CONSOL ENERGY INC - 10-Q Quarterly Report

Incremental Decrease
in Pre-tax Income
Assuming a
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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, 2004

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

For the transition period from to

Commission File Number: 001-14901

CONSOL ENERGY INC.

(Exact name of registrant as specified in its charter)

Delaware

51-0337383

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

1800 Washington Road,

Pittsburgh, Pennsylvania 15241

(Address of principal executive offices, including zip code)

(412) 831-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class		Shares outstanding as of July 29, 2004
Common stock, $0.01 par value		90,320,233

TABLE OF CONTENTS


		Page
	PART I FINANCIAL INFORMATION

ITEM 1.	CONDENSED FINANCIAL STATEMENTS

	Consolidated Statements of Income for the three months and six months ended June 30, 2004 and June 30, 2003	1

	Consolidated Balance Sheets at June 30, 2004 and December 31, 2003	2

	Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2004	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and June 30, 2003	4

	Notes to Consolidated Financial Statements	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	64

ITEM 4.	CONTROLS AND PROCEDURES	65

	PART II OTHER INFORMATION

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	66

ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	66

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
Sales—Outside	$	623,975	$	511,235		$	1,214,463	$	1,017,795
Sales—Related Parties		—		—			—		1,369
Freight—Outside		29,768		25,580			61,207		57,608
Freight—Related Parties		—		—			—		562
Other Income		20,841		19,703			49,769		38,993

Total Revenue and Other Income		674,584		556,518			1,325,439		1,116,327
Cost of Goods Sold and Other Operating Charges		482,793		383,691			929,331		791,562
Freight Expense		29,768		25,580			61,207		58,170
Selling, General and Administrative Expense		17,263		19,389			35,860		36,473
Depreciation, Depletion and Amortization		61,725		62,293			121,195		122,999
Interest Expense		8,321		8,490			17,382		17,966
Taxes Other Than Income		48,488		42,420			96,521		85,562
Export Sales Excise Tax Resolution		—		(614	)		—		(614	)

Total Costs		648,358		541,249			1,261,496		1,112,118

Earnings Before Income Taxes		26,226		15,269			63,943		4,209
Income Tax Expense (Benefit)		21		4,710			4,828		(9,739	)

Earnings Before Cumulative Effect of Change in Accounting Principle		26,205		10,559			59,115		13,948
Cumulative Effect of Changes in Accounting for Mine Closing, Reclamation and Gas Well Closing Costs, net of Income Taxes of $3,035		—		—			—		4,768
Cumulative Effect of Changes in Accounting for Workers’ Compensation Liability, net of Income Taxes of $53,080		—		—			83,373		—

Net Income	$	26,205	$	10,559		$	142,488	$	18,716

Basic Earnings Per Share	$	0.29	$	0.13		$	1.58	$	0.24

Dilutive Earnings Per Share	$	0.29	$	0.13		$	1.57	$	0.24

Weighted Average Number of Common Shares Outstanding:
Basic		89,884,760		78,759,875			89,906,033		78,754,557

Dilutive		90,770,999		79,104,915			90,666,510		78,960,438

Dividends Paid Per Share	$	0.14	$	0.14		$	0.28	$	0.28

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	(Unaudited)
	JUNE 30, 2004			DECEMBER 31, 2003
ASSETS
Current Assets:
Cash and Cash Equivalents	$	60,128		$	6,513
Accounts and Notes Receivable:
Trade		96,975			89,971
Other Receivables		77,775			91,401
Inventories		111,886			103,358
Deferred Income Taxes		136,746			125,938
Recoverable Income Taxes		12,566			20,257
Prepaid Expenses		66,715			33,402

Total Current Assets		562,791			470,840
Property, Plant and Equipment:
Property, Plant and Equipment		6,322,483			6,274,030
Less—Accumulated Depreciation, Depletion and Amortization		3,187,607			3,212,523

Total Property, Plant and Equipment—Net		3,134,876			3,061,507
Other Assets:
Deferred Income Taxes		344,768			409,090
Investment in Affiliates		46,914			84,878
Restricted Cash		918			190,918
Other		106,486			101,745

Total Other Assets		499,086			786,631

TOTAL ASSETS	$	4,196,753		$	4,318,978

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	123,674		$	134,772
Short-Term Notes Payable		—			68,760
Current Portion of Long-Term Debt		3,812			53,330
Other Accrued Liabilities		566,489			567,737

Total Current Liabilities		693,975			824,599
Total Long-Term Debt		424,974			441,912
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		1,515,456			1,494,615
Pneumoconiosis Benefits		433,231			441,076
Mine Closing		313,771			312,208
Workers’ Compensation		126,864			255,785
Deferred Revenue		58,043			61,673
Salary Retirement		107,133			79,545
Reclamation		8,098			14,480
Other		109,217			102,448

Total Deferred Credits and Other Liabilities		2,671,813			2,761,830
Stockholders’ Equity:
Common Stock, $.01 par value; 500,000,000 Shares Authorized, 91,267,558 Issued; and 90,213,689 Outstanding at June 30, 2004, and 89,861,900 Outstanding at December 31, 2003		913			913
Preferred Stock, 15,000,000 Shares Authorized; None Issued and Outstanding		—			—
Capital in Excess of Par Value		836,839			833,675
Retained Earnings (Deficit)		(308,179	)		(425,470	)
Other Comprehensive Loss		(111,678	)		(102,601	)
Common Stock in Treasury, at Cost—1,053,869 Shares at June 30, 2004 and 1,405,658 Shares at December 31, 2003		(11,904	)		(15,880	)

Total Stockholders’ Equity		405,991			290,637

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,196,753		$	4,318,978

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)


	Common Stock		Capital in Excess of Par Value		Retained Earnings (Deficit)			Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance—December 31, 2003	$	913	$	833,675	$	(425,470	)	$	(102,601	)	$	(15,880	)	$	290,637

(Unaudited)
Net Income		—		—		142,488			—			—			142,488
Treasury Rate Lock (Net of $27 tax)		—		—		—			(40	)		—			(40	)
Interest Rate Swap Contract (Net of ($514) tax)		—		—		—			807			—			807
Gas Cash Flow Hedge (Net of $6,332 tax)		—		—		—			(9,844	)		—			(9,844	)

Comprehensive Income (Loss)		—		—		142,488			(9,077	)		—			133,411
Issuance of Restricted Stock Units under the Equity Incentive Plan (194,807 units)		—		286		—			—			—			286
Stock-Based Compensation		—		848		—			—			—			848
Treasury Stock Issued (351,789 shares)		—		2,030		—			—			3,976			6,006
Dividends ($.28 per share)		—		—		(25,197	)		—			—			(25,197	)

Balance—June 30, 2004	$	913	$	836,839	$	(308,179	)	$	(111,678	)	$	(11,904	)	$	405,991

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Six Months Ended June 30,
	2004			2003
Operating Activities:
Net Income	$	142,488		$	18,716
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Cumulative Effect of Change in Accounting Principle, net of tax		(83,373	)		(4,768	)
Depreciation, Depletion and Amortization		121,195			122,999
Compensation from Restricted Stock Unit Grants		286			—
Gain on the Sale of Assets		(30,336	)		(17,403	)
Amortization of Mineral Leases		3,501			1,424
Deferred Income Taxes		6,279			(15,638	)
Equity in Earnings of Affiliates		3,395			5,077
Changes in Operating Assets:
Accounts Receivable Securitization		17,000			50,000
Accounts and Notes Receivable		(6,628	)		30,402
Inventories		(8,528	)		1,104
Prepaid Expenses		(33,314	)		(4,782	)
Changes in Other Assets		4,856			3,601
Changes in Operating Liabilities:
Accounts Payable		10,159			(30,622	)
Other Operating Liabilities		6,681			97,460
Changes in Other Liabilities		35,433			(15,053	)
Other		(1,457	)		(3,415	)

		45,149			220,386

Net Cash Provided by Operating Activities		187,637			239,102

Investing Activities:
Capital Expenditures		(204,597	)		(110,720	)
Additions to Mineral Leases		(3,387	)		(3,222	)
Investment in Equity Affiliates		(2,611	)		(4,710	)
Proceeds from Sales of Assets		20,102			80,735

Net Cash Used in Investing Activities		(190,493	)		(37,917	)

Financing Activities:
Payments on Commercial Paper		—			(177,954	)
Payments on Miscellaneous Borrowings		(4,338	)		(84	)
Payments on Revolver		(65,000	)		—
Payments on Long Term Notes		(45,000	)		—
Proceeds from Long Term Notes		—			1,007
Dividends Paid		(25,174	)		(22,032	)
Withdrawal from Restricted Cash		190,000			—
Issuance of Treasury Stock		5,983			328

Net Cash Provided by (Used in) Financing Activities		56,471			(198,735	)

Net Increase (Decrease) in Cash and Cash Equivalents		53,615			2,450
Cash and Cash Equivalents at Beginning of Period		6,513			11,517

Cash and Cash Equivalents at End of Period	$	60,128		$	13,967

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

(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, as well as the cumulative effect of changes in accounting for workers’ compensation and mine closing, reclamation and gas well closing) considered necessary for a fair presentation have been included. Operating results for the three-month period and six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all the footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2003 included in CONSOL Energy Inc.’s (CONSOL Energy) Form 10-K.

Certain reclassifications of the prior year’s data have been made to conform to the six months ended June 30, 2004 classifications, with no effect on previously reported net income or stockholders’ equity. The reclassifications include classifying leased coal interest and advance mining royalties, previously reported separately on the balance sheet as intangible assets, as a component of property, plant and equipment in accordance with Emerging Issues Task Force Issue No. 04-03, “Whether Mineral Rights Are Tangible or Intangible Assets.”

Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the reporting period. Diluted earnings per share are computed similarly to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 1,120,553 shares and 1,124,553 shares of common stock were outstanding for the three and six month period ended June 30, 2004, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 1,089,393 shares and 1,729,780 shares of common stock were outstanding for the three and six month period ended June 30, 2003, respectively, but were not included in the computation of diluted earnings per share because the options were antidilutive.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2004		2003		2004		2003
Earnings before cumulative effect of change in accounting	$	26,205	$	10,559	$	59,115	$	13,948
Cumulative effect of accounting change		—		—		83,373		4,768

Net Income	$	26,205	$	10,559	$	142,488	$	18,716

Average shares of common stock Outstanding:
Basic		89,884,760		78,759,875		89,906,033		78,754,557
Effect of stock options		886,239		345,040		760,477		205,881

Diluted		90,770,999		79,104,915		90,666,510		78,960,438
Earnings per share:
Basic before cumulative effect	$	0.29	$	0.13	$	0.66	$	0.18

Basic after cumulative effect	$	0.29	$	0.13	$	1.58	$	0.24

Diluted before cumulative effect	$	0.29	$	0.13	$	0.65	$	0.18

Diluted after cumulative effect	$	0.29	$	0.13	$	1.57	$	0.24

NOTE 2—DISPOSITIONS:

In June 2004, CONSOL Energy finalized working capital items and remaining liability transfers related to the sale of its Canadian coal assets and related port facilities. The initial sale was completed in February 2003. The finalization of these items resulted in CONSOL Energy making a cash payment of $4,167 and recording a pre-tax gain of $3,290.

In February 2004, CONSOL Energy sold the stock in its wholly owned subsidiary CNX Australia Pty Limited to certain affiliates of AMCI, Inc. for $27,500 ($11,000 of cash and $16,500 of Notes Receivable). Certain affiliates of AMCI, Inc. also assumed $21,190 of debt and the associated interest rate swaps and foreign currency hedges that a subsidiary of CNX Australia Pty Limited had. CNX Australia Pty Limited, through its wholly owned subsidiary CONSOL Energy Australia Pty Limited, owned a 50% interest in the Glennies Creek Mine in New South Wales, Australia with its joint venture partner Maitland Main Collieries Pty Limited, an affiliate of AMCI, Inc. The sale resulted in a pre-tax gain of $14,374.

NOTE 3—STOCK-BASED COMPENSATION:

CONSOL Energy has implemented the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment of SFAS 123” (SFAS No. 148). CONSOL Energy continues to measure compensation expense for its stock-based compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” as amended. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if CONSOL Energy had applied the fair value recognition provisions of SFAS No. 123 and 148, to stock-based employee compensation:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net income, as reported	$	26,205		$	10,559		$	142,488		$	18,716
Add: stock-based compensation expense for restricted stock units		286			—			286			—
Deduct: Total stock-based employee compensation expense determined under Black-Scholes option pricing model and stock-based compensation expense for restricted stock units		(1,467	)		(876	)		(2,407	)		(1,503	)

Pro forma net income	$	25,024		$	9,683		$	140,367		$	17,213

Earnings per share:
Basic—as reported	$	0.29		$	0.13		$	1.58		$	0.24

Basic—pro forma	$	0.28		$	0.12		$	1.56		$	0.22

Diluted—as reported	$	0.29		$	0.13		$	1.57		$	0.24

Diluted—pro forma	$	0.28		$	0.12		$	1.55		$	0.22

The pro forma adjustments in the current period are not necessarily indicative of future period pro forma adjustments as the assumptions used to determine fair value can vary significantly and the number of future shares to be issued under these plans is unknown.

Restricted Stock Unit Awards are grants that entitle the holder to receive shares of common stock as the award vests. A total of 194,807 restricted stock units were granted during the six months ended June 30, 2004, vesting over a weighted average period of 3.57 years. Each restricted stock unit represents one share of common stock. The shares represented by these restricted stock units had a market value of $30.78 per share (based upon the closing share price) at date of grant. Compensation expense will be recognized over the vesting period of the units.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

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

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


	Pension Benefits												Other Benefits
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2004			2003			2004			2003			2004		2003		2004			2003
Service cost	$	5,166		$	5,765		$	10,333		$	11,530		$	2,978	$	3,237	$	6,175		$	6,474
Interest cost		7,054			7,059			14,108			14,119			31,383		33,568		65,845			67,136
Expected return on plan assets		(4,016	)		(4,953	)		(8,033	)		(9,907	)		—		—		—			—
Amortization costs		6,024			4,620			12,048			9,239			6,542		7,870		16,820			15,740
Curtailment gain		—			—			—			—			—		—		(3,454	)		—

Net periodic benefit cost	$	14,228		$	12,491		$	28,456		$	24,981		$	40,903	$	44,675	$	85,386		$	89,350

CONSOL Energy previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $57,414 to its pension plan in 2004. As of June 30, 2004, $849 of contributions has been made. CONSOL Energy presently anticipates contributing an additional $56,565 to fund its pension plan in 2004 for a total of $57,414.

CONSOL Energy has recognized the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the six months ended June 30, 2004 in accordance with FASB Staff Position No. FAS 106-b, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” Implementation of the Act resulted in a reduction of our postretirement benefit costs of $9,553 and $12,072 for the three and six months ended June 30, 2004, and a reduction of our postretirement benefit obligation of $182,256.

As previously disclosed in its financial statements for the year ended December 31, 2003, CONSOL Energy does not expect to contribute to the other post employment benefit plan in 2004. We intend to pay benefit claims as they become due. As of June 30, 2004, $60,314 of other post employment benefits has been paid.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

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

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


	CWP												Workers’ Compensation
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,		Six Months Ended June 30,
	2004			2003			2004			2003			2004		2004
Service cost	$	1,068		$	1,012		$	2,137		$	2,025		$	11,446	$	22,892
Interest cost		3,120			3,412			6,240			6,824			2,068		4,135
Expected return on plan assets		—			(50	)		—			(100	)		—		—
Amortization of actuarial gain		(5,642	)		(6,112	)		(11,285	)		(12,225	)		—		—
Legal and administrative costs		675			525			1,350			1,050			609		1,217

Net periodic (benefit)cost	$	(779	)	$	(1,213	)	$	(1,558	)	$	(2,426	)	$	14,123	$	28,244

As previously disclosed in its financial statements for the year ended December 31, 2003, CONSOL Energy does not expect to contribute to the CWP plan in 2004. We intend to pay benefit claims as they become due. For the six months ended June 30, 2004, $6,353 of CWP benefits have been paid.

CONSOL Energy’s workers’ compensation liabilities are unfunded, and benefit claims are paid as they become due. For the six months ended June 30, 2004, $24,801 of workers’ compensation benefits have been paid.

CONSOL Energy also has expensed $6,145 for the six months ended June 30, 2004 for various state administrative fees and insurance bond premiums. The state administrative fees are paid to various states for the right to self-insure workers’ compensation claims.

Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Additionally, the workers’ compensation liability is recorded on a discounted basis, which has been actuarially determined using various assumptions, including a discount rate of 6% and a future health care trend rate of 10%, declining to 4.75% in 2010. CONSOL Energy believes this change was preferable since it aligns the accounting with the Company’s accounting for other long-term employee benefit obligations, which are recorded on a discounted basis. Additionally, it provides a better comparison with the Company’s industry peers, the majority of which record workers’ compensation liability on a discounted basis.

Effective January 1, 2004, as a result of the change, CONSOL Energy reduced its workers’ compensation liability by $136,453 and reduced its related deferred tax asset by $53,080. The cumulative effect adjustment recognized upon adoption was a gain of $83,373, net of a tax cost of approximately $53,080, and accordingly is reflected as a cumulative effect adjustment from a change in accounting. This cumulative effect adjustment is not included in the 2004 figures in the table above.

Prior to the change, CONSOL Energy recorded its workers’ compensation liability on an undiscounted basis. The liability represented the estimated liability for claims that had been filed with a third party administrator and an estimate representing an incurred but not reported claim liability. The total expense related

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

to workers compensation for the three and six months ended June 30, 2003 was $16,093 and $32,831, respectively. Pro forma net income for the three and six months ended June 30, 2003 would have been $8,675 and $14,017, respectively, had the change in accounting for workers’ compensation costs occurred at the beginning of 2003. Pro forma net income per basic common share and pro forma net income per diluted common share for the three months and six months ended June 30, 2003 would have been $0.11 and $0.18, respectively.

NOTE 6—CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR MINE CLOSING, RECLAMATION AND GAS WELL CLOSING COSTS:

Effective January 1, 2003, CONSOL Energy adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). As a result of this statement, CONSOL Energy recognized additional liabilities of $51,692 for asset retirement obligations associated with the costs of mine closing, reclamation and gas well closing. In addition, CONSOL Energy capitalized asset retirement costs by increasing the carrying amount of related long-lived assets, net of the associated accumulated depreciation, by $59,495.

The cumulative effect adjustment recognized upon adoption of this statement was a gain of $4,768, net of a tax cost of approximately $3,035.

NOTE 7—RESTRUCTURING COSTS:

In December 2003, CONSOL Energy reduced corporate overhead costs by eliminating approximately 100 selling, general and administrative and other positions within the Company. The restructuring of the corporate overhead was a result of developments in CONSOL Energy’s business, including operating fewer mines than have been operated in the past, the sale of non-core business assets and de-emphasizing coal exports. At that time, restructuring charges of $3,606 were recognized representing estimated severance costs related to the workforce reduction. At December 31, 2003, approximately 75%, or $2,720, of the employee termination benefits related to the program had been paid. The remaining restructuring obligation is recorded as Other Accrued Liabilities. Cash payments for the three and six months ended June 30, 2004 were $220 and $826, respectively. There were no other adjustments made to the restructuring liability in the three or six months ended June 30, 2004. The remaining restructuring liability at June 30, 2004 was $60 and is expected to be paid by December 31, 2004.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

NOTE 8—INCOME TAXES:

The following is a reconciliation stated in dollars and as a percentage of pretax income, of the U. S. statutory federal income tax rate to CONSOL Energy’s effective tax rate:


	For the Six Months Ended June 30,
	2004					2003
	Amount			Percent		Amount			Percent
Statutory U.S. federal income tax rate	$	22,380		35.0	%	$	1,473		35.0	%
Excess tax depletion		(11,915	)	(18.6	)%		(9,678	)	(229.9	)%
Effect from sale of Foreign Interest		(5,396	)	(8.4	)%		—		—
Effect of Medicare Prescription Drug, Improvement and Modernization Act of 2003		(2,590	)	(4.0	)%		—		—
Net Effect of state tax		3,232		5.1	%		(773	)	(18.4	)%
Net Effect of foreign tax		(1,411	)	(2.2	)%		864		20.5	%
Other		528		0.7	%		(1,625	)	(38.6	)%

Income Tax (Benefit) Expense / Effective Rate	$	4,828		7.6	%	$	(9,739	)	(231.4	)%

The effective tax rate for the three and six months ended June 30, 2004 was calculated using the combination of an annual effective rate projection on recurring earnings and a discrete tax calculation for the impact of the sale of its wholly owned subsidiary CNX Australia Pty Limited. The effective rate is sensitive to changes in annual profitability, percentage depletion and the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In addition, the provision for income taxes is adjusted at the time the tax returns are filed to reflect changes in previously estimated amounts. These adjustments decreased income tax expense by $3,011 and $1,128 for the three months ended June 30, 2004 and 2003, respectively. These adjustments are included in Net Effect of foreign tax and Effect from sale of foreign interest for the three and six months ended June 30, 2004 and Other for the three and six months ended June 30, 2003.

NOTE 9—INVENTORIES:

The components of inventories consist of the following:


	June 30, 2004		December 31, 2003
Coal	$	26,363	$	28,362
Merchandise for resale		28,039		21,407
Supplies		57,484		53,589

Total Inventories	$	111,886	$	103,358

NOTE 10—ACCOUNTS RECEIVABLE SECURITIZATION

In April 2003, CONSOL Energy and certain of its U.S. subsidiaries entered into a trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.

The receivables facility allows CONSOL Energy to receive, on a revolving basis, up to $125,000. The cost of funds is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $721 and $1,239 for the three and six months ended June 30, 2004, respectively. Costs associated with the receivables facility totaled $263 for the three and six months ended June 30, 2003, respectively. These costs have been recorded as financing fees, which are included in Cost of Goods Sold and Other Operating Charges in the consolidated statements of income. No servicing asset or liability has been recorded. The receivables facility expires in 2006.

At June 30, 2004 and December 31, 2003, eligible accounts receivable totaled approximately $119,500 and $108,600, respectively. There was no subordinated retained interest at June 30, 2004. The subordinated retained interest approximated $600 at December 31, 2003. Accounts receivable totaling $125,000 and $108,000 were removed from the consolidated balance sheet at June 30, 2004 and December 31, 2003, respectively. In accordance with the facility agreement, the Company is able to receive proceeds based upon total eligible accounts receivable at the previous month-end. Proceeds at June 30, 2004, determined by eligible accounts receivable at May 31, 2004, exceeded the eligible accounts receivable at June 30, 2004. The $5,500 of proceeds not supported by accounts receivable at June 30, 2004 is included in the $125,000 of accounts receivable, which was removed from the consolidated balance sheet at June 30, 2004. The $2,900 and $17,000 of additional proceeds received in the three and six months ended June 30, 2004 and the $50,000 of proceeds received in three and six months ended June 30, 2003 is included in cash flows from operating activities in the consolidated statement of cash flows.

NOTE 11—PROPERTY, PLANT AND EQUIPMENT:


	June 30, 2004		December 31, 2003
Coal properties and surface lands	$	1,451,499	$	1,006,345
Mineral interests		778,870		778,934
Plant and equipment		3,031,032		3,487,219
Mine development		411,238		363,912
Airshafts		649,844		637,620

		6,322,483		6,274,030
Less Accumulated depreciation, depletion and amortization		3,187,607		3,212,523

Net Property, Plant and Equipment	$	3,134,876	$	3,061,507

Leased coal interest and advance mining royalties, previously reported separately on the balance sheet as intangible assets, are reflected as mineral interests within property, plant and equipment in accordance with Emerging Issues Task Force Issue No. 04-03, “Whether Mineral Rights Are Tangible or Intangible Assets”.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

NOTE 12—DEBT:

On June 30, 2004, CONSOL Energy completed a $600,000 senior secured credit facility to replace an existing facility of $266,750. The agreement consists of a five-year $400,000 revolving credit facility and a six-year $200,000 Tranche B credit-linked deposit facility. Borrowings under the facility are secured by nearly all of the assets of the Company. Collateral has been provided to the banks and is shared equally and ratably with the holders of CONSOL Energy’s 7.875% bonds maturing in 2012 and CONSOL Energy’s subsidiary’s 8.25% medium-term notes maturing in 2007.

Funds may be borrowed for periods of 1 to 180 days depending on the interest rate method chosen by CONSOL Energy. Interest is based, at our option, upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread, which is dependent on our credit rating. Borrowings under the facilities will be used for general corporate purposes of CONSOL Energy and its subsidiaries, including working capital, capital expenditures and letter of credit needs. Previous cash collateralized letters of credit have been transferred to the Tranche B facility and the $190,000 of restricted cash has been released and used to pay down short-term debt.

The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450,000, $550,000 and $550,000 for the twelve months ended December 31, 2004, 2005 and 2006, respectively. For each fiscal year thereafter, the limit is $400,000. At June 30, 2004, the revolving credit facility had $26,573 of letters of credit outstanding, leaving $373,427 of capacity available for borrowings and the issuance of letters of credit. At June 30, 2004, the Tranche B credit-linked deposit facility had $200,000 of letters of credit outstanding and has reached the facility’s capacity.

NOTE 13—COMMITMENTS AND CONTINGENCIES:

CONSOL Energy has various purchase commitments for materials, supplies and items of permanent investment incidental to the ordinary conduct of business. Such commitments are not at prices in excess of current market values.

One of our subsidiaries, Fairmont Supply Company, which distributes industrial supplies, currently is named as a defendant in approximately 24,400 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, New Jersey and Mississippi. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time and, in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. To date, payments by Fairmont

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

with respect to asbestos cases have not been material. However, there cannot be any assurance that payments in the future with respect to pending or future asbestos cases will not be material to the financial position, results of operations or cash flows of CONSOL Energy.

CONSOL Energy is subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes, and other claims and actions arising out of the normal course of business. In the opinion of management, the ultimate liabilities resulting from such pending lawsuits and claims will not materially affect the financial position, results of operations or cash flows of CONSOL Energy. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized an estimated liability for remediation of this site of which $2,703 remained as of March 31, 2004. In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. The transaction resulted in the reversal of the remaining liability and the recognition of $1,438 of income.

In January 2003, Mine 84, near Washington, Pennsylvania experienced a fire along several hundred feet of the conveyor belt servicing the longwall section of the mine. The fire was extinguished approximately two weeks later. On January 20, 2003, the mine resumed production on a limited basis with continuous mining machines, while repairs continued on the belt entry. The fire caused damage to the roof support system, conveyor belt and steel framework on which the belt travels. Repairs took several weeks to complete and total estimated costs are approximately $7,000, net of expected insurance recovery of approximately $2,800. Costs incurred in the six months ended June 30, 2003 were $6,500 and are primarily reflected in cost of goods sold and other charges, and the expected insurance recovery for damages is reflected in other receivables. No payments for damages incurred have been received by CONSOL Energy to date. Longwall coal production, which accounts for the majority of coal normally produced at the mine, resumed on February 10, 2003.

In February 2003, our Loveridge Mine experienced a fire near the bottom of the slope entry that is used to carry coal from the mine to the surface. The cost of extinguishing the fire was estimated to be approximately $20,000, net of expected insurance recovery of approximately $25,000. Costs to the Company are primarily reflected in the 2003 cost of goods sold and other charges, $7,650 of which is included in the six months ended June 30, 2003, and expected insurance recovery for damages is reflected in other receivables. Payments for damages of $13,000 have been received by CONSOL Energy through June 30, 2004. The remaining receivable is expected to be collected in the third quarter of 2004. In late December 2002, the mine began the process of developing a new underground area that would be mined with longwall mining equipment that was expected to be installed later in 2003. The fire delayed this installation until March of 2004.

CONSOL Energy has filed insurance claims related to the damage incurred by these fires including claims under its business interruption policy. The claims process is lengthy and its outcome cannot be predicted with certainty. No benefit for business interruption recovery have been recorded to date.

On October 21, 2003, a purported class action complaint was filed in the United States District Court for the Western District of Pennsylvania on behalf of Seth Moorhead against CONSOL Energy, J. Brett Harvey and William J. Lyons. On May 5, 2004, an amended complaint was filed after the court granted a motion by Gus A. Karozos to act as lead plaintiff. The amended complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act and that during the period between January 24, 2002, and July 18, 2002, the defendants issued false and misleading

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

statements to the public that failed to disclose or misrepresented the following, among other things that: (a) CONSOL Energy utilized an aggressive approach regarding its spot market sales by reserving 20% of its production to that market, and that by increasing its exposure to the spot market, CONSOL Energy was subjecting itself to increased risk and uncertainty as the price and demand for coal could be volatile; (b) CONSOL Energy was experiencing difficulty selling the production that it had allocated to the spot market, and, nonetheless, CONSOL Energy maintained its production levels which caused its coal inventory to increase; (c) CONSOL Energy’s increasing coal inventory was causing its expenses to rise dramatically, thereby weakening the company’s financial condition; and (d) based on the foregoing, defendants’ positive statements regarding CONSOL Energy’s earnings and prospects were lacking in a reasonable basis at all times and therefore were materially false and misleading. The amended complaint asks the court to (1) award unspecified damages to plaintiff and the purported class members and (2) award reasonable costs and expenses incurred in connection with this action, including counsel fees and expert fees. One other purported class action complaint has been filed in the United States District Court for the Western District of Pennsylvania against CONSOL Energy and certain officers and directors. This complaint was filed on December 12, 2003 by William A. McMahen and the allegations are essentially the same as the Moorhead/Karozos complaint. None of the named defendants have been served with the McMahen complaint. CONSOL Energy management believes these claims are without merit, and, accordingly, the Company has not accrued any liability associated with these claims.

CONSOL Energy and certain of its subsidiaries have provided the following financial guarantees. CONSOL Energy Management believes that these guarantees will expire without being funded, and therefore, the commitments will not have a material adverse effect on financial condition. The fair values of all liabilities associated with these guarantees have been properly recorded and reported in the financial statements at June 30, 2004.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)


Guarantee	Term	Maximum Payments
Workers’ Compensation Surety Bonds (a)	Various	$	306,244
Reclamation Surety Bonds (b)	Various		259,482
Gas Sales Agreements (c)	Various		130,213
1992 Benefit Plan (d)	10/2002 -10/2004		127,009
Ohio Power Company (e)	6/1993 -6/2006		68,039
Workers’ Compensation Letters of Credit (f)	Various		42,423
Longwall Lease Agreements (g)	Various		40,347
Ohio Valley Electric Corporation (h)	5/2000 -12/2006		28,049
Ginger Hills Synfuels, LLC (i)	1/2003 -12/2007		26,532
Gas Hedging Agreements (j)	Various		25,164
Travelers Casualty & Surety Co. (k)	1/2004-1/2005		19,214
Miscellaneous Surety Bonds (l)	Various		12,082
Environmental Liabilities Letters of Credit (m)	Various		10,855
Zurich American Insurance (n)	11/2003 -11/2004		7,000
West Penn Power Company (o)	7/1967 -12/2004		6,215
Duke Energy Corporation (p)	2/2003 -12/2004		5,459
Bank of Novia Scotia (q)	9/2003 -10/2004		5,000
W.V. Workers’ Compensation Division (r)	4/2003 -4/2005		4,579
Commonwealth of Kentucky (s)	6/2004 -6/2005		3,623
Key Corp Leasing (t)	7/2001 -12/2011		2,950
Ontario Power Generation, Inc. (u)	1/2004 -12/2006		2,673
Court Bonds (v)	Various		2,527
Hooks Industrial (w)	2/2004 -2/2005		1,800
Reliant Energy (x)	12/2002 -12/2005		1,575
Travelers Casualty & Surety Co. (y)	11/2003 -11/2004		1,500
Centimark Corp. (z)	8/2000 -7/2008		1,252
W. Va. Department of Environmental Protection (aa)	8/2003 -8/2008		918
Orion Power (bb)	12/2003 -12/2006		800
U. S. Department of Labor (cc)	6/2004 -6/2005		800
Marathon Ashland Petroleum LLC (dd)	4/2004 -4/2005		750
Illinois Industrial Commission (ee)	3/2004 -10/2004		656
Orion Power (ff)	12/2002 -12/2005		635
Highmark Life & Casualty (gg)	5/2003 -5/2005		500
Travelers Casualty & Surety Company (hh)	4/2004 -4/2005		450
Lumbermens Mutual (ii)	10/2003 -11/2004		253
Allegheny Energy Supply Co. (jj)	3/2004 -3/2005		152
LABAR Co. (kk)	4/1999 -3/2005		95
Henry Berdine (ll)	4/2004 -4/2005		9

Total Guarantees		$	1,147,824

(a)

CONSOL Energy and its subsidiaries, at various times throughout the year, have obtained surety bonds related to workers’ compensation obligations. These bonds are necessary because CONSOL Energy is self insured for workers’ compensation. The bonds will be called if CONSOL Energy or any of its subsidiaries fails to pay workers’ compensation claims.

(b)	A number of CONSOL Energy subsidiaries have obtained surety bonds related to reclamation and subsidence obligations, which guarantee the performance of these obligations related to reclamation and subsidence.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

(c)	Certain subsidiaries of CONSOL Energy have entered into gas sales agreements in which CONSOL Energy guarantees the delivery of a specific quantity of fixed price gas for the duration of the contract. These agreements include the following:

1. CNX Gas Company LLC, a subsidiary of CONSOL Energy, has an agreement with CONOCO/Phillips Inc. that guarantees the physical delivery of CNX Gas Company LLC production through December 31, 2005. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this sales agreement, up to $60,000.

2. CONSOL Energy has an agreement with Dominion Field Services to guarantee any unpaid obligations of CNX Gas Company LLC and Greene Energy, subsidiaries of CONSOL Energy, pursuant to their gas sales agreements with Dominion Field Services. The maximum undiscounted future payments required pursuant to the agreement to be made by these subsidiaries at June 30, 2004 are as follows: (a) CNX Gas Company LLC—$36,000, and (b) Greene Energy—$3,000.

3. CONSOL Energy has an agreement with AEP Energy Services to unconditionally guarantee the full and prompt payment of all obligations, up to $15,000, of CNX Gas Company LLC, a subsidiary of CONSOL Energy, arising from AEP Energy Services’ purchase, sale or exchange of energy services or energy related commodities with respect to the sales agreement between CNX Gas Company LLC and AEP Energy Services.

4. CONSOL Energy guarantees the delivery of specific quantities of gas by CNX Gas Company LLC through May 7, 2022. If our subsidiary fails to deliver the volume specified in the contract, CONSOL Energy is obligated to pay a deficiency charge, for each day delivery is not made, equal to the undelivered volumes times the daily price of gas.

5. CNX Gas Company LLC, a subsidiary of CONSOL Energy, has an agreement dated June 30, 2004 with Baltimore Gas and Electric Company (BGE) that guarantees the prompt and complete payment of all obligations and amounts owed to BGE related to the purchase and/or sale of natural gas. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, up to $3,000. The guaranty will continue in force until thirty days prior written notice is given by CONSOL Energy.

6. CONSOL Energy is the guarantor of the agreement dated May 26, 2004 between CNX Gas Company LLC and Equitable Energy, LLC, relating to the purchases and/or trades of natural gas and/or natural gas products, electric energy or capacity, financial derivatives or related contracts. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, up to $10,000. The guaranty will continue in force until thirty days prior written notice is given by CONSOL Energy.

7. CONSOL Energy is the guarantor of the agreement dated April 14, 2004 between CNX Gas Company LLC and Columbia Gas Transmission Corp., relating to the transportation of natural gas or other services rendered and to be rendered on present or future orders on credit from Columbia Gas Transmission Corp. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, at an amount of $535.50 per month from May 2004-October 2004, or $3,213. The guaranty shall continue in full force and effect for a term of one year from the effective date, and year-to-year thereafter unless terminated at any time by CONSOL Energy by providing sixty days prior written notice to Columbia Gas Transmission Corp.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

(d)

On October 15, 2002, a subsidiary of CONSOL Energy arranged for the issuance of a letter of credit for the benefit of the 1992 Benefit Plan. This letter of credit will be drawn upon if the subsidiary fails to pay the claims related to this plan. At June 30, 2004, this guarantee is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement.

(e)	CONSOL Energy is the guarantor of the Coal Supply Agreement dated June 3, 1993 between several of its subsidiaries and Ohio Power Company. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from the Coal Supply Agreement.

(f)

CONSOL Energy and its subsidiaries obtained the issuance of various letters of credit related to CONSOL Energy’s self-insurance program for workers’ compensation. Should CONSOL Energy, or any of these subsidiaries, fail to pay the workers’ compensation claims, the guarantee will draw on the letter of credit. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement. The individual guarantees are as follows: W.V. Workers’ Compensation Division $21,682; Illinois Industrial Commission $9,569; Old Republic Insurance $6,403; Commonwealth of Kentucky $1,819; Travelers Casualty & Surety Company $1,500; U.S. Department of Labor $1,350; Maryland Workers’ Compensation Commission $100.

(g)

CONSOL Energy’s subsidiaries have entered into various longwall equipment leases. CONSOL Energy is the guarantor of these agreements and promises full and timely payment to the lessors if the subsidiaries should fail to perform the obligations of the agreements. The individual guarantees are as follows: LaSalle National Leasing Corp. $15,602; Orix Financial Services $14,027; U.S. Bancorp $10,718.

(h)

CONSOL Energy is the guarantor of the Coal Supply Agreement dated May 22, 2000 between several of its subsidiaries and Ohio Valley Electric Corporation. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this Coal Supply Agreement.

(i)

CONSOL Energy is the guarantor of the Coal Supply Agreement dated January 15, 2003 between one of its subsidiaries and Ginger Hill Synfuels, LLC. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of its subsidiary with respect to this Coal Supply Agreement.

(j)

CONSOL Energy has entered into various International Swap and Derivative Association (ISDA) Agreements. These agreements cover the gas derivative hedging activity of CNX Gas Company LLC. The individual agreements are as follows: Morgan Stanley Capital Group Inc. $18,836; Citibank ISDA Agreements $6,328.

(k)

On January 8, 2004, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Travelers Casualty & Surety Company. This letter of credit is to serve as collateral for certain surety bonds and will be drawn upon if CONSOL Energy fails to make the payments related to these bonds. At June 30, 2004 this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement.

(l)	Several subsidiaries of CONSOL Energy have issued miscellaneous surety bonds, primarily water quality bonds and road bonds. CONSOL Energy guarantees the performance of these obligations by its subsidiaries.

(m)

CONSOL Energy and its subsidiaries obtained the issuance of various letters of credit related to CONSOL Energy’s environmental liabilities. Should CONSOL Energy, or any of these subsidiaries, fail to perform the obligations related to these projects, the guarantee will draw on the letter of credit. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Energy’s Senior Secured Loan Agreement. The individual guarantees are as follows: Pennsylvania Department of Protection $5,099; Pennsylvania Department of Transportation $5,000; Commonwealth of Kentucky $709; Commonwealth of Virginia $47.

(n)

On November 19, 2003, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Zurich American Insurance Company. Zurich American processes and pays automobile claims and then bills CONSOL Energy, which is self-insured, for reimbursement. This letter of credit will be drawn upon if CONSOL Energy fails to reimburse Zurich American for these payments.

(o)	CONSOL Energy is the guarantor of the Coal Supply Agreement dated July 3, 1967 between several of its subsidiaries and West Penn Power Company. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this agreement.

(p)

CONSOL Energy is the guarantor of the Coal Supply Agreement dated February 1, 2003 between several of its subsidiaries and Duke Energy Corporation. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from this Coal Supply Agreement.

(q)

A subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the Bank of Nova Scotia on September 16, 2003. This letter of credit serves as a guarantee of performance of certain reclamation obligations and will be drawn if CONSOL Energy’s subsidiary defaults on these obligations.

(r)

On April 24, 2003, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit to West Virginia’s Workers’ Compensation Division in relation to workers’ compensation liabilities. This letter of credit is a result of the fact that CONSOL Energy and its subsidiaries are self-insured for these obligations. The letter of credit will be drawn upon if the subsidiary fails to pay the related workers’ compensation liabilities.

(s)

On June 23, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the Commonwealth of Kentucky in relation to workers’ compensation liabilities. This letter of credit is a result of CONSOL Energy and its subsidiaries being self-insured for these liabilities. The letter of credit will be drawn upon if the subsidiary fails to pay the related workers’ compensation liabilities.

(t)

A CONSOL Energy subsidiary entered into an agreement on July 1, 2001 with Key Corp. Leasing to lease open top coal hopper railcars. CONSOL Energy is the guarantor of this agreement and promises prompt and full payment to Key Corp. Leasing upon the failure of the subsidiary to satisfy the obligations of the agreement.

(u)	CONSOL Energy is the guarantor of the Coal Supply Agreement dated January 1, 2004 between one of its subsidiaries and Ontario Power Generation, Inc. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of its subsidiary arising from this agreement.

(v)

Several subsidiaries of CONSOL Energy have issued court bonds related to court proceedings in which they are involved. These bonds would be called if any of the subsidiaries file bankruptcy while the proceedings still exist and are unresolved. The bonds will be released by the court when the proceedings conclude.

(w)	On February 27, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Hooks Industrial. This letter of credit is related to pending litigation and will be drawn upon if the court does not rule in favor of the CONSOL Energy subsidiary.

(x)

CONSOL Energy is the guarantor of the Coal Supply Agreement dated December 17, 2002 between several of its subsidiaries and Reliant Energy Mid-Atlantic Power Holdings, LLC. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this Coal Supply Agreement.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

(y)

On November 3, 2003, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Travelers Casualty and Surety Company. This letter of credit supports workers’ compensation liabilities, because CONSOL Energy and its subsidiaries are self-insured for these liabilities. This letter of credit will be drawn upon if CONSOL Energy fails to pay the related workers’ compensation claims.

(z)	A subsidiary of CONSOL Energy entered into an agreement to lease office space from Centimark Corporation on August 1, 2000. In connection with this agreement, CONSOL Energy guarantees full and timely performance of all obligations of the subsidiary to Centimark, in relation to this lease agreement.

(aa)	On August 11, 2003, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the West Virginia Department of Environmental Protection to guarantee payment if this subsidiary fails to pay these liabilities.

(bb)

CONSOL Energy is the guarantor of the Coal Supply Agreement dated December 22, 2003 between several of its subsidiaries and Orion Power MidWest, L.P. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this agreement.

(cc)

On June 23, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the U. S. Department of Labor. This letter of credit is related to Longshore and Harborworkers workers’ compensation claims and will be drawn upon should the subsidiary fail to pay the claims.

(dd)

On April 28, 2004, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Marathon Ashland Petroleum LLC. This letter of credit is to serve as collateral for a purchase agreement entered into between CONSOL Energy and Marathon Ashland Petroleum LLC. This letter of credit will be called upon should CONSOL Energy fail to perform its obligation.

(ee)

On March 17, 2004, CONSOL Energy, in conjunction with several of its subsidiaries, obtained the issuance of a letter of credit to the Illinois Industrial Commission. This letter of credit is related to CONSOL Energy’s self-insurance program for workers’ compensation. Should CONSOL Energy, or any of these subsidiaries, fail to pay workers’ compensation claims, the Illinois Industrial Commission will draw on this letter of credit.

(ff)

CONSOL Energy is the guarantor of the Coal Supply Agreement dated December 17, 2002 between several of its subsidiaries and Orion Power MidWest, LP. Under this agreement, CONSOL Energy guarantees the full and timely performance of all obligations of these subsidiaries with respect to this Coal Supply Agreement.

(gg)

On May 1, 2003, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Highmark Life and Casualty to support medical payments under various CONSOL Energy medical benefit programs. CONSOL Energy and its subsidiaries are self-insured for obligations under these programs. Highmark processes and pays the medical claims under the CONSOL Energy medical benefits programs and then bills CONSOL Energy for reimbursement. The letter of credit will be drawn upon if CONSOL Energy or its subsidiary fails to reimburse Highmark for these payments. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement.

(hh)

On April 27, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Travelers Casualty and Surety Company. This letter of credit is to serve as 50% collateral for a Supersedeas bond for a warn notice lawsuit. This letter of credit will be called upon if the subsidiary fails to fulfill the obligations of the required court bond.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

(ii)

On October 30, 2003, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Lumbermens Mutual. Lumbermens Mutual processes and pays all automobile claims and then bills CONSOL Energy, which is self-insured, for reimbursement. The letter of credit will be drawn upon if CONSOL Energy should fail to reimburse Lumbermens Mutual for these payments.

(jj)

On March 3, 2004, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Allegheny Energy Supply Co. This letter of credit is related to an expansion of the Buchanan Generation substation, which is a joint venture project between CONSOL Energy and Allegheny Energy Supply. Allegheny Energy Supply, which owns the substation, may be liable to American Electric Power for additional taxes because of the increase in the assessed asset value of the substation. This letter of credit represents CONSOL Energy’s 50% portion of any additional taxes due and will be drawn upon if Allegheny Energy Supply is forced to reimburse American Electric Power for these additional taxes.

(kk)	On April 1, 1999, a subsidiary of CONSOL Energy entered into an agreement with Alaska Supply Chain Integrators (ASCI) to lease warehouse space from LABAR Co. CONSOL Energy guarantees prompt payment of all amounts due under the lease in the event of default by the subsidiary.

(ll)

On April 2, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Henry Berdine. This letter of credit is related to a court order for reclamation work related to water loss. CONSOL Energy is the guarantor of this agreement and promises prompt and full payment to Henry Berdine upon the failure of the subsidiary to satisfy the obligations of the agreement.

NOTE 14—FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions were used to estimate the fair values of financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value due to the short maturity of these instruments.

Restricted Cash: The carrying amount reported in the balance sheets for restricted cash approximates its fair value. Restricted cash is invested in highly liquid securities to support requirements of long-term letters of credit.

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

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

Capital Leases: At June 30, 2004, the carrying amount of capital leases approximates its fair value due to the short-term nature of the remaining obligations. At December 31, 2003, the fair values of capital leases are estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

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


	June 30, 2004						December 31, 2003
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	60,128		$	60,128		$	6,513		$	6,513
Restricted cash	$	918		$	918		$	190,918		$	190,918
Short-term notes payable	$	—		$	—		$	(68,760	)	$	(68,760	)
Long-term debt	$	(428,766	)	$	(446,476	)	$	(490,504	)	$	(512,215	)
Capital Leases	$	(20	)	$	(20	)	$	(4,738	)	$	(4,742	)

NOTE 15—SEGMENT INFORMATION:

CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the three and six months ended June 30, 2004, the Northern Appalachian aggregated segment includes the following mines: Shoemaker, Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork and Mine 84. For the three and six months ended June 30, 2004, the Central Appalachian aggregated segment includes the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the three and six months ended June 30, 2004, the Metallurgical aggregated segment includes the following mines: Buchanan, Amonate and V.P. #8. The Other Coal segment includes the Company’s purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to individual mines. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energy’s All Other Classification is made up of the Company’s terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. The segment information presented for prior periods has been restated to be consistent with the information presented for the current period.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Industry segment results for the three months ended June 30, 2004:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other			Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	370,037	$	57,588	$	66,494	$	19,725		$	513,844	$	83,716	$	26,415		$	—		$	623,975
Freight—outside		—		—		—		29,745			29,745		—		23			—			29,768
Intersegment transfers		—		—		—		—			—		868		24,302			(25,170	)		—

Total Sales and Freight	$	370,037	$	57,588	$	66,494	$	49,470		$	543,589	$	84,584	$	50,740		$	(25,170	)	$	653,743

Earnings (Loss) Before Income Taxes	$	29,746	$	1,304	$	6,352	$	(22,043	)	$	15,359	$	32,125	$	(4,152	)	$	(17,106	)	$	26,226	(A)

Segment assets										$	2,754,490	$	671,918	$	211,555		$	558,790		$	4,196,753	(B)

Depreciation, depletion and amortization										$	50,221	$	8,161	$	3,343		$	—		$	61,725

Capital Expenditures										$	80,175	$	19,723	$	387		$	—		$	100,285

(A)	Includes equity in earnings (losses) of unconsolidated affiliates of $(105) and $(294) for Gas and All Other, respectively.

(B)	Includes investments in unconsolidated equity affiliates of $20,233 and $26,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

Industry segment results for the three months ended June 30, 2003:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other			Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	306,754	$	50,418	$	62,022	$	22,429		$	441,623	$	50,742	$	18,870		$	—		$	511,235
Freight—outside		—		—		—		25,555			25,555		—		25			—			25,580
Intersegment transfers		—		—		—		—			—		834		22,609			(23,443	)		—

Total Sales and Freight	$	306,754	$	50,418	$	62,022	$	47,984		$	467,178	$	51,576	$	41,504		$	(23,443	)	$	536,815

Earnings (Loss) Before Income Taxes	$	36,329	$	785	$	5,180	$	(29,739	)	$	12,555	$	17,173	$	(5,060	)	$	(9,399	)	$	15,269	(C)

Segment assets										$	2,803,276	$	609,898	$	224,272		$	563,577		$	4,201,023	(D)

Depreciation, depletion and amortization										$	49,790	$	9,589	$	2,914		$	—		$	62,293

Capital Expenditures										$	45,194	$	18,240	$	640		$	—		$	64,074

(C)	Includes equity in earnings (losses) of unconsolidated affiliates of $(3,940), $(328) and $(472) for Other Coal, Gas and All Other, respectively.

(D)	Includes investments in unconsolidated equity affiliates of $37,378, $15,767 and $28,428 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Industry segment results for the six months ended June 30, 2004:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	731,119	$	112,625	$	122,612	$	45,219		$	1,011,575	$	153,647	$	49,241	$	—		$	1,214,463
Freight—outside		—		—		—		61,043			61,043		—		164		—			61,207
Intersegment transfers		—		—		—		—			—		1,784		49,484		(51,268	)		—

Total Sales and Freight	$	731,119	$	112,625	$	122,612	$	106,262		$	1,072,618	$	155,431	$	98,889	$	(51,268	)	$	1,275,670

Earnings (Loss) Before Income Taxes	$	78,097	$	1,919	$	1,947	$	(57,373	)	$	24,590	$	67,643	$	4,320	$	(32,610	)	$	63,943	(E)

Segment assets										$	2,754,490	$	671,918	$	211,555	$	558,790		$	4,196,753	(F)

Depreciation, depletion and amortization										$	98,704	$	15,801	$	6,690	$	—		$	121,195

Capital Expenditures										$	168,080	$	35,304	$	1,213	$	—		$	204,597

(E)	Includes equity in earnings (losses) of unconsolidated affiliates of $(2,733), $(296) and $(366) for Other Coal, Gas and All Other, respectively.

(F)	Includes investments in unconsolidated equity affiliates of $20,233 and $26,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Industry segment results for the six months ended June 30, 2003:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal			Gas		All Other			Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	603,740	$	97,558	$	120,885	$	54,890		$	877,073		$	102,525	$	38,197		$	—		$	1,017,795
Sales—related party		—		1,267		102		—			1,369			—		—			—			1,369
Freight—outside		—		—		—		57,462			57,462			—		146			—			57,608
Freight—related party		—		—		—		562			562			—		—			—			562
Intersegment transfers		—		—		—		—			—			1,785		46,842			(48,627	)		—

Total Sales and Freight	$	603,740	$	98,825	$	120,987	$	112,914		$	936,466		$	104,310	$	85,185		$	(48,627	)	$	1,077,334

Earnings (Loss) Before Income Taxes	$	62,296	$	1,719	$	10,869	$	(74,928	)	$	(44	)	$	33,257	$	(11,220	)	$	(17,784	)	$	4,209	(G)

Segment assets										$	2,803,221		$	609,898	$	224,272		$	563,632		$	4,201,023	(H)

Depreciation, depletion and amortization										$	98,750		$	18,623	$	5,626		$	—		$	122,999

Capital Expenditures										$	82,747		$	26,912	$	1,061		$	—		$	110,720

(G)	Includes equity in earnings (losses) of unconsolidated affiliates of $(3,431), $(606) and $(1,040) for Other Coal, Gas and All Other, respectively.

(H)	Includes investments in unconsolidated equity affiliates of $37,378 $15,767 and $28,428 for Coal, Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Reconciliation of Segment Information to Consolidated Amounts:

Earnings (Loss) Before Income Taxes:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2004			2003			2004			2003
Segment earnings before income taxes for total reportable business segments	$	47,484		$	29,728		$	92,233		$	33,213
Segment earnings (loss) before income taxes for all other businesses		(4,152	)		(5,060	)		4,320			(11,220	)
Incentive compensation		(6,769	)		(4,101	)		(15,347	)		(4,093	)
Other post employee benefit curtailment gain		—			—			3,454			—
Interest income (expense), net and other non-operating activity		(10,337	)		(5,298	)		(20,717	)		(13,691	)

Earnings (Loss) Before Income Taxes	$	26,226		$	15,269		$	63,943		$	4,209


	June 30,
	2004		2003
Total Assets:
Segment assets for total reportable business segments	$	3,426,408	$	3,413,119
Segment assets for all other businesses		211,555		224,272
Items excluded from segment assets:
Cash and other investments		60,665		14,291
Restricted Cash		918		—
Deferred tax assets		481,514		531,681
Recoverable income taxes		12,566		14,542
Intangible asset—overfunded pension plan		468		55
Bond issuance costs		2,659		3,063

Total Consolidated Assets	$	4,196,753	$	4,201,023

NOTE 16—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:

Effective September 30, 2003, CONSOL Energy executed Supplemental Indenture No. 2. This Supplemental Indenture revised the Guarantor Subsidiaries as defined in the First Supplemental Indenture to include additional subsidiaries as guarantors and remove one subsidiary as a guarantor. Accordingly, CONSOL Energy has revised prior year’s data to conform to the classifications effective at September 30, 2003.

The payment obligations under the $250,000 7.875 percent Notes due 2012 issued by CONSOL Energy in 2002 are fully and unconditionally guaranteed by several subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all of their subsidiaries. For example, these include deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Income Statement for the Three Months Ended June 30, 2004:


	Parent			Guarantors			Non-Guarantors			Elimination			Consolidated
Sales—Outside	$	—		$	603,843		$	20,132		$	—		$	623,975
Freight—Outside		—			29,745			23			—			29,768
Other Income (including equity earnings)		38,262			14,773			4,745			(36,939	)		20,841

Total Revenue and Other Income		38,262			648,361			24,900			(36,939	)		674,584
Cost of Goods Sold and Other Operating Charges		10,521			460,598			45,339			(33,665	)		482,793
Intercompany Activity		(307	)		(12,034	)		(21,671	)		34,012			—
Freight Expense		—			29,745			23			—			29,768
Selling, General and Administrative Expense		—			16,705			558			—			17,263
Depreciation, Depletion and Amortization		1,535			59,934			256			—			61,725
Interest Expense		6,391			1,930			—			—			8,321
Taxes Other Than Income		867			47,246			375			—			48,488

Total Costs		19,007			604,124			24,880			347			648,358

Earnings (Loss) Before Income Taxes		19,255			44,237			20			(37,286	)		26,226
Income Tax Expense (Benefit)		(6,950	)		6,964			7			—			21

Net Income (Loss)	$	26,205		$	37,273		$	13		$	(37,286	)	$	26,205

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Balance Sheet for June 30, 2004:


	Parent		Guarantors			Non-Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	56,172	$	237		$	3,719	$	—		$	60,128
Accounts and Notes Receivable:
Trade		—		521			96,454		—			96,975
Other		5,191		69,759			2,825		—			77,775
Inventories		173		82,959			28,754		—			111,886
Deferred Income Taxes		136,746		—			—		—			136,746
Recoverable Income Taxes		12,566		—			—		—			12,566
Prepaid Expenses		9,638		56,531			546		—			66,715

Total Current Assets		220,486		210,007			132,298		—			562,791
Property, Plant and Equipment:
Property, Plant and Equipment		98,602		6,199,004			24,877		—			6,322,483
Less-Accumulated Depreciation, Depletion and Amortization		49,905		3,118,021			19,681		—			3,187,607

Property, Plant and Equipment—Net		48,697		3,080,983			5,196		—			3,134,876
Other Assets:
Deferred Income Taxes		344,768		—			—		—			344,768
Investment in Affiliates		1,536,616		28,783			—		(1,518,485	)		46,914
Restricted Cash		—		918			—		—			918
Other		24,895		81,523			68		—			106,486

Total Other Assets		1,906,279		111,224			68		(1,518,485	)		499,086

Total Assets	$	2,175,462	$	3,402,214		$	137,562	$	(1,518,485	)	$	4,196,753

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	92,861	$	15,988		$	14,825	$	—		$	123,674
Accounts Payable (Recoverable)- Related Parties		1,177,599		(1,273,786	)		96,187		—			—
Current Portion of Long-Term Debt		—		3,812			—		—			3,812
Other Accrued Liabilities		84,970		476,556			4,963		—			566,489

Total Current Liabilities		1,355,430		(777,430	)		115,975		—			693,975
Long-Term Debt:		248,417		176,557			—		—			424,974
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		1,515,456			—		—			1,515,456
Pneumoconiosis Benefits		—		433,231			—		—			433,231
Mine Closing		—		313,771			—		—			313,771
Workers’ Compensation		28		126,836			—		—			126,864
Deferred Revenue		—		58,043			—		—			58,043
Salary Retirement		107,119		14			—		—			107,133
Reclamation		—		8,098			—		—			8,098
Other		58,477		50,221			519		—			109,217

Total Deferred Credits and Other Liabilities		165,624		2,505,670			519		—			2,671,813
Stockholders’ Equity		405,991		1,497,417			21,068		(1,518,485	)		405,991

Total Liabilities and Stockholders’ Equity	$	2,175,462	$	3,402,214		$	137,562	$	(1,518,485	)	$	4,196,753

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Three Months Ended June 30, 2004:


	Parent			Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash (Used in) Provided by Operating Activities	$	(48,570	)	$	137,713		$	2,945		$	—	$	92,088

Cash Flows from Investing Activities:
Capital Expenditures	$	(2,311	)	$	(97,974	)	$	—		$	—	$	(100,285	)
Investment in Equity Affiliates		—			(447	)		(958	)		—		(1,405	)
Other Investing Activities		—			5,689			—			—		5,689

Net Cash Used in Investing Activities	$	(2,311	)	$	(92,732	)	$	(958	)	$	—	$	(96,001	)

Cash Flows from Financing Activities:
Payments on Short-Term Debt	$	(100,000	)	$	—		$	—		$	—	$	(100,000	)
Payments on Long-Term Notes		—			(45,000	)		—			—		(45,000	)
Dividends Paid		(12,598	)		—			—			—		(12,598	)
Withdrawal from Restricted Cash		190,000			—			—			—		190,000
Other Financing Activities		4,139			(126	)		—			—		4,013

Net Cash Provided by (Used in) Financing Activities	$	81,541		$	(45,126	)	$	—		$	—	$	36,415

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Income Statement for the Three Months Ended June 30, 2003:


	Parent			Guarantors			Non-Guarantors			Elimination			Consolidated
Sales—Outside	$	—		$	494,737		$	16,498		$	—		$	511,235
Sales—Related Parties		—			—			—			—			—
Freight—Outside		—			25,485			95			—			25,580
Other Income (including equity earnings)		20,049			13,584			1,899			(15,829	)		19,703

Total Revenue and Other Income		20,049			533,806			18,492			(15,829	)		556,518
Cost of Goods Sold and Other Operating Charges		6,398			369,373			47,165			(39,245	)		383,691
Intercompany Activity		41			(20,040	)		(19,756	)		39,755			—
Freight Expense		—			25,485			95			—			25,580
Selling, General and Administrative Expense		—			18,565			824			—			19,389
Depreciation, Depletion and Amortization		841			61,148			304			—			62,293
Interest Expense		4,286			3,980			224			—			8,490
Taxes Other Than Income		911			41,308			201			—			42,420
Export Sales Excise Tax Resolution		—			(614	)		—			—			(614	)

Total Costs		12,477			499,205			29,057			510			541,249

Earnings (Loss) Before Income Taxes		7,572			34,601			(10,565	)		(16,339	)		15,269
Income Tax Expense (Benefit)		(2,987	)		11,395			(3,698	)		—			4,710

Net Income (Loss)	$	10,559		$	23,206		$	(6,867	)	$	(16,339	)	$	10,559

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Balance Sheet for December 31, 2003:


	Parent		Guarantors			Non-Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	5,173	$	347		$	993	$	—		$	6,513
Accounts and Notes Receivable:
Trade		—		418			89,553		—			89,971
Other		916		87,327			3,158		—			91,401
Inventories		174		80,021			23,163		—			103,358
Deferred Income Taxes		125,938		—			—		—			125,938
Recoverable Income Taxes		20,257		—			—		—			20,257
Prepaid Expenses		6,094		26,781			527		—			33,402

Total Current Assets		158,552		194,894			117,394		—			470,840
Property, Plant and Equipment:
Property, Plant and Equipment		98,208		6,151,180			24,642		—			6,274,030
Less-Accumulated Depreciation, Depletion and Amortization		46,585		3,146,711			19,227		—			3,212,523

Property, Plant and Equipment—Net		51,623		3,004,469			5,415		—			3,061,507
Other Assets:
Deferred Income Taxes		409,090		—			—		—			409,090
Investment in Affiliates		1,318,921		27,640			38,108		(1,299,791	)		84,878
Restricted Cash		190,000		918			—		—			190,918
Other		4,039		92,478			5,228		—			101,745

Total Other Assets		1,922,050		121,036			43,336		(1,299,791	)		786,631

Total Assets	$	2,132,225	$	3,320,399		$	166,145	$	(1,299,791	)	$	4,318,978

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	82,458	$	32,867		$	19,447	$	—		$	134,772
Accounts Payable (Recoverable)- Related Parties		1,246,783		(1,345,508	)		98,725		—			—
Short-Term Notes Payable		65,000		—			3,760		—			68,760
Current Portion of Long-Term Debt		—		53,330			—		—			53,330
Other Accrued Liabilities		55,789		508,821			3,127		—			567,737

Total Current Liabilities		1,450,030		(750,490	)		125,059		—			824,599
Long-Term Debt:		248,314		176,348			17,250		—			441,912
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		1,494,615			—		—			1,494,615
Pneumoconiosis Benefits		—		441,076			—		—			441,076
Mine Closing		—		312,208			—		—			312,208
Workers’ Compensation		1,433		254,352			—		—			255,785
Deferred Revenue		—		61,673			—		—			61,673
Salary Retirement		79,453		92			—		—			79,545
Reclamation		—		14,480			—		—			14,480
Other		62,358		31,015			9,075		—			102,448

Total Deferred Credits and Other Liabilities		143,244		2,609,511			9,075		—			2,761,830
Stockholders’ Equity		290,637		1,285,030			14,761		(1,299,791	)		290,637

Total Liabilities and Stockholders’ Equity	$	2,132,225	$	3,320,399		$	166,145	$	(1,299,791	)	$	4,318,978

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Three Months Ended June 30, 2003:


	Parent			Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	137,673		$	57,733		$	336		$	—	$	195,742

Cash Flows from Investing Activities:
Capital Expenditures	$	(2,728	)	$	(61,346	)	$	—		$	—	$	(64,074	)
Investment in Equity Affiliates		—			(199	)		(3,680	)		—		(3,879	)
Other Investing Activities		2			4,450			(1,152	)		—		3,300

Net Cash Used in Investing Activities	$	(2,726	)	$	(57,095	)	$	(4,832	)	$	—	$	(64,653	)

Cash Flows from Financing Activities:
Payments on Short-Term Borrowings	$	(125,673	)	$	—		$	—		$	—	$	(125,673	)
Dividends Paid		(11,016	)		—			—			—		(11,016	)
Other Financing Activities		328			(1,040	)		335			—		(377	)

Net Cash (Used in) Provided by Financing Activities	$	(136,361	)	$	(1,040	)	$	335		$	—	$	(137,066	)

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Income Statement for the Six Months Ended June 30, 2004:


	Parent			Guarantors			Non-Guarantors			Elimination			Consolidated
Sales—Outside	$	—		$	1,174,761		$	39,702		$	—		$	1,214,463
Freight—Outside		—			61,043			164			—			61,207
Other Income (including equity earnings)		171,369			26,529			6,808			(154,937	)		49,769

Total Revenue and Other Income		171,369			1,262,333			46,674			(154,937	)		1,325,439
Cost of Goods Sold and Other Operating Charges		18,401			888,053			89,544			(66,667	)		929,331
Intercompany Activity		(315	)		(27,981	)		(44,425	)		72,721			—
Freight Expense		—			61,043			164			—			61,207
Selling, General and Administrative Expense		—			35,023			837			—			35,860
Depreciation, Depletion and Amortization		3,106			119,428			515			(1,854	)		121,195
Interest Expense		13,087			4,213			82			—			17,382
Taxes Other Than Income		1,883			93,868			770			—			96,521

Total Costs		36,162			1,173,647			47,487			4,200			1,261,496

Earnings (Loss) Before Income Taxes		135,207			88,686			(813	)		(159,137	)		63,943
Income Tax Expense (Benefit)		(7,281	)		12,394			(285	)		—			4,828

Earnings (Loss) before Cumulative Effect of Change in Accounting Principle		142,488			76,292			(528	)		(159,137	)		59,115
Cumulative Effect of Changes in Accounting for Workers’ Compensation Liability, net of Income Taxes of $53,080		—			83,373			—			—			83,373

Net Income (Loss)	$	142,488		$	159,665		$	(528	)	$	(159,137	)	$	142,488

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Six Months Ended June 30, 2004:


	Parent			Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash (Used in) Provided by Operating Activities	$	(61,115	)	$	243,911		$	4,841		$	—	$	187,637

Cash Flows from Investing Activities:
Capital Expenditures	$	(4,695	)	$	(199,902	)	$	—		$	—	$	(204,597	)
Investment in Equity Affiliates		—			(496	)		(2,115	)		—		(2,611	)
Other Investing Activities		11,000			5,715			—			—		16,715

Net Cash Provided by (Used in) Investing Activities	$	6,305		$	(194,683	)	$	(2,115	)	$	—	$	(190,493	)

Cash Flows from Financing Activities:
Payments on Short-Term Debt	$	(65,000	)	$	—		$	—		$	—	$	(65,000	)
Payments on Long-Term Notes		—			(45,000	)		—			—		(45,000	)
Dividends Paid		(25,174	)		—			—			—		(25,174	)
Withdrawal from Restricted Cash		190,000			—			—			—		190,000
Other Financing Activities		5,983			(4,338	)		—			—		1,645

Net Cash Provided by (Used in) Financing Activities	$	105,809		$	(49,338	)	$	—		$	—	$	56,471

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Income Statement for the Six Month Ended June 30, 2003:


	Parent			Guarantors			Non-Guarantors			Elimination			Consolidated
Sales—Outside	$	—		$	984,462		$	33,333		$	—		$	1,017,795
Sales—Related Parties		—			1,369			—			—			1,369
Freight—Outside		—			57,393			215			—			57,608
Freight—Related Parties		—			562			—			—			562
Other Income (including equity earnings)		36,407			17,294			15,852			(30,560	)		38,993

Total Revenue and Other Income		36,407			1,061,080			49,400			(30,560	)		1,116,327
Cost of Goods Sold and Other Operating Charges		10,427			773,734			86,309			(78,908	)		791,562
Intercompany Activity		278			(44,203	)		(41,299	)		85,224			—
Freight Expense		—			57,955			215			—			58,170
Selling, General and Administrative Expense		—			35,394			1,079			—			36,473
Depreciation, Depletion and Amortization		1,535			122,718			600			(1,854	)		122,999
Interest Expense		10,186			7,270			510			—			17,966
Taxes Other Than Income		2,134			82,714			714			—			85,562
Export Sales Excise Tax Resolution		—			(614	)		—			—			(614	)

Total Costs		24,560			1,034,968			48,128			4,462			1,112,118

Earnings (Loss) Before Income Taxes		11,847			26,112			1,272			(35,022	)		4,209
Income Tax Expense (Benefit)		(6,869	)		(3,315	)		445			—			(9,739	)

Earnings (Loss) before Cumulative Effect of Change in Accounting Principle		18,716			29,427			827			(35,022	)		13,948
Cumulative Effect of Changes in Accounting for Mine Closing, Reclamation, and Gas Well Closing Costs, Net of Income Taxes of $3,035		—			4,768			—			—			4,768

Net Income (Loss)	$	18,716		$	34,195		$	827		$	(35,022	)	$	18,716

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Six Months Ended June 30, 2003:


	Parent			Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash Provided by (Used in) Operating Activities	$	205,173		$	96,977		$	(63,048	)	$	—	$	239,102

Cash Flows from Investing Activities:
Capital Expenditures	$	(5,303	)	$	(105,417	)	$	—		$	—	$	(110,720	)
Investment in Equity Affiliates		—			(214	)		(4,496	)		—		(4,710	)
Other Investing Activities		3			9,160			68,350			—		77,513

Net Cash (Used in) Provided by Investing Activities	$	(5,300	)	$	(96,471	)	$	63,854		$	—	$	(37,917	)

Cash Flows from Financing Activities:
Payments on Short-Term Debt	$	(177,954	)	$	—		$	—		$	—	$	(177,954	)
Proceeds from Long-Term Notes		—			—			1,007			—		1,007
Dividends Paid		(22,032	)		—			—			—		(22,032	)
Other Financing Activities		228			(1,937	)		1,953			—		244

Net Cash (Used in) Provided by Financing Activities	$	(199,758	)	$	(1,937	)	$	2,960		$	—	$	(198,735	)

NOTE 17—RECENT ACCOUNTING PRONOUNCEMENTS:

In March 2004, the FASB issued Emerging Issues Task Force Issue No. 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets” (EITF 04-2). In this Issue, the Task Force reached the consensus that mineral rights are tangible assets. This consensus differs from the requirements of Statement of Financial Accounting Standards No. 141, “Business Combinations” and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which classify mineral rights as intangible assets. Effective with the 2004 second quarter, CONSOL Energy has reclassified mineral rights as property, plant and equipment in accordance with EITF 04-2.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted by recently issued accounting guidance, CONSOL Energy has recognized the benefits of the Act as of March 8, 2004 by adjusting the three months ended March 31, 2004 net income by approximately $2,200. The benefits of the Act are also recognized as a reduction of other postemployment benefit costs in the three months ended June 30, 2004.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entities activities, is entitled to receive a majority of the variable interest entities residual returns, or both. The interpretation also requires disclosures about variable interest entities that the company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 applied immediately to variable interest entities created after January 31, 2003. Effective December 2003, the FASB elected to defer the effective date until the first fiscal year or interim period that begins after March 15, 2004 for variable interest entities in which an enterprise acquired before February 1, 2003. As of June 30, 2004, management believes that CONSOL Energy does not have any variable interest entities, therefore, there is no impact from the adoption of this standard.

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

General

CONSOL Energy had net income of $26 million for the three months ended June 30, 2004 compared to $11 million for the three months ended June 30, 2003. Net income for the 2004 period improved from the 2003 period due to increased sales volumes and increased average sales prices for both coal and gas. The increase in sales volumes and average sales prices was offset, in part, by higher cost of goods sold attributable to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to higher royalty expense. Royalty expense increased primarily due to the increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period.

Total coal sales for the three months ended June 30, 2004 were 17.3 million tons of which 16.7 million tons were produced by CONSOL Energy operations or sold from inventory of company produced coal. This compares with total coal sales of 16.0 million tons for the three months ended June 30, 2003, of which 15.4 million tons were produced by CONSOL Energy operations, by our equity affiliates or sold from inventory of company produced coal. The increase in tons sold was due primarily to increased production as a result of the reactivation of the Loveridge Mine and higher production at the Bailey Mine. These increases in production were offset, in part, by lower recovery ratios (portion of extracted coal versus rock) at Enlow Fork Mine and Buchanan Mine. Production increases were also offset, in part, due to Mine 84 encountering adverse geological conditions. Company produced inventory, including our portion of inventory at equity affiliates, was 1.0 million tons at June 30, 2004 and was 1.3 million tons at December 31, 2003. CONSOL Energy currently has obligations to deliver 99% of its projected 2004 production, subject to the right of customers to defer delivery.

Sales volumes of coalbed methane gas, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 10.0% to 13.6 billion cubic feet in the 2004 period compared with 12.4 billion cubic feet in the 2003 period. The increase in sales volumes is primarily due to higher production as a result of additional wells coming on line from the ongoing drilling program. Our average sales price for coalbed methane gas, including sales of equity affiliates, and including the effects of derivative transactions, increased 21.8% to $4.98 per thousand cubic feet in the 2004 period compared with $4.09 per thousand cubic feet in the 2003 period. Gas prices through the second quarter of 2004 were higher than levels during the second quarter of 2003 due to continued concerns about declining North American gas production, as well as increased oil prices and economic recovery increasing demand.

CONSOL Energy restated first quarter 2004 net income by approximately $2.2 million to reflect the recognition of the favorable effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as of March 8, 2004 in accordance with recently issued accounting guidance.

In July 2004, CONSOL Energy announced that it expects to reactivate the Emery Mine in Utah during the third quarter of 2004. The mine, which has been idle since September 2003, is expected to produce about 0.2 million tons during the remainder of 2004. This production level will retain the federal coal leases that constitute a part of the mine’s reserves. CONSOL Energy is currently discussing sales contracts with potential customers.

On June 30, 2004, CONSOL Energy completed a $600 million senior secured credit facility to replace the existing $267 million facility. The new facility consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The revolving credit and Tranche B letter of credit facility will be used for general corporate purposes of CONSOL Energy and its subsidiaries, including working capital, capital expenditures and letter of credit needs. Cash collateralized letters of credit issued previously were transferred to the Tranche B facility and the $190 million of restricted cash was released and used to pay down short-term debt.

In June 2004, Moody’s Investor Service upgraded CONSOL Energy’s 7.875% notes due 2012 to Ba2 (12th lowest out of 21 rating categories). Moody’s Investor Service also upgraded CONSOL Energy’s subsidiary’s medium term notes to Ba2. Moody’s Investor Service also affirmed the Ba3 senior implied rating and the Ba2 rating on CONSOL Energy’s $600 million secured bank facility, which replaced the Company’s previous secured $267 million bank facility. The rating outlook is stable. Obligations which are rated “Ba” are considered to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. The modifier 2 indicates that the obligation ranks in the mid-range of its generic rating category. The modifier 3 indicates that the obligation ranks in the lower end of its generic rating category.

In July 2004, Standard and Poor’s upgraded CONSOL Energy’s 7.875% notes due 2012 to BB (12^th lowest out of 22 rating categories). Also, in July 2004, Standard and Poor’s affirmed CONSOL Energy’s BB- corporate credit rating and confirmed a BB rating (12^th lowest out of 22 rating categories) with a recovery rate of ‘1’ to CONSOL Energy’s $600 million secured bank facility, which replaced the Company’s previous secured $267 million bank facility. The outlook is stable. Standard and Poor’s defines an obligation rated ‘BB’ as less vulnerable to nonpayment than other speculative issues. However, the rating indicates that an obligor faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. The rating of BB with a recovery rating of ‘1’ indicates a high expectation of full recovery of principal in the event of a default.

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

Results of Operations

Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003

Net Income

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


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Coal Sales-Produced and Purchased	$	514	$	441	$	73		16.6	%
Produced Gas Sales		67		51		16		31.4	%
Purchased Gas Sales		16		—		16		100.0	%
Other Sales and Other Income		78		65		13		20.0	%

Total Revenue and Other Income		675		557		118		21.2	%
Coal Cost of Goods Sold—Produced and Purchased		386		315		71		22.5	%
Produced Gas Cost of Goods Sold		24		21		3		14.3	%
Purchased Gas Cost of Goods Sold		16		—		16		100.0	%
Other Cost of Goods Sold		57		48		9		18.8	%

Total Cost of Goods Sold		483		384		99		25.8	%
Other		166		157		9		5.7	%

Total Costs		649		541		108		20.0	%

Earnings (Loss) before Income Taxes		26		16		10		62.5	%
Income Tax Expense (Benefit)		—		5		(5	)	(100.0	)%

Net Income	$	26	$	11	$	15		136.4	%

Net income for the 2004 period improved from the 2003 period due to increased sales volumes and increased average sales prices for both coal and gas. The increase in sales volumes and average sales price was offset, in part, by higher cost of goods sold attributable to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to an increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period.

Revenue

Revenue and other income increased due to the following items:


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Sales
Produced Coal	$	498	$	423	$	75		17.7	%
Purchased Coal		16		18		(2	)	(11.1	)%
Produced Gas		67		51		16		31.4	%
Purchased Gas		16		—		16		100.0	%
Industrial Supplies		20		16		4		25.0	%
Other		7		3		4		133.3	%

Total Sales		624		511		113		22.1	%
Freight Revenue		30		26		4		15.4	%
Other Income		21		20		1		5.0	%

Total Revenue and Other Income	$	675	$	557	$	118		21.2	%

The increase in Company produced coal sales revenue was due mainly to the increase in volumes sold and the increase in average sales price per ton during the 2004 period.


	2004 Period		2003 Period		Variance		Percentage Change
Produced Tons Sold (in millions)		16.7		15.3		1.4	9.2	%
Average Sales Price Per Ton	$	29.73	$	27.67	$	2.06	7.4	%

The increase in tons sold is due primarily to the Loveridge Mine resuming production in March 2004 and increased production at the Bailey Mine. Loveridge experienced a fire in February 2003 while it was in the process of developing a new underground area that would be mined with longwall mining equipment. The fire delayed completion of the development until March 2004. The increased production at Loveridge was offset, in part, by lower production at Enlow Fork Mine and Buchanan Mine. Production increases were also offset, in part, due to Mine 84 encountering adverse geological conditions. The increase in average sales price primarily reflects stronger prices negotiated in the prior year and an overall improvement in prices in the eastern coal market for domestic utility, export utility and metallurgical products.

The decrease in Company purchased coal sales revenue was due to a decrease in sales volume and a decrease in average sales price per ton of purchased coal.


	2004 Period		2003 Period		Variance			Percentage Change
Purchased Tons Sold (in millions)		0.5		0.6		(0.1	)	(16.7	)%
Average Sales Price Per Ton	$	30.90	$	31.11	$	(0.21	)	(0.7	)%

The reduced average sales price is primarily due to sales of purchased coal in 2004 at prices that were agreed to during periods of lower prices compared to the 2004 period. Lower sales revenues from Company purchased coal were also due to lower sales volumes in the 2004 period compared to the 2003 period.

The increase in gas sales revenue was primarily due to a higher average sales price per thousand cubic feet and increased volumes sold in the 2004 period compared to the 2003 period.


	2004 Period		2003 Period		Variance		Percentage Change
Produced Gas Sales Volumes (in billion gross cubic feet)		13.6		12.4		1.2	9.7	%
Average Sales Price Per thousand cubic feet (including effects of derivative transactions)	$	4.97	$	4.09	$	0.88	21.5	%

We believe that the 2004 gas market price increases were largely driven by continued concerns about declining North American gas production, as well as increased oil prices and the economic recovery which resulted in greater electricity use in our principal markets. CONSOL Energy enters into various physical gas supply transactions with our gas marketers (gas sales transactions generally exceeding one year.) CONSOL Energy has also entered into various gas swap transactions that qualify as financial cash flow hedges. These gas swap transactions exist parallel to the underlying physical transactions. In the 2004 period, these cash flow hedges represented 30% of our produced sales volumes at an average price of $5.05 per thousand cubic feet. We intend these transactions to cover approximately 27% of our current 2004 estimated produced sales volumes at an average price of $5.02 per thousand cubic feet. CONSOL Energy sold 90% of its gas sales volumes in the three months ended June 30, 2004 under fixed price contracts at an average price of $4.93 per thousand cubic feet compared to 88% of its gas sales volumes under fixed price contracts in the three months ended June 30, 2003 at an average of $3.86 per thousand cubic feet. Higher sales volumes in the 2004 period were a result of wells coming on line from the ongoing drilling program, which allowed CONSOL Energy to take advantage of increased prices.

Due to the anticipated curtailment in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the Columbia Gas Transmission Corporation’s interstate gas pipeline, CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline. The firm transportation arrangement covers the May 2004 through October 2004 period and assures pipeline capacity of our projected production. In addition, in order to satisfy obligations to certain customers, we purchased from and sold to other gas suppliers, which increased our revenues and our costs.


	2004 Period		2003 Period	Variance		Percentage Change
Purchased Gas Sales Volumes (in billion gross cubic feet)		2.4	—		2.4	100.0	%
Average Sales Price Per thousand cubic feet	$	6.73	—	$	6.73	100.0	%

CONSOL Energy believes that it will be necessary to purchase firm transportation guarantees of capacity in the future as a result of increased capacity demands on the Columbia pipeline.

The increase in revenues from the sale of industrial supplies was primarily due to increased sales volumes.

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

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


	2004 Period		2003 Period			Dollar Variance			Percentage Change
Gain on sale of assets	$	8	$	9		$	(1	)	(11.1	)%
Equity in loss of affiliates		—		(5	)		5		100.0	%
Other miscellaneous		13		16			(3	)	(18.8	)%

Total other income	$	21	$	20		$	1		5.0	%

The gain on sale of assets in the 2004 period is due to the June 2004 finalization of the working capital and other items related to the sale of its Canadian coal assets completed in February 2003. The finalization of these items resulted in a gain on sale of assets of approximately $3 million. The additional gain on sale of assets in the 2004 period is related to the sale of several previously closed operations. The 2003 period gain on sale of assets is primarily related to the expiration of a $5 million option granted to a third party to purchase property and the sale of surplus equipment.

The equity losses of affiliates in the 2003 period primarily represent our share of Glennies Creek Mine operating losses. CONSOL Energy’s interests in Glennies Creek were sold in February 2004.

Other miscellaneous income in the 2003 period included a $3 million refund received from the federal government for prior claims related to harbor maintenance fees imposed by Federal statute that was subsequently declared unconstitutional.

Costs


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Cost of Goods Sold and Other Charges
Produced Coal	$	370	$	297	$	73		24.6	%
Purchased Coal		16		18		(2	)	(11.1	)%
Produced Gas		24		21		3		14.3	%
Purchased Gas		16		—		16		100.0	%
Industrial Supplies		23		17		6		35.3	%
Closed and Idle Mines		20		15		5		33.3	%
Other		14		16		(2	)	(12.5	)%

Total Cost of Goods Sold	$	483	$	384	$	99		25.8	%

Increased cost of goods sold and other charges for company produced coal was due mainly to a 9.2% increase in sales volumes and a 13.6% increase in cost per unit of produced coal sold.


	2004 Period		2003 Period		Variance		Percentage Change
Produced Tons Sold (in millions)		16.7		15.3		1.4	9.2	%
Average Cost of Goods Sold and Other Charges Per Ton	$	22.08	$	19.44	$	2.64	13.6	%

Average cost of goods sold and other charges per ton for company produced coal increased in the 2004 period compared to the 2003 period. The increase in average cost per ton was due primarily to increased Combined Fund premiums related to a premium differential announced by the Social Security Administration for the past eleven plan years for beneficiaries assigned to CONSOL Energy. The increase is approximately $28 million for the plan year beginning October 1, 2003, of which approximately 75% has been expensed from October 1, 2003 through June 30, 2004. Approximately $7 million of expense was recognized in the three months ended June 30, 2004. CONSOL estimates the additional costs for plan years subsequent to October 1, 2003 will be approximately $2 million per year. Cost per ton for produced coal also increased due to higher maintenance, labor and supply costs per unit. Increased labor and supply costs were related to additional continuous miner shifts in the 2004 period. Among other things, continuous mining machines are used to mine the coal reserve in such a way that large, rectangular blocks of coal, called panels, are delineated underground in preparation for mining by larger more efficient longwall machines in mines equipped with these systems. Typically, mines attempt to delineate more than one panel in advance so that as the longwall machine completes the extraction of coal in one panel, it can move without delay to another prepared panel. Continuous mining machines are more labor intensive and use more supplies per ton of coal produced than longwall mining systems. Cost of goods sold and other charges also increased due to higher sales volumes of company produced coal in the 2004 period compared to the 2003 period. These increases in costs were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period.

Purchased coal cost of goods sold and other charges decreased slightly in the 2004 period compared to the 2003 period.


	2004 Period		2003 Period		Variance			Percentage Change
Purchased Tons Sold (in millions)		0.5		0.6		(0.1	)	(16.7	)%
Average Cost of Goods Sold and Other Charges Per Ton	$	30.22	$	29.88	$	(0.34	)	(1.1	)%

The decrease in cost of goods sold and other charges for purchased coal is primarily due to lower volumes sold in the 2004 period compared to the 2003 period. The decreased costs due to volume was offset, in part, by the increased average cost of purchased coal. The increase in the average cost of purchased coal is primarily due to increased market price for coal, offset, in part, by purchasing some coal in the 2004 period under commitments made during the prior year when prices were lower. Due to the low volume of purchased coal sold in both periods, the decrease in average cost of goods sold and other charges per ton did not have a significant impact on the period-to-period comparison.

Gas cost of goods sold and other charges increased due to increased average cost per thousand cubic feet sold and increased volumes.


	2004 Period		2003 Period		Variance		Percentage Change
Gas Sales Volumes (in billion gross cubic feet)		13.6		12.4		1.2	9.7	%
Average Cost Per Thousand Cubic Feet	$	1.80	$	1.72	$	0.08	4.7	%

The increase in average cost per thousand cubic feet of gas sold was also attributable to approximately $0.08 increase per thousand cubic feet related the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to a $0.04 increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the 21.5% increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period. Gas cost of goods sold and other charges also increased due to the increased volumes sold in the 2004 period as discussed previously.

In addition, in order to satisfy obligations to certain customers, we purchased from and sold to other gas suppliers, which increased our revenues and our costs.


	2004 Period		2003 Period	Variance		Percentage Change
Purchased Gas Sales Volumes (in billion gross cubic feet)		2.4	—		2.4	100.0	%
Average Cost Per thousand cubic feet	$	6.79	—	$	6.79	100.0	%

CONSOL Energy believes that it will be necessary to purchase firm transportation capacity in the future as a result of increased capacity demands on the Columbia pipeline.

Industrial supplies cost of goods sold increased primarily due to higher sales volumes.

Closed and idle mine cost was $20 million in the 2004 period compared to $15 million in the 2003 period. The $5 million increase in the 2004 period compared to the 2003 period was due primarily to mine closing, perpetual care water treatment and reclamation liability adjustments as a result of updated engineering survey adjustments. Survey adjustments resulted in $3 million of expense in the 2004 period for closed and idled locations. Closed and idle mine cost also increased approximately $1 million due to the interest component of

workers’ compensation expense in the 2004 period. Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. The remaining $1 million increase was due to various miscellaneous transactions that occurred throughout both periods, none of which were individually material.

The decrease in miscellaneous cost of goods sold and other charges reflect the following items:


	2004 Period			2003 Period		Dollar Variance			Percentage Change
Buckeye landfill superfund site liability transfer	$	(1	)	$	—	$	(1	)	(100.0	)%
Incentive compensation		7			4		3		75.0	%
Miscellaneous other		8			12		(4	)	(33.3	)%

	$	14		$	16	$	(2	)	(12.5	)%

In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized an estimated liability for remediation of this site. The Transfer and Indemnity transaction resulted in the reversal of the remaining liability and the recognition of approximately $1 million of income.

Incentive compensation expense increased in the 2004 period compared to the 2003 period due mainly to the level of earnings achieved in the 2004 period compared to expected 2004 annual results. The incentive compensation program is designed to increase compensation to eligible employees when CONSOL Energy reaches predetermined earnings targets and the employees reach predetermined performance targets.

Miscellaneous other costs decreased $4 million due to various transactions that occurred throughout both periods, none of which were individually material.

Freight expense is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to whom CONSOL Energy contractually provides transportation. Freight expense is billed to customers and the revenue from such billing equals the transportation expense.

2004

Period

2003

Period

Dollar

Variance

Percentage

Change

Freight expense

15.4

Selling, general and administrative costs have decreased due to the following items:


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Professional consulting and other purchased services	$	3	$	4	$	(1	)	(25.0	)%
Wages and salaries		6		7		(1	)	(14.3	)%
Other post employment benefits		—		1		(1	)	(100.0	)%
Insurance		1		—		1		100.0	%
Other		7		7		—		—

Total Selling, General and Administrative	$	17	$	19	$	(2	)	(10.5	)%

Costs of professional consulting and other purchased services have decreased in the 2004 period primarily due to lower software support services, offset, in part, by additional services provided by various professional groups for services provided in relation to reviewing employee benefit plans and compensation packages provided by CONSOL Energy.

Wages and salaries for selling, general and administrative employees have decreased primarily due to the December 2003 reduction of approximately 100 positions. The reduction program was primarily a result of the developments in CONSOL Energy’s business, including operating fewer mines than had been operated in the past, the sale of non-core businesses and de-emphasizing coal exports.

Costs related to other post employment benefits in the 2004 period have decreased from the 2003 period due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period.

Costs for insurance increased primarily due to director and officer insurance costs incurred in the 2004 period. CONSOL Energy officers and directors were previously insured under the RWE AG general liability policy. CONSOL Energy began to independently insure its directors and officers in June 2003.

Depreciation, depletion and amortization has remained unchanged in the 2004 period from the 2003 period.


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Coal	$	50	$	49	$	1		2.0	%
Gas:
Production		5		7		(2	)	(28.6	)%
Gathering		3		3		—		—

Total Gas		8		10		(2	)	(20.0	)%
Other		4		3		1		33.3	%

Total depreciation, depletion and amortization	$	62	$	62	$	—		—	%

The increase in coal depreciation, depletion and amortization was primarily attributable to higher units-of-production financial depletion related to higher production volumes in the 2004 period compared to the 2003 period.

The decrease in gas production depreciation, depletion and amortization was primarily due to gob gas production. Gob wells generally produce for less than twelve months. As a result of the short production life, costs of the wells are generally expensed instead of capitalized and then amortized. Gathering depreciation, depletion and amortization is recorded on the straight-line method and remained consistent in both periods.

Other depreciation, depletion and amortization increased primarily due to the depreciation related to the new integrated information technology system that is currently being used. All modules of the system have been implemented and are currently being amortized on a straight-line basis over seven years. All modules of the integrated information technology system were not completed in the 2003 period and therefore were not being amortized at that time.

Interest expense has remained unchanged in the 2004 period compared to the 2003 period.


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Commercial paper and revolver	$	1	$	—	$	1		100.0	%
Other		7		8		(1	)	(12.5	)%

Total Interest Expense	$	8	$	8	$	—		—

Interest expense on commercial paper and the revolving credit facility increased in the 2004 period primarily due to an increase from 1.6% to 5.6% per annum in our average interest rate on the bank credit facility rather than on the commercial paper markets in the 2003 period of 1.6% per annum. As of July 2003, CONSOL Energy was no longer able to participate as a seller of commercial paper due to Standard and Poor’s lowering its rating.

Other interest expense was reduced primarily due to the increase in the amount of interest capitalized in the 2004 period as a result of the higher level of capital projects funded from operating cash flows in the three months ended June 30, 2004.

Taxes other than income increased primarily due to the following items:


	2004 Period		2003 Period		Dollar Variance		Percentage Change
Production taxes:
Coal	$	30	$	26	$	4	15.4	%
Gas		2		1		1	100.0	%

Total Production Taxes		32		27		5	18.5	%
Other taxes:
Coal		14		13		1	7.7	%
Gas		1		1		—	—	%
Other		1		1		—	—	%

Other		16		15		1	6.7	%

Total Taxes Other Than Income	$	48	$	42	$	6	14.3	%

Increased coal production taxes are primarily due to higher black lung excise and severance taxes attributable to higher coal volumes and higher average sales price. Increased gas production taxes are primarily due to higher severance taxes related to increased gas production volumes and higher average sales prices.

Increased other taxes in the coal segment are due to higher payroll taxes related to an increase in the 2004 period labor costs compared to the 2003 period. The increased labor costs are primarily related to the late March 2004 start up of the Loveridge mine. This mine was idled throughout the 2003 period.

In the 2003 period, CONSOL Energy received refunds for claims and related interest for certain excise taxes on export sales. Upon receipt of these refunds, the estimate of the interest receivable was adjusted to the actual amount received resulting in an additional $0.6 million of income in the 2003 period. A $26 million receivable for the claims for the years 1991-1993 is still outstanding. There is no interest receivable related to the claims that are still outstanding.

Income Taxes


	2004 Period			2003 Period			Variance			Percentage Change
Earnings (Loss) Before Income Taxes	$	26		$	15		$	11		73.3	%
Tax Expense (Benefit)		—			5			(5	)	(100.0	)%
Effective Income Tax Rate		0.0	%		30.8	%		(30.8	)%

CONSOL Energy’s effective tax rate is sensitive to changes to the relationship between pre-tax earnings and percentage depletion. The effective rate for the 2004 period was also impacted by the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. See “Note 8—Income Taxes” in Item 1, Condensed Financial Statement of this Form 10-Q.

Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003

Net Income

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


	2004 Period		2003 Period			Dollar Variance		Percentage Change
Coal Sales-Produced and Purchased	$	1,012	$	878		$	134	15.3	%
Produced Gas Sales		137		102			35	34.3	%
Purchased Gas Sales		16		—			16	100.0	%
Gain on Sale of Glennies Creek		14		—			14	100.0	%
Other Sales and Other Income		146		136			10	7.4	%

Total Revenue and Other Income		1,325		1,116			209	18.7	%
Coal Cost of Goods Sold—Produced and Purchased		747		638			109	17.1	%
Produced Gas Cost of Goods Sold		48		40			8	20.0	%
Purchased Gas Cost of Goods Sold		16		—			16	100.0	%
Other Cost of Goods Sold		118		114			4	3.5	%

Total Cost of Goods Sold		929		792			137	17.3	%
Other		332		320			12	3.8	%

Total Costs		1,261		1,112			149	13.4	%

Earnings (Loss) before Income Taxes		64		4			60	1,500.0	%
Income Tax Expense (Benefit)		5		(10	)		15	150.0	%

Earnings Before Cumulative Effect of Change in Accounting Principle		59		14			45	321.4	%
Cumulative Effect of Change in Accounting Principle		83		5			78	1,560.0	%

Net Income	$	142	$	19		$	123	647.4	%

Net income for the 2004 period improved due to increased coal and gas production and increased average sales prices for both coal and gas. The higher net income was also due to the gain on sale of the stock of the Company’s wholly owned subsidiary, CNX Australia Pty Limited, to certain affiliates of AMCI, Inc. In addition, net income for the 2004 period improved due to the cumulative effect of change in accounting related to workers’ compensation. Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Prior to the change, the Company recorded its workers’ compensation liability on an undiscounted basis. Under the new method, the Company recorded its liability on a discounted basis, which has been actuarially determined using various assumptions, including discount rate and projected future cost trends. The increase in net income was reduced, in part, by higher cost of goods sold attributable, in part, to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due mainly to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to an increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the increase in average sales in the 2004 period compared to the 2003 period.

Revenue

Revenue and other income increased due to the following items:


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Sales
Produced Coal	$	976	$	839	$	137		16.3	%
Produced Coal—Related Party		—		1		(1	)	(100.0	)%

Total Produced Coal		976		840		136		16.2	%
Purchased Coal		36		38		(2	)	(5.3	)%
Produced Gas		137		102		35		34.3	%
Purchased Gas		16		—		16		100.0	%
Industrial Supplies		37		31		6		19.4	%
Other		12		8		4		50.0	%

Total Sales		1,214		1,019		195		19.1	%
Freight Revenue		61		57		4		7.0	%
Freight Revenue—Related Party		—		1		(1	)	(100.0	)%

Total Freight Revenue		61		58		3		5.2	%
Other Income		50		39		11		28.2	%

Total Revenue and Other Income	$	1,325	$	1,116	$	209		18.7	%

The increase in Company produced coal sales revenue was due mainly to the increase in volumes sold and the increase in average sales price per ton during the 2004 period.


	2004 Period		2003 Period		Variance		Percentage Change
Produced Tons Sold (in millions)		33.5		30.7		2.8	9.1	%
Average Sales Price Per Ton	$	29.15	$	27.40	$	1.75	6.4	%

The increase in tons sold is due primarily to the Loveridge Mine resuming production in March 2004 and improved production at the Bailey/Enlow complex. Loveridge experienced a fire in February 2003 while it was in the process of developing a new underground area that would be mined with longwall mining equipment. The fire delayed completion of the development until March 2004. Bailey/Enlow Complex production was improved in the 2004 period compared to the 2003 period due mainly to higher productivity at this complex. The increased production at Loveridge and Bailey/Enlow complex was offset, in part, by lower production at Buchanan Mine due to equipment problems and unfavorable geology. The increase in average sales price in 2004 primarily reflects higher prices negotiated in 2003 and an overall improvement in prices in the eastern coal market for domestic utility, export utility and metallurgical products.

The decrease in Company purchased coal sales revenue was due to lower sales volumes and lower average sales price per ton of purchased coal.


	2004 Period		2003 Period		Variance			Percentage Change
Purchased Tons Sold (in millions)		1.1		1.2		(0.1	)	(8.3	)%
Average Sales Price Per Ton	$	31.76	$	32.36	($	0.60	)	(1.9	)%

Decreased sales revenue from Company purchased coal was primarily due to lower sales volumes in the 2004 period compared to the 2003 period. Decreased sales revenues were also due to the reduced average sales price. Lower sales price per ton of Company purchased coal sold is primarily due to sales of purchased coal in 2004 at prices that were agreed to during periods of lower prices compared to the 2004 period.

The increase in gas sales revenue was primarily due to a higher average sales price per thousand cubic feet and increased volumes sold in the 2004 period compared to the 2003 period.


	2004 Period		2003 Period		Variance		Percentage Change
Gas Sales Volumes (in billion gross cubic feet)		26.6		24.1		2.5	10.4	%
Average Sales Price Per thousand cubic feet (including effects of derivative transactions)	$	5.14	$	4.23	$	0.91	21.5	%

We believe that the 2004 gas market price increases were largely driven by continued concerns about declining North American gas production, as well as increased oil prices and economic recovery which resulted in greater electricity use in our principal markets. CONSOL Energy enters into various physical gas supply transactions with our gas marketers (gas sales transactions generally exceeding one year.) CONSOL Energy has also entered various gas swap transactions. The gas swap transactions qualify as financial cash flow hedges. The swap transactions exist parallel to the underlying physical transactions. In the 2004 period, these cash flow hedges represented 26% of our produced sales volumes at an average price of $5.22 per thousand cubic feet. We intend these transactions to cover approximately 27% of our current 2004 estimated produced sales volumes at an average price of $5.02 per thousand cubic feet. CONSOL Energy sold 86% of its gas sales volumes in the six months ended June 30, 2004 under fixed price contracts at an average price of $5.08 per thousand cubic feet compared to 88% of its gas sales volumes under fixed price sales contracts in the six months ended June 30, 2003 at an average of $4.03 per thousand cubic feet. Higher sales volumes were a result of wells coming on line from the ongoing drilling program, which allowed CONSOL Energy to take advantage of increased prices.


	2004 Period		2003 Period	Variance		Percentage Change
Purchased Gas Sales Volumes (in billion gross cubic feet)		2.4	—		2.4	100.0	%
Average Sales Price Per thousand cubic feet	$	6.72	—	$	6.72	100.0	%

CONSOL Energy believes this type of transaction will continue as a result of increased capacity demands on the Columbia pipeline.

The increase in revenues from the sale of industrial supplies was primarily due to increased sales volumes.


	2004 Period			2003 Period			Dollar Variance			Percentage Change
Gain on sale of assets	$	30		$	17		$	13		76.5	%
Equity in loss of affiliates		(3	)		(5	)		2		40.0	%
Harbor maintenance fees		—			3			(3	)	(100.0	)%
Other miscellaneous		23			24			(1	)	(4.2	)%

Total other income	$	50		$	39		$	11		28.2	%

The increase in gain on sale of assets is due mainly to CONSOL Energy’s sale of stock in its wholly owned subsidiary CNX Australia Pty Limited to certain affiliates of AMCI, Inc. for $27.5 million. Certain affiliates of AMCI, Inc. also assumed approximately $21.2 million of debt, and associated interest rate swaps and foreign currency hedges. CNX Australia Pty Limited, through its wholly owned subsidiary CONSOL Energy Australia Pty Limited, owned a 50% interest in the Glennies Creek Mine in New South Wales, Australia with its joint venture partner Maitland Main Collieries Pty Limited, an affiliate of AMCI, Inc. The sale was completed on February 25, 2004 and resulted in a pre-tax gain of approximately $14.4 million. The additional gain on sale of assets in the 2004 period is related to the sale of several previously closed operations. The 2003 period gain on sale of assets is primarily related to the sale of surplus equipment and the expiration of a $5 million option granted to a third party to purchase property and the sale of surplus equipment.

The equity losses of affiliates is due mainly to the equity losses related to Glennies Creek Mine operating results prior to the sale that occurred in February 2004.

An additional $1 million decrease in other income was due to various transactions that occurred throughout both periods, none of which were individually material.

Costs


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Cost of Goods Sold and Other Charges
Produced Coal	$	712	$	601	$	111		18.5	%
Purchased Coal		35		37		(2	)	(5.4	)%
Produced Gas		48		40		8		20.0	%
Purchased Gas		16		—		16		100.0	%
Industrial Supplies		43		35		8		22.9	%
Closed and Idle Mines		36		30		6		20.0	%
Other		39		49		(10	)	(20.4	)%

Total Cost of Goods Sold	$	929	$	792	$	137		17.3	%

Increased cost of goods sold and other charges for company produced coal was due mainly to a 8.7% increase in cost per unit of produced coal sold and a 9.1% increase in sales volumes.


	2004 Period		2003 Period		Variance		Percentage Change
Produced Tons Sold (in millions)		33.5		30.7		2.8	9.1	%
Average Cost of Goods Sold and Other Charges Per Ton	$	21.29	$	19.59	$	1.70	8.7	%

delineate more than one panel in advance so that as the longwall machine completes the extraction of coal in one panel, it can move without delay to another prepared panel. Continuous mining machines are more labor intensive and use more supplies per ton of coal produced than longwall mining systems. Cost of goods sold and other charges also increased due to higher sales volumes of company produced coal in the 2004 period compared to the 2003 period. These increases in costs were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period.

Purchased coal cost of goods sold and other charges decreased in the 2004 period compared to the 2003 period.


	2004 Period		2003 Period		Variance			Percentage Change
Purchased Tons Sold (in millions)		1.1		1.2		(0.1	)	(8.3	)
Average Cost of Goods Sold and Other Charges Per Ton	$	30.86	$	31.47	$	(0.61	)	(1.9	)%

The decrease in cost of goods sold and other charges for purchased coal is primarily due to lower volumes sold in the 2004 period compared to the 2003 period. Due to the low volume of purchased coal sold in both periods, the decrease in average cost of goods sold and other charges per ton did not have a significant impact on the period-to-period comparison.

Gas cost of goods sold and other charges increased due to increased volumes and increased average cost per thousand cubic feet sold.


	2004 Period		2003 Period		Variance		Percentage Change
Gas Sales Volumes (in billion gross cubic feet)		26.6		24.1		2.5	10.4	%
Average Cost Per Thousand Cubic Feet	$	1.80	$	1.65	$	0.15	9.1	%

Produced gas cost of goods sold and other charges increased due to the increased volumes sold in the 2004 period as discussed previously. Produced gas average cost per thousand cubic feet of gas sold also increased. The increase in average cost per thousand cubic feet of gas sold was also attributable to an $0.11 increase per thousand cubic feet in royalty expense. Royalty expense increased primarily due to the 21.5% increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period. Average cost per thousand cubic feet of gas sold also increased approximately $0.04 related to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production.

In addition, in order to satisfy obligations to certain customers, we purchased from and sold to other gas suppliers, which increased our revenues and our costs.


	2004 Period		2003 Period	Variance		Percentage Change
Purchased Gas Sales Volumes (in billion gross cubic feet)		2.4	—		2.4	100.0	%
Average Cost Per thousand cubic feet	$	6.78	—	$	6.78	100.0	%

CONSOL Energy believes this type of transaction will continue as a result of increased capacity demands on the Columbia pipeline.

Industrial supplies cost of goods sold increased primarily due to higher sales volumes.

Closed and idle mine cost was $36 million in the 2004 period compared to $30 million in the 2003 period. The increase in cost primarily reflects mine closing, perpetual care water treatment and reclamation liability adjustments as a result of updated engineering surveys. Survey adjustments resulted in $3 million of expense in the 2004 period for closed and idled locations. Closed and idle mine cost also increased approximately $2 million due to the interest component of workers’ compensation expense in the 2004 period. Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Closed and idled mine costs also increased $1 million due to costs related to the Emery mine in the 2004 period. This mine was operating in the 2003 period.

The decrease in miscellaneous cost of goods sold and other charges reflects the following items:


	2004 Period			2003 Period		Dollar Variance			Percentage Change
Loveridge fire	$	—		$	7	$	(7	)	(100.0	)%
Mine Eighty-Four fire		—			5		(5	)	(100.0	)%
Gas royalty dispute		—			6		(6	)	(100.0	)%
Other post employee benefit curtailment gain		(3	)		—		(3	)	(100.0	)%
Buckeye landfill superfund site liability transfer		(1	)		—		(1	)	(100.0	)%
Incentive compensation		15			4		11		275.0	%
Sales contract buy outs		4			—		4		100.0	%
Other		24			27		(3	)	(11.1	)%

	$	39		$	49	$	(10	)	(20.4	)%

In February 2003, Loveridge Mine experienced a fire near the bottom of the slope entry that is used to carry coal from the mine to the surface. The costs of extinguishing the fire were estimated to be approximately $7 million, net of expected insurance recovery, attributable to cost of goods sold and other charges as of June 30, 2003. In late December 2002, the mine had begun the process of developing a new underground area that would be mined with longwall mining equipment that was expected to be installed later in 2003. The fire delayed this installation until March 2004.

In January 2003, Eighty-Four Mine experienced a fire along several hundred feet of the conveyor belt entry servicing the longwall section of the mine. The fire was extinguished approximately two weeks later. On January 20, 2003, the mine resumed production on a limited basis with continuous mining machines, while repairs continued on the belt entry. The fire caused damage to the roof support system, the conveyor belt and the steel framework on which the belt travels. Repairs took several weeks to complete and were estimated to cost approximately $5 million, net of expected insurance recovery, attributable to cost of goods sold and other related charges. Longwall coal production, which accounts for the majority of coal normally produced at the mine resumed on February 10, 2003.

Miscellaneous cost of goods sold and other charges also decreased due to a $6 million payment made in the 2003 period of gas royalties in connection with a dispute between a subsidiary of CONSOL Energy and certain gas lessors.

Due to the restructuring that occurred in December 2003, a curtailment gain related to the other post employment benefit plan of approximately $3 million was recognized in the 2004 period. Due to CONSOL Energy’s measurement date being September 30, the gain was not able to be recognized in the financial statements until the quarter ended March 31, 2004.

In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized or estimated liability for remediation of this site. The Transfer and Indemnity transaction resulted in the reversal of the remaining liability and the recognition of approximately $1 million of income.

In the 2004 period, agreements were made with several customers in order to release tons committed under lower priced contracts for sale to other customers at higher pricing.

Other cost of goods sold decreased $5 million due to various transactions that occurred throughout both periods, none of which were individually material.

2004

Period

2003

Period

Dollar

Variance

Percentage

Change

Freight expense

5.2

Selling, general and administrative costs have remained stable in both periods due to the following items:


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Professional consulting and other purchased services	$	7	$	6	$	1		16.7	%
Insurance		1		—		1		100.0	%
Wages and salaries		13		14		(1	)	(7.1	)%
Other post-employment benefits		1		3		(2	)	(66.7	)%
Other		14		13		1		7.7	%

Total Selling, General and Administrative	$	36	$	36	$	—		—

Costs of professional consulting and other purchased services have increased in the 2004 period primarily due to services provided to complete procedures related to the special investigation into matters alleged in an anonymous letter and to services provided in relation to reviewing employee benefit plans and compensation packages provided by CONSOL Energy. These increases were offset, in part, by lower software support services.

Costs for insurance increased primarily due to director and officer insurance costs incurred in the 2004 period. CONSOL Energy officers and directors were previously insured under the RWE AG general liability policy at lower corporate fees. CONSOL Energy began to independently insure its directors and officers in June 2003.

Wages and salaries for selling, general and administrative employees have decreased primarily due to the December 2003 reduction in workforce program. The reduction program was primarily focused on reducing the number of positions in the selling, general and administrative areas to better align with the Company’s current business strategy. The program reduced approximately 100 positions. These reductions were offset, in part, by the completion of the integrated information technology system provided by SAP AG in August 2003. Prior to the completion, wages and salaries for dedicated staff were capitalized as a component of the cost of the implementation project and are being amortized over seven years. The wages capitalized for the six months ended June 30, 2003 were approximately $2 million.

Other selling, general and administrative costs increased $1 million due to various transactions that occurred throughout both periods, none of which are individually material.

The decrease in depreciation, depletion and amortization reflects the following items:


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Coal	$	99	$	99	$	—		—	%
Gas:
Production		11		14		(3	)	(21.4	)%
Gathering		5		5		—		—

Total Gas		16		19		(3	)	(15.8	)%
Other		6		5		1		20.0	%

Total depreciation, depletion and amortization	$	121	$	123	$	(2	)	(1.6	)%

Coal depreciation, depletion and amortization remained stable in the 2004 period compared to the 2003 period. Coal units-of-production financial depletion expense increased in the period-to-period comparison due to higher production, but was offset, in part, due to mine equipment becoming fully depreciated.

Other depreciation, depletion and amortized increased primarily due to the depreciation related to the new integrated information technology system that is currently being used. All modules of the system have been implemented and are currently being amortized on a straight-line basis over seven years. All modules of the integrated information technology system were not completed in the 2003 period and therefore were not being amortized at that time.

Interest expense decreased in the 2004 period compared to the 2003 period.


	2004 Period		2003 Period		Dollar Variance			Percentage Change
Commercial paper and revolver	$	3	$	1	$	2		200.0	%
Other		14		17		(3	)	(17.6	)%

Total Interest Expense	$	17	$	18	$	(1	)	(5.6	)%

Interest expense increased primarily due to an increase in the weighted average interest rate from 1.6% per annum in the 2003 period to 5.2% per annum in the 2004 period. As of July 2003, CONSOL Energy was no longer able to participate as a seller of commercial paper due to Standard and Poor’s lowering its rating of our long-term debt to BB+.

Other interest expense was reduced primarily due to the increase in the amount of interest capitalized in the current period as a result of the higher level of capital projects funded from operating cash flows in the six months ended June 30, 2004.

Taxes other than income increased primarily due to the following items:


	2004 Period		2003 Period		Dollar Variance		Percentage Change
Production taxes:
Coal	$	58	$	50	$	8	16.0	%
Gas		4		3		1	33.3	%

Total Production Taxes		62		53		9	17.0	%
Other taxes:
Coal		30		28		2	7.1	%
Gas		2		2		—	—	%
Other		3		3		—	—	%

Other		35		33		2	6.1	%

Total Taxes Other Than Income	$	97	$	86	$	11	12.8	%

In the 2003 period, CONSOL Energy received refunds for claims and related interest for certain excise taxes on export sales. Upon receipt of these refunds, the estimate of interest receivable was adjusted to the actual amount received resulting in an additional $0.6 million of income. A $26 million receivable for the claims for the years 1991-1993 is still outstanding. There is no interest receivable related to the claims that are still outstanding.

Income Taxes


	2004 Period			2003 Period			Variance			Percentage Change
Earnings (Loss) Before Income Taxes	$	64		$	4		$	60		1,500.0	%
Tax Expense (Benefit)		5			(10	)		15		150.0	%
Effective Income Tax Rate		7.6	%		(231.4	)%		239.0	%

Cumulative Effect of Change in Accounting

Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Additionally, the workers’ compensation liability is recorded on a discounted basis, which has been actuarially determined using various assumptions, including a discount rate of 6% and a future health care trend rate of 10%, declining to 4.75% in 2010. CONSOL Energy believes this change was preferable since it aligns the accounting with the Company’s other long-term employee benefit obligations, which are recorded on a discounted basis. Additionally, it provides a better comparison with the Company’s industry peers, the majority of which record the workers’ compensation liability on a discounted basis.

As a result of the change, CONSOL Energy reduced its workers’ compensation liability by $136 million and reduced its related deferred tax asset by $53 million. The cumulative effect adjustment recognized upon adoption was a gain of $83 million, net of a tax cost of approximately $53 million, and accordingly is reflected as a cumulative effect adjustment from a change in accounting.

Effective January 1, 2003, CONSOL Energy adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”, as required. CONSOL Energy reflected a gain of approximately $5 million, net of a tax cost of approximately $3 million. At the time of adoption, total assets, net of accumulated depreciation, increased approximately $59 million and total liabilities increased approximately $51 million. The amounts recorded upon adoption are dependent upon a number of variables, including the estimated future retirement costs, estimated proved reserves, assumptions involving profit margins, inflation rates and the assumed credit-adjusted risk-free interest rate.

Previous accounting standards generally used the units-of-production method to match estimated retirement costs with the revenues generated by the producing assets. In contrast, SFAS No. 143 requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. The depreciation will generally be determined on a units-of-production basis, whereas the accretion to be recognized will escalate over the life of the producing assets, typically as production declines. Because of the long lives of the underlying producing assets, the impact on net income in the near term is not expected to be material.

Liquidity and Capital Resources

CONSOL Energy generally has satisfied its working capital requirements and funded its capital expenditures and debt service obligations from cash generated from operations and proceeds from borrowings. On June 30, 2004, CONSOL Energy completed a $600 million Senior Secured Loan Agreement to replace the existing $267 million facility. The new agreement consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The new facility is secured by nearly all of the assets of the company. CONSOL Energy’s 7.875 percent bonds that mature in 2012 and CONSOL Energy’s subsidiary’s 8.25 percent medium-term notes maturing in 2007 have been equally and ratably secured. The facility can be used for letters of credit and borrowings for general corporate purposes. As of June 30, 2004, cash collateralized letters of credit issued under the previous facility have been transferred to the Tranche B facility and the $190 million of restricted cash has been released and was used to pay short-term debt. At our option, interest on borrowings under the new facility is based upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread that is dependent on our credit rating. The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The revolving credit facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450.0 million for the twelve months ended December 31, 2004. At June 30, 2004, this facility had approximately $226.6 million letters of credit issued and had no borrowings outstanding under the new facility, leaving approximately $373.4 million of unused capacity.

In June 2004, Moody’s Investor Service affirmed the rating of Ba2 (12^th lowest out of 21 rating categories) to the $600 million secured bank facility, which to replaced the Company’s secured $267 million bank facility. The rating outlook is stable. Obligations which are rated “Ba” are considered to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. The modifier 2 indicates that the obligation ranks in the middle of its generic rating category. In July 2004, Standard and Poor’s confirmed the BB rating (12^th lowest out of 22 rating

categories) with a recovery rate of ‘1’ to CONSOL Energy’s $600 million secured bank facility, which replaced the Company’s secured $267 million bank facility. Standard and Poor’s defines an obligation rated ‘BB’ as less vulnerable to nonpayment than other speculative issues. However, the rating indicates that an obligor faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. The recovery rating of ‘1’ indicates a high expectation of full recovery of principal in the event of a default.

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

In April 2003, CONSOL Energy and certain of its Subsidiaries entered into a receivables facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable that will provide, on a revolving basis, up to $125 million of short-term funding. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary, for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to CNX Funding Corporation. CNX Funding Corporation then sells, on a revolving basis, an undivided percentage interest in the pool of eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the trade receivables. CONSOL Energy has agreed to continue servicing the sold receivables for the financial institutions for a fee based upon market rates for similar services. The cost of funds are consistent with commercial paper rates plus a charge for administrative services paid to the financial institution. The receivables facility expires in 2006. At June 30, 2004, eligible accounts receivable total approximately $119.5 million and there was no subordinated retained interest. Accounts receivable totaling $125.0 million were removed from the consolidated balance sheet at June 30, 2004. In accordance with the facility agreement, the Company is able to receive proceeds based upon total eligible accounts receivable at the previous month-end. Proceeds at the end of the quarter, determined by eligible accounts receivable at May 31, 2004, exceeded the eligible accounts receivable at June 30, 2004. The excess proceeds of $5.5 million at June 30, 2004 are included in the accounts receivable balance of $125.0 million that was removed from the consolidated balance sheet. Related proceeds of $17.0 million are included in cash flows from operating activities in the consolidated statement of cash flows for the six months ended June 30, 2004.

CONSOL Energy believes that cash generated from operations and its borrowing capacity under its new credit facility will be sufficient to meet its working capital requirements, anticipated capital expenditures (other than major acquisitions), scheduled debt payments, anticipated dividend payments in 2004 and to provide required letters of credit. Nevertheless, the ability of CONSOL Energy to satisfy its working capital requirements, debt service obligations, to fund planned capital expenditures or pay dividends will depend upon its future operating performance, which will be affected by prevailing economic conditions in the coal and gas industries and other financial and business factors, some of which are beyond CONSOL Energy’s control.

In order to manage the market risk exposure of volatile natural gas prices in the future, CONSOL Energy enters into various physical gas supply transactions with our gas marketers (selling gas under short-term multi-month contract nominations generally not exceeding one year). CONSOL Energy has also entered into various gas swap transactions that qualify as financial cash flow hedges, which exist parallel to the underlying physical transactions. The fair value of these contracts was a loss of $15.3 million (net of $9.8 million of deferred tax) at June 30, 2004 and expense of $0.1 million for the six months ended June 30, 2004.

CONSOL Energy frequently evaluates potential acquisitions. CONSOL Energy has funded acquisitions primarily with cash generated from operations and a variety of other sources, depending on the size of the transaction, including debt financing. There can be no assurance that additional capital resources, including debt financing, will be available to CONSOL Energy on terms which CONSOL Energy finds acceptable, or at all.

Cash Flows (in millions) for the six months ended June 30


	2004 Period			2003 Period			Change
Cash flows provided by (used in) operating activities	$	188		$	239		$	(51	)
Cash used in investing activities	$	(190	)	$	(38	)	$	(152	)
Cash provided by (used in) financing activities	$	56		$	(199	)	$	255

Cash flows from operating activities have decreased primarily due to the following items:

•

Approximately $68 million was received in the 2003 period for refunds filed for 1994-1999 related to our black lung excise claims and related interest.

•

Under the accounts receivable securitization facility, cash proceeds of $17 million were received during the six months ended June 30, 2004 compared to $50 million received during the 2003 period.

These decreases in operating cashflows were offset, in part, by; the collection of approximately $13 million in the six months ended June 30, 2004 related to the mine fires experienced in 2003. Accounts receivables from the expected insurance recoveries related to the two mines fires of approximately $18 million were recorded in the 2003 period. Operating cashflows also improved due to increased net income as previously discussed.

Net cash used in or provided by investing activities changed primarily due to the following items:

•

Capital expenditures were $205 million in the 2004 period compared to $111 million in the 2003 period. 2004 capital expenditures include the purchase of longwall shields, development work at Loveridge and McElroy and the expansion of the Bailey Preparation Plant.

•

More proceeds from sales of assets received in the 2003 period than in the 2004 periods. Proceeds from the sales of assets in the 2003 period primarily were from the sale, in February 2003, of CONSOL Energy’s Canadian coal assets and port facilities to Fording Inc. for a note and cash. The note was exchanged for 3.2 million units in the Fording Canadian Coal Trust, a newly organized publicly traded trust which acquired the assets of Fording Inc. CONSOL Energy sold the coal trust units in March 2003.

Net cash received from or used in financing activities changed primarily due to the following items;

•

Payments of $178 million were made to reduce the outstanding commercial paper in the 2003 period.

•

Payments of approximately $65 million were made to reduce amounts borrowed under the revolving credit facility, which was replaced with a new facility, in the 2004 period.

•

Scheduled long-term debt repayments of $45 million were made in the 2004 period.

•

Dividend payments were $25 million in the 2004 period compared to $22 million in the 2003 period due to the additional 11 million shares of common stock that were issued by CONSOL Energy in September 2003.

•

Previously restricted cash of $190 million was released due to the completion of a new $600 million debt facility (see Liquidity section of Form 10-Q for additional discussion of the new debt facility).

The following is a summary of our significant contractual obligations at June 30, 2004 (in thousands):

Payments due by Year


	Within 1 Year		1-3 Years		3-5 Years		After 5 Years		Total
Short-term Notes Payable	$	—	$	—	$	—	$	—	$	—
Long-term Debt		3,792		51,623		4,653		370,420		430,488
Capital Lease Obligations		20		—		—		—		20
Operating Lease Obligations		17,064		26,885		16,309		7,786		68,044

Total Contractual Obligations	$	20,876	$	78,508	$	20,962	$	378,206	$	498,552

Additionally, we have long-term liabilities relating to other post employment benefits, work-related injuries and illnesses, defined benefit pension plans, mine reclamation and closure, and other long-term liability costs. We estimate payments, net of any applicable trust reimbursements, related to these items at June 30, 2004 (in thousands) to be:

Payments due by Year


Within 1 Year	1-3 Years		3-5 Years		Total
$341,362	$	630,365	$	578,139	$	1,549,866

As discussed in “Critical Accounting Policies” and in the Notes to our Consolidated Financial Statements in Form 10-K, our determination of these long-term liabilities is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year. In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated. Moreover, in particular, for periods after 2004 our estimates may change from the amounts included in the table, and may change significantly, if our assumptions change to reflect changing conditions.

Debt

At June 30, 2004, CONSOL Energy had total long-term debt of $429 million outstanding, including current portion of long-term debt of $4 million. This long-term debt consisted of:

•

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. Payment of the principal and premium, if any, and interest on the notes are guaranteed by most of CONSOL Energy subsidiaries. The notes are senior secured obligations and rank equally with all other secured indebtedness of the guarantors;

•

An aggregate principal amount of $45 million of secured notes which bear interest at fixed rates of 8.25% per annum and are due in 2007;

•

An aggregate principal amount of $103 million of two series of industrial revenue bonds which were issued to finance the Baltimore port facility and bear interest at 6.50% per annum and mature in 2010 and 2011;

•

$31 million in advance royalty commitments with an average interest rate of 8.723% per annum;

•

An aggregate principal amount of $2 million of variable rate notes with a weighted average interest rate of 4.86% due at various dates ranging from 2004 through 2031.

On June 30, 2004, CONSOL Energy completed a $600 million Senior Secured Loan Agreement to replace the existing $267 million facility. The new agreement consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The new facility is secured by nearly all of the assets of the company. Collateral has been provided to the banks and shared equally and ratably with

the holders of CONSOL Energy’s 7.875% bonds that mature in 2012 and CONSOL Energy’s subsidiary’s 8.25% medium-term notes maturing in 2007. The facility can be used for letters of credit and borrowings for general corporate purposes. As of June 30, 2004, cash collateralized letters of credit issued under the previous facility have been transferred to the Tranche B facility and the $190 million of restricted cash was released and used to pay short-term debt. At our option, interest is based upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread that is dependent on our credit rating. The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The revolving credit facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450.0 million and $550.0 million for the twelve months ended December 31, 2004 and 2005, respectively. At June 30, 2004, this facility had approximately $226.6 million letters of credit issued and had no borrowings outstanding, leaving approximately $373.4 million of unused capacity.

Stockholders’ Equity and Dividends

CONSOL Energy had stockholders’ equity of $406 million at June 30, 2004 and $291 million at December 31, 2003. The increase is primarily attributable to net income for the six months ended June 30, 2004, offset, in part, by various cash flow hedges related to our gas business and the payment of dividends.

Dividend information for the current year to date is as follows:


Declaration Date	Amount Per Share	Record Date	Payment Date
July 27, 2004	$0.14	August 8, 2004	September 2, 2004
April 23, 2004	$0.14	May 11, 2004	May 28, 2004
January 30, 2004	$0.14	February 10, 2004	February 27, 2004

The revolving credit facility does restrict CONSOL Energy’s ability to pay cash dividends. As long as CONSOL Energy has not achieved and maintained an Investment Grade rating, dividends payable on common stock cannot exceed $0.56 per share per fiscal year, provided the payment of dividends does not result in an event of default.

Additional comprehensive losses, primarily related to gas hedging transactions, of approximately $9 million were recognized in the six months ended June 30, 2004.

Off-Balance Sheet Transactions

CONSOL Energy does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on CONSOL Energy’s condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the notes to the consolidated financial statements.

Recent Accounting Pronouncements

“Goodwill and Other Intangible Assets” which classify mineral rights as intangible assets. Effective with the 2004 second quarter, CONSOL Energy has reclassified mineral rights as property, plant and equipment in accordance with EITF 04-2.

Forward-Looking Statements

We are including the following cautionary statement in this Report on Form 10-Q to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of us. With the exception of historical matters, the matters discussed in this Report on Form 10-Q are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and uncertainties that could cause actual results to differ materially from projected results. In addition to other factors and matters discussed elsewhere in this Report on Form 10-Q and, in CONSOL Energy’s Form 10-K filed with the Securities and Exchange Commission on March 12, 2004, and other periodic reports filed, these risks, uncertainties and contingencies include, but are not limited to, the following:

•

effects of the amount of our debt compared to stockholders’ equity and recent changes in our credit ratings;

•

results of an informal SEC inquiry regarding certain matters, which may include allegations contained in an anonymous letter that certain directors and senior executive officers have misappropriated corporate funds and other assets and engaged in other illegal or inappropriate activities;

•

the continued incurrence of losses in future periods;

•

a reduction in deferred tax assets could materially reduce our operating results and stockholders’ equity and possibly preclude dividend payments;

•

our inability to obtain substantial additional financing necessary in order to fund our operations, capital expenditures and to meet our other obligations;

•

our ability to comply with restrictions imposed by our senior credit facility;

•

increased cost and expense related to the downgrading of our credit ratings;

•

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

•

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

•

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

•

overcapacity in the coal or gas industry impairing our profitability;

•

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

•

reliance on major customers;

•

a decline in our customers’ coal requirements;

•

the creditworthiness of our customer base declining;

•

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

•

disputes with customers concerning coal contracts resulting in litigation;

•

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

•

uncertainties in estimating our economically recoverable coal and gas reserves;

•

risks in exploring for and producing gas;

•

our failure to remove and dispose of water from coal beds may hamper our ability to produce gas in commercial quantities;

•

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

•

the effects of government regulation;

•

obtaining governmental permits and approvals for our operations;

•

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

•

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

•

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

•

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

•

new legislation resulting in restrictions on coal use;

•

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

•

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

•

excessive lump sum payments made to retiring salaried employees pursuant to our defined benefit pension plan;

•

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

•

the outcome of various asbestos litigation cases;

•

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

•

results of one or more purported class action lawsuits against us and certain of our officers alleging that the defendants issued false and misleading statements to the public and seeking damages and costs;

•

the anti-takeover effects of our rights plan could prevent a change of control;

•

decline in our share price due to the increase in shares eligible for sale; and

•

our ability to service debt and pay dividends is dependent upon us receiving distributions from our subsidiaries.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to the risks inherent in operations, CONSOL Energy is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding CONSOL Energy’s exposure to the risks of changing natural gas prices, interest rates and foreign exchange rates.

CONSOL Energy is exposed to market price risk in the normal course of selling natural gas production and to a lesser extent in the sale of coal. CONSOL Energy sells coal under both short-term and long-term contracts with fixed price and/or indexed price contracts that reflect market value. CONSOL Energy uses fixed-price contracts, collar-price contracts and derivative commodity instruments that qualify as cash-flow hedges under Statement of Financial Accounting Standards No. 133 to minimize exposure to market price volatility in the sale of natural gas. Our risk management policy strictly prohibits the use of derivatives for speculative positions.

CONSOL Energy has established risk management policies and procedures to strengthen the internal control environment of the marketing of commodities produced from its asset base. All of the derivative instruments are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility and cover underlying exposures. CONSOL Energy’s market risk strategy incorporates fundamental risk management tools to assess market price risk and establish a framework in which management can maintain a portfolio of transactions within pre-defined risk parameters.

The use of derivative instruments could materially affect CONSOL Energy’s results of operations depending on market prices. CONSOL Energy believes that the use of derivative instruments along with the risk assessment procedures and internal controls does not expose CONSOL Energy to material risk. However, we believe that use of these instruments will not have a material adverse effect on our financial position or liquidity.

For a summary of accounting policies related to derivative instruments, see Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report Form 10-K for the year ended December 31, 2003.

Sensitivity analyses of the incremental effects on pre-tax income for the six months ended June 30, 2004 of a hypothetical 10 percent and 25 percent change in natural gas prices for open derivative instruments as of June 30, 2004 are provided in the following table:

(a)	CONSOL Energy remains at risk for possible changes in the market value of these derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. The effect of this

offset is not reflected in the sensitivity analyses. CONSOL Energy entered into derivative instruments to convert the market prices related to 2004 and 2005 anticipated sales of natural gas to fixed prices. The sensitivity analysis reflects an inverse relationship between increases in commodity prices and a benefit to earnings. The fair value of these contracts was a loss of $15.3 million (net of $9.8 million of deferred tax) at June 30, 2004 and expense of $0.1 million for the six months ended June 30, 2004. We continually evaluate the portfolio of derivative commodity instruments and adjust the strategy to anticipated market conditions and risks accordingly.

CONSOL Energy is exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review.

CONSOL Energy’s interest expense is sensitive to changes in the general level of interest rates in the United States. At June 30, 2004, CONSOL Energy had $429 million aggregate principal amount of debt outstanding under fixed-rate instruments. CONSOL Energy’s primary exposure to market risk for changes in interest rates relates to its revolving credit facility, under which there were no borrowings outstanding at June 30, 2004. On June 30, 2004, CONSOL Energy completed a $600 million senior secured loan facility to replace the existing $267 million facility. The new facility consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. CONSOL Energy’s $267 million revolving credit facility bore interest at a weighted average rate of 5.2% per annum during the six months ended June 30, 2004. Due to the level of borrowings against this facility in the six months ended June 30, 2004, a 100 basis-point increase in the average rate for CONSOL Energy’s revolving credit facility would not have significantly decreased net income for the period.

Almost all of CONSOL Energy’s transactions are denominated in U.S. dollars, and, as a result, it does not have material exposure to currency exchange-rate risks.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures. CONSOL Energy, under the supervision and with the participation of its management, including CONSOL Energy’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, CONSOL Energy’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by CONSOL Energy in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by CONSOL Energy in such reports is accumulated and communicated to CONSOL Energy’s management, including CONSOL Energy’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting. There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 27, 2004 CONSOL Energy held its annual shareholder meeting for the purpose of (1) electing directors and (2) ratifying the retention of PricewaterhouseCoopers LLP as CONSOL Energy’s independent accountants for the year ending December 31, 2004.

(1)

Shareholders elected the following directors and the vote tabulation for each individual director was as follows:


Nominee	Votes For	Withheld
John Whitmire	48,692,929	283,063
J. Brett Harvey	48,693,912	282,080
James E. Altmeyer	48,687,519	288,473
Phillip W. Baxter	48,692,666	283,326
William E. Davis	48,685,316	290,676
Raj K. Gupta	48,689,012	286,980
Patricia A. Hammick	48,695,250	280,742
William P. Powell	48,686,420	289,572
Joseph T. Williams	48,689,279	286,713

(2)

The proposal to ratify the appointment of PricewaterhouseCoopers LLC as CONSOL Energy’s independent accountants for the year ending December 31, 2004 was approved by a vote of the shareholders. The number of votes cast for this proposal was 48,588,392 and the number of votes cast against this proposal was 46,512. There were 341,088 abstentions for this proposal.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a)		Exhibits filed as part of this Report:

10.53		CONSOL Energy Inc. Directors’ Deferred Fee Plan, dated as of July 20, 2004.

10.54		Form of CONSOL Energy Inc. Equity Incentive Plan Deferred Stock Unit Grant Agreement.

10.55		Form of Restricted Stock Unit Award Under CONSOL Energy Inc. Equity Incentive Plan.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		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.

32.2		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)		Reports on Form 8-K:

		The Company did furnish the following information required to be furnished under Item 12 during the quarter ended June 30, 2004:

(1)		A report dated April 22, 2004, which included, under Item 12, the Company’s press release announcing the results of operations for the three months ended March 31, 2004.

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 5, 2004
	By:	/s/ J. BRETT HARVEY
		President Chief Executive Officer (Duly Authorized Officer )

	By:	/s/ WILLIAM J. LYONS
		Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

Exhibit Index



10.53		CONSOL Energy Inc. Directors’ Deferred Fee Plan, dated as of July 20, 2004.

10.54		Form of CONSOL Energy Inc. Equity Incentive Plan Deferred Stock Unit Grant Agreement.

10.55		Form of Restricted Stock Unit Award Under CONSOL Energy Inc. Equity Incentive Plan.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		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.

32.2		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.