2001 period. The change in net cash provided by or used in
financing activities primarily reflects the cash received of approximately $246
million related to the issuance on March 7, 2002, of 7.875% notes due 2012. Cash
was also increased in the period to period comparison due to additional payments
made to reduce the outstanding principal balance of commercial paper in the year
to date 2001 period compared to the year to date 2002 period. These sources of
cash were offset, in part, by scheduled payments of $66 million made on
unsecured notes in the year to date 2002 period.
35
The following is a summary of our significant obligations at June 30, 2002 (in
thousands):
Payments due by Year
-------------------------------------------
Within 1 2-3 4-5 After 5
Year Years Years Years
---- ---- ---- -----
Long-term Debt $ 2,795 $ 49,705 $ 48,735 $ 369,929
Capital Lease Obligations 4,159 6,504 - -
Operating Lease Obligations 6,559 17,701 16,376 11,686
-------- -------- -------- ---------
Total Obligations $ 13,513 $ 73,910 $ 65,111 $ 381,615
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
the payments related to these items at June 30, 2002 (in thousands) to be:
Payments due by Year
----------------------------------------------------------------
Within 1 Year 2-3 Years 4-5 Years
------------- --------- ---------
$ 194,824 $ 579,041 $ 533,366
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 2002 our estimates may change from the amounts
included in the table, and may change significantly, if our assumptions change
to reflect changing conditions.
These assumptions are discussed in the notes to our consolidated financial
statements and in our discussion of critical accounting policies included in our
Form 10-K for the transition period ended December 31, 2001, as amended, to
which we refer you.
Debt
At June 30, 2002, CONSOL Energy had total long-term debt of $480 million,
including the current portion of long-term debt of $7 million. Such long-term
debt consisted of:
. an aggregate principal amount of $248 million ($250 million of 7.875%
notes due in 2012, net of $2 million unamortized debt discount). The
notes were issued at 99.174% of the principal amount. Interest on the
notes is payable March 1 and September 1 of each year commencing
September 1, 2002. Payment of the principal and premium, if any, and
interest on the notes are guaranteed by several CONSOL Energy
subsidiaries that incur or guarantee certain indebtedness. The notes
are senior unsecured obligations and will rank equally with all other
unsecured and unsubordinated indebtedness of the guarantors.
. an aggregate principal amount of $90 million of unsecured notes which
bear interest at fixed rates ranging from 8.21% to 8.28% per annum and
are due at various dates between 2002 and 2007,
. an aggregate principal amount of $103 million of two series of
industrial revenue bonds which were issued in order to finance CONSOL
Energy's Baltimore port facility and bear interest at the rate of
6.50% per annum and mature in 2010 and 2011,
. $28 million in advance royalty commitments with an average interest
rate of 8.2% per annum, and
36
. an aggregate principal amount of $11 million of capital leases with an
average interest rate of 7.4% per annum.
At June 30, 2002, CONSOL Energy had an aggregate principal amount of $291
million of commercial paper outstanding that had maturities remaining ranging
from 1 to 83 days with interest at varying rates ranging from 2.12% per annum to
2.16% per annum.
CONSOL Energy has a $400 million revolving credit facility with several banks.
This facility is used to support the commercial paper program and borrowing may
not be used for other purposes. The term of this facility is 364-day basis. In
the aggregate, the total amount of funds borrowed under this facility and
outstanding commercial paper cannot exceed $400 million. Borrowings under this
revolving credit facility bear interest based on the London Interbank Offer Rate
(LIBOR) or the Prime Rate at CONSOL Energy's option. Funds may be borrowed for
periods of 1 to 270 days depending on the interest rate method. There were no
borrowings under this facility at June 30, 2002 or December 31, 2001. This
facility has one financial debt covenant that requires Consol Energy to maintain
a ratio of its total indebtedness for borrowed money at the last day of each
calendar quarter to total earnings for the last four consecutive quarters
(before interest, income taxes, depreciation and amortization and excluding any
extraordinary gains or losses) of not more than 3.0 to 1.0.
Recent Accounting Pronouncements
On August 17, 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued and will be effective
for CONSOL Energy in the first quarter of the year ending December 31, 2003. The
new rule requires the fair value of a liability for an asset retirement
obligation to be recognized in the period in which it is incurred. When the
liability is initially recorded, a cost is capitalized by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. To settle the liability,
the obligation for the recorded amount is paid, and to the extent of the
difference in liability to cash paid, a gain or loss upon settlement is
incurred. Management is analyzing this requirement to determine its effect on
CONSOL Energy's financial statements.
In July 2001, Statement of Financial Accounting Standards No. 144, "Impairment
or Disposal of Long-Lived Assets," was issued and will be effective for CONSOL
Energy in the first quarter of the year ending December 31, 2003. The provisions
of this statement provide a single accounting model for impairment of long-lived
assets. No material effect from this adoption is anticipated.
Forward-Looking Statements
CONSOL Energy is including the following cautionary statement in this Report on
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of CONSOL Energy. 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 29, 2002, and
other periodic reports filed, these risks, uncertainties and
contingencies include, but are not limited to, the following: the success or
failure of CONSOL Energy's efforts to implement its business strategy; reliance
on major customers and long-term
37
contracts; the effects of market demand and price on performance; the ability to
renew coal sales agreements upon expiration; the price of coal and gas sold
under any new sales agreements; fluctuating sales prices; contract penalties;
CONSOL Energy's ability to comply with laws or regulations requiring that it
obtain surety bonds for workers' compensation, reclamation and certain other
liabilities, actions of CONSOL Energy's competitors and, CONSOL Energy's ability
to respond to such actions; risks inherent in mining including geological
conditions and mine accidents; weather-related factors; results of litigation;
the effects of government regulation; the risk of work stoppages; the risk of
transportation disruptions that could impair CONSOL Energy's ability to sell
coal and gas; management's ability to correctly estimate and accrue for
contingent liabilities; and CONSOL Energy's ability to identify suitable
acquisition candidates and to successfully finance, consummate the acquisition
of, and integrate these candidates as part of its acquisition strategy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONSOL Energy's interest expense is sensitive to changes in the general level of
interest rates in the United States. At June 30, 2002, CONSOL Energy had
outstanding $480 million aggregate principal amount of debt under fixed-rate
instruments and $291 million aggregate principal amount of debt under its
variable-rate commercial paper program. CONSOL Energy's primary exposure to
market risk for changes in interest rates relates to its commercial paper
program. CONSOL Energy's commercial paper bore interest at an average rate of
2.29% per annum during the six months ended June 30, 2002. A 100 basis-point
increase in the average rate for CONSOL Energy's commercial paper would have
decreased CONSOL Energy's net income for the six months ended June 30, 2002, by
approximately $0.9 million.
Almost all of CONSOL Energy's transactions are denominated in U.S. dollars and,
as a result, CONSOL Energy does not have material exposure to currency
exchange-rate risks.
Other than the financial derivative contract related to the issuance of $250
million principal amount of 7.875% notes due in 2012 previously discussed,
CONSOL Energy did not engage in any interest rate, foreign currency exchange
rate or commodity price hedging transactions.
38
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
CONSOL Energy announced that Ronald J. FlorJancic, Executive Vice-President -
Marketing, retired, effective July 28, 2002, after 28 years of service.
39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The following condensed consolidated financial statements of CONSOL Energy Inc.
and subsidiaries are included in this filing on the pages indicated:
Page
----
Consolidated Statements of Income for the three months and six months ended June 30,
2002 and June 30, 2001 ................................................................... 1
Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 ....................... 2
Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2002 ... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and
December 31, 2001 ........................................................................ 5
Notes to Consolidated Financial Statements ............................................... 6
(a) (2) Financial Statement Schedules:
No financial statement schedules are required to be presented by CONSOL Energy.
(a) (3) Exhibits:
10.25 Letter Amendment, dated as of June 25, 2002, amending the Senior Revolving
Loan Agreement, dated September 21, 2001, among Consol Energy Inc. and Citibank
N.A., The Bank of Nova Scotia, Dresdner Bank, AG, New York and Grand Cayman
Branches, Mellon Bank N.A., Australia and New Zealand Banking Group Limited, PNC
Bank NA and National City Bank.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) (1) Reports on Form 8-K:
The company filed a current report on Form 8-K with the Securities and Exchange
Commission on June 10, 2002. The following items were reported on such Form 8-K:
1. Item 4. Change in the Registrant's Certifying Accountant.
2. Item 7. Financial Statements, Pro Forma Information and Exhibits.
40
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.
CONSOL ENERGY INC.
Date: August 13, 2002
By: /s/ W. J. Lyons
-----------------------------------------
William J. Lyons,
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
41
CONSOL ENERGY INC.
Form 10-Q
Exhibit Index
Exhibit
Number Description
10.25 Letter Amendment, dated as of June 25, 2002, amending the
Senior Revolving Loan Agreement, dated September 21, 2001,
among Consol Energy Inc. and Citibank N.A., The Bank of Nova
Scotia, Dresdner Bank, AG, New York and Grand Cayman Branches,
Mellon Bank N.A., Australia and New Zealand Banking Group
Limited, PNC Bank NA and National City Bank.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
42