<PAGE>
As filed with the Securities and Exchange Commission on December 15, 1998
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
CONSOL ENERGY INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 1222 51-0337383
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
CONSOL ENERGY INC.
300 DELAWARE AVENUE, SUITE 567
WILMINGTON, DELAWARE 19801-1622
TELEPHONE: (302) 477-1260
(Address, including zip code, and telephone number of Registrant's principal
executive offices)
___________________
DANIEL L. FASSIO, ESQ.
C/O CONSOL INC.
CONSOL PLAZA, 1800 WASHINGTON ROAD
PITTSBURGH, PENNSYLVANIA 15241
TELEPHONE: (412) 831-4000
(Name, address, including zip code, and telephone number of agent for service)
___________________
Copies to:
STEVEN L. WASSERMAN, ESQ. RICHARD J. SANDLER, ESQ.
THELEN REID & PRIEST LLP DAVIS POLK & WARDWELL
40 WEST 57TH STREET 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10017
TELEPHONE: (212) 603-2000 TELEPHONE: (212) 450-4000
___________________
Approximate date of commencement of proposed sale of the securities to the
public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
___________________
CALCULATION OF REGISTRATION FEE
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==================================================================================================================================
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PROPOSED MAXIMUM AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE(1)
- ----------------------------------------------------------------------------------------------------------------------------------
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COMMON STOCK, PAR VALUE $1.00 PER SHARE $10,000,000 $2,780.00
==================================================================================================================================
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(1) THE FILING FEE HAS BEEN CALCULATED PURSUANT TO RULE 457(O) PROMULGATED UNDER
THE SECURITIES ACT OF 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS SUBJECT TO COMPLETION
DATED DECEMBER 15, 1998
,000,000 Shares
CONSOL ENERGY INC. [Logo]
Common Stock
CONSOL Energy Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our common
stock. We estimate that the initial public offering price will be between $
and $ per share.
We will apply to list the common stock on the New York Stock Exchange under the
symbol "CNX".
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS CONSOL
- ------------------------------------------------
Per Share $ $ $
- ------------------------------------------------
Total $ $ $
- ------------------------------------------------
CONSOL has granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments.
It is expected that delivery of the shares will be made to investors on or about
, 1999.
J. P. MORGAN & CO. MERRILL LYNCH & CO.
, 1999
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary........................ 4
Risk Factors............................. 12
The Company.............................. 22
Use of Proceeds.......................... 23
Dividend Policy.......................... 23
Capitalization........................... 24
Selected Consolidated Financial and
Operating Data....................... 25
Management's Discussion and Analysis of
Results of Operations and
Financial Condition.................... 27
Coal Industry Overview................... 37
Business................................. 47
Regulation............................... 69
Management............................... 74
Certain Relationships and Related Party
Transactions.......................... 83
Principal Stockholders................... 84
Shares Eligible for Future Sale.......... 85
Description of Capital Stock............. 86
Certain Tax Considerations............... 87
Underwriting............................. 90
Legal Matters............................ 91
Experts.................................. 92
Glossary................................. 93
In deciding whether to buy our common stock, you should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
We are offering to sell, and seeking offers to buy, shares of common stock only
in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
Until , 1999, all dealers that buy, sell or trade common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2
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PROSPECTUS SUMMARY
This section summarizes certain information contained elsewhere in this
prospectus, and you should refer to the more detailed information contained in
this prospectus, including the Consolidated Financial Statements and the related
notes thereto. All references to "tons" are references to short tons. For
definitions of certain coal-related terms, see "Glossary." The market data
presented in this prospectus are based upon our management's estimates, using
various third-party sources where available. While our management believes that
such estimates are reasonable and reliable, in certain cases, such estimates
cannot be verified by information available from independent sources.
Accordingly, we can give no assurance that such market data are accurate in all
material respects. Unless otherwise indicated, "we," "us," "our" and similar
terms as well as references to "CONSOL" refer to CONSOL Energy Inc., its
subsidiaries and their predecessors. Unless otherwise indicated, (1) the
information set forth in this prospectus assumes an initial public offering
price of $ per share of common stock and no exercise of the underwriters'
over-allotment option and (2) all share and per share data give effect to a
- -for-one stock split effective on , 1999.
THE COMPANY
We rank among the largest coal companies in the United States based upon total
revenue, net income and operating cash flow. We produced 73 million tons of coal
during 1997. Our production accounted for 7% of the total tons produced in the
United States and 12% of the total tons produced in the eastern United States in
1997. We are one of America's premier coal companies by several measures:
. We mined more high-Btu bituminous coal than any other U.S. producer
in 1997.
. We are the largest coal producer east of the Mississippi River.
. We are the largest U.S. producer of coal from underground mines.
. We export more coal from the United States than any other coal
producer or trading company.
. We have the second largest coal reserves among U.S. coal producers.
Our consistent financial performance has enabled us to establish a strong
history of cash generation and dividend payments.
PRINCIPAL MARKETS
Coal is an important source of energy for power generators in the United States.
Coal-fired plants produced 57% of the country's electricity in 1997. In 1997, we
sold 68% of our coal to U.S. electricity generators, most of which were located
east of the Mississippi River. More than two-thirds of the country's coal-fired
generating capacity is located east of the Mississippi River. We can sell coal
to these customers at a low delivered cost because of the following factors:
. Our mines are located close to eastern generating plants.
. We have access to low-cost transportation.
. We are able to use highly productive mining techniques because we
have favorable geologic conditions for mining.
3
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DEMAND FOR CONSOL'S COALS
We believe that eastern, high-Btu coal will continue to be a valued source of
energy and that demand for such coal will continue to grow for the following
reasons.
. The electric utility industry soon will be deregulated in the United
States which should increase competition and influence power
companies to seek the lowest cost fuel for their generating plants.
Fuel costs represent up to 78% of the variable cost of generating
electricity at power plants that burn fossil fuels. Coal is the
lowest cost fuel available to most power generators.
. Electricity demand will grow as the economy grows, and electricity
generators that burn coal will seek to meet increased electricity
demand by using the available capacity of their existing power plants
rather than building new power plants. In the aggregate, domestic
coal-fired generating stations currently run at 65% capacity
utilization. The optimal sustainable capacity utilization is 85% for
a typical plant, although many can run at higher rates for short
periods of time. Generators of electricity can increase existing
capacity at their plants by burning high-Btu coal.
. A significant portion of the nuclear-based generating plants is
likely to be retired during the next 15 years. Although natural gas
will replace some of this capacity, we believe that coal also will be
used to replace retired nuclear capacity. Coal producers that can
reduce mining costs and which have access to low-cost transportation
should be well positioned to increase their share of the market.
The Clean Air Act regulates the emission of sulfur dioxide and oxides of
nitrogen from coal combustion. This has led utilities to retrofit plants with
scrubbers, purchase emission allowances or burn low-sulfur coal. To the extent
that the cost of environmental control technology continues to decline and
environmental regulations tighten, we expect more electricity generators with
coal-based systems to install scrubbers. As scrubbing increases at existing
plants, we believe that high- and medium-sulfur coals with low delivered costs
and high-Btu content will become increasingly attractive to electricity
generators because the cost of operating the scrubber is typically less than 10%
of variable costs. We already ship 65% of our high-sulfur coal product to
scrubbed generating plants.
The advantage of retrofitting scrubbers to generating stations should be
particularly apparent as the current bank of sulfur dioxide allowances declines
and the more restrictive phase of the Clean Air Act becomes effective in 2000.
Electricity generators are beginning to respond in anticipation. For example, in
August 1998, Mission Energy announced its intention to acquire a large
generating station in central Pennsylvania, Homer City, and to install a
scrubber and other environmental control technologies. RDI, an industry
consultant, recently forecast that by 2015 the owners of plants with up to
80,000 megawatts of existing coal-fired capacity may invest in scrubbers to
comply with the new environmental regulations. The majority of these plants are
located east of the Mississippi River. As a result, we believe that we are well
positioned to benefit from this anticipated trend.
COAL RESERVES AND MINING OPERATIONS
At December 31, 1997, we had 4.8 billion tons of proved and probable coal
reserves. Our reserves are located in northern Appalachia (52%), central
Appalachia (13%), the midwest (21%) and the western United States and Canada
(14%). Approximately 65% of our coal reserves consist of high-Btu coal, which is
favored by many power generators. The size, quality and strategic location of
our reserves allow for the cost-effective expansion of many of our existing
mines and for new mine development.
We operate 25 mining complexes. We lead the U.S. coal industry in using longwall
systems. Longwall systems are a mechanized, high-extraction method of
underground mining. We use these systems at 14 of our mines. Longwall systems
accounted for 84% of the coal we mined in 1997. We are able to expand production
at longwall mines at very low incremental cost. Our ability to source coal from
our multiple longwall mines provides us with great flexibility in meeting
customer fuel requirements.
4
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STRATEGY
Our objective is to maintain and enhance our position as one of the premier coal
companies in the United States based on our financial strength, operating
capability and reserve position. We believe that we are well-positioned to grow
faster than the industry by reason of our low-cost structure and strong
financial position. Our strategy for achieving long-term growth does not depend
on either the construction of new coal combustion facilities or on high overall
growth in coal demand. Instead, we believe that most growth in demand for coal
will come from the expansion and increased use of existing power generating
facilities. We further believe that there will be a growing demand from
electricity generators for high-Btu fuels available at low delivered cost and
that the sulfur content of coal will not be the principal quality determining
coal demand. Our strategy reflects our belief that delivered cost and Btu
content will be the chief determinants of coal demand. Accordingly, we believe
that coal produced in the eastern United States will continue to be an
attractive fuel for electricity producers.
Specifically, we will implement our strategy by:
. strengthening our core operating position in northern Appalachia by
continuing to make productivity improvements and by expanding the
low-cost production capacity of existing mines at low incremental
costs;
. developing new mining complexes in locations with reserves controlled
by us where price levels or volume demand would generate attractive
returns and where we can achieve low mining costs;
. making large-scale acquisitions, both in the United States and
abroad, that will enable us to bring our mining expertise to coal
markets where we do not have an existing presence; and
. making opportunistic acquisitions in our existing markets that will
enable us to leverage our existing infrastructure and operations. For
example, we recently acquired the Rochester & Pittsburgh Coal Company
and the Vesta coal reserves in southwestern Pennsylvania. These
acquisitions have strengthened our position in northern Appalachia.
Competitive Strengths
Strong Financial Performance
We are one of the most profitable coal companies in the United States and have
shown strong net income growth and cash flow generation.
. Net income has grown since 1994 at a compound annual growth rate of
11% and reached $184 million in 1997.
. Net cash provided by operating activities has averaged $361 million
per year since 1994, more than double capital expenditures, which
averaged $173 million per year for the same period. During the same
period, we paid $700 million in dividends, including an extraordinary
dividend of $380 million in 1997, while reducing borrowings by $33
million.
We believe that our financial strength will enable us to be a major
consolidating force in the coal industry. The top ten coal producers have
increased their share of production from 40% in 1990 to 54% in 1997.
Productivity Leadership
We have maintained our strong financial performance despite generally lower coal
prices by increasing productivity and reducing unit costs.
5
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. From 1994 to 1997, we maintained annual coal production at
approximately 72 million tons while reducing our workforce by
approximately 20% and reducing the number of mining complexes that we
operate from 30 to 24.
. Between 1990 and 1996, we achieved a compound annual growth rate in
productivity at our underground mines (measured in tons per manday)
of 8.4% compared with a growth rate for the industry for underground
mines of 6.5%. As a result, we reduced costs per ton of coal mined by
9.9% during the period.
. In 1997, our productivity increased by 11.3%.
We operate 25% of the longwall mining systems in the United States. Because of
the high production levels of these mining systems, we operate seven of the 20
largest mines east of the Mississippi River, measured by tons of coal produced
in 1997. These mines have high productivity and low variable cost structures.
Our extensive reserve base supports the expansion and life extension of existing
mines at low incremental cost. This is in contrast to many other producers with
higher cost structures and less extensive reserves, particularly certain
companies dependent on operations in central Appalachia.
High-Quality, Strategically Located Reserve Base
We have a large proved and probable reserve base of 4.8 billion tons. Our
northern Appalachian reserves accounted for 52% of total reserves at year-end
1997. These reserves are near many coal users in the United States, particularly
generators of electricity, and are served by major coal-transporting railroads
and low-cost river transportation. Mining from these reserves accounted for 68%
of our production in 1997.
Fifty-two percent of our reserve base is ranked as high-Btu and high-sulfur.
During the past two decades, air quality laws have created some market
advantages for lower-sulfur coals by imposing restrictions on sulfur-dioxide
emissions. These usually require high-sulfur coal users to switch to lower
sulfur coals, install scrubbers or, in more recent years, to buy pollution
allowances. Nevertheless, our high-sulfur coal remains competitive because of
our transportation advantage and generally higher Btu content. In addition, we
have maintained our margins by progressively reducing unit costs and increasing
mine productivity.
Experienced Management Team
Our management team is one of the most experienced in the coal industry with an
average of over 24 years of coal industry experience. The management team has
demonstrated its ability to streamline operations and reduce costs. Management
has successfully expanded existing mines, built new mines and acquired
additional operations leading to an increase in our production, productivity and
earnings.
Research and Development Capabilities
We operate the largest private research and development facility in the United
States devoted to the mining and use of coal. Our Research and Development
Department has pioneered several major technical developments in mining
technology. We also are in the forefront of U.S. coal companies in solving
coal-combustion and other challenges for customers which enables us to create
new business opportunities.
The Research and Development Department also works to improve the effectiveness
and the cost of pollution- control technologies. Our facilities and staff,
including 100 scientists and engineers, provide both testing and field-
diagnostic service to customers and potential customers.
Broad, Diverse Customer Base
We currently sell coal to more than 160 different customers, including
financially strong domestic utilities. Our three largest customers are Allegheny
Energy, Pennsylvania Power Company and Detroit Edison. During 1998, we will sell
about 61% of our production under contracts with terms exceeding one year. These
contract
6
<PAGE>
customers represent a base of nearly 60 companies, both domestic and foreign,
including generators of electricity, steel mills, heavy manufacturers, chemical
plants, cement plants and paper manufacturers.
PRINCIPAL STOCKHOLDER
Rheinbraun A.G. and Rheinbraun U.S. GmbH currently own 94% of our outstanding
common stock. Rheinbraun A.G. and Rheinbraun U.S. GmbH are direct and indirect
subsidiaries of RWE A.G., a leading international energy-based industrial
conglomerate headquartered in Germany and the fifth largest industrial group in
Germany based on sales.
EXECUTIVE OFFICES
Our principal executive office is located at 300 Delaware Avenue, Suite 567,
Wilmington, Delaware 19801. Our telephone number is (302) 477-1260.
THE OFFERING
Common Stock Offered...................... shares of our common stock(1)
Common Stock Outstanding After this
Offering.................................. shares of our common stock(1)(2)
Use of Proceeds........................... We estimate that we will receive
net proceeds of approximately $
million (or $ million if the
underwriters exercise their over-
allotment option in full). We
anticipate using these proceeds to
repay a portion of the commercial
paper issued by us in order to
finance:
. the November 1998 purchase of
shares of our common stock from
DuPont Energy Company;
. the payment of a dividend prior
to this offering; and
. the September 1998 acquisition
of Rochester & Pittsburgh Coal
Company and the refinancing of
certain indebtedness of
Rochester & Pittsburgh Coal
Company. See "Use of Proceeds."
Dividends................................. The Board of Directors currently
intends to declare and pay
quarterly dividends on our common
stock. We expect the first
quarterly dividend to be $ per
share (a rate of $ per share
annually) to be paid in the third
quarter of 1999. See "Dividend
Policy."
Proposed New York Stock Exchange
Trading Symbol for Common
Stock..................................... "CNX"
- ------------------------------------
(1) Excludes up to shares of common stock subject to an over-allotment option
granted by us to the underwriters. See "Underwriting."
(2) Excludes shares issuable upon exercise of options to be granted under our
1998 Equity Incentive Plan upon consummation of this offering. Also excludes an
additional shares of common stock reserved for future issuance under the plan.
7
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RISK FACTORS
You should read the section entitled "Risk Factors," which begins on page 11 and
which provides a description of certain risks relevant to an investment in our
common stock.
8
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SUMMARY FINANCIAL AND OPERATING DATA
The following table provides summary financial and operating data of CONSOL for
the periods indicated. We have derived the summary financial data for the years
ended December 31, 1993, 1994, 1995, 1996 and 1997 from our consolidated
financial statements, which have been audited by Ernst & Young LLP, independent
auditors. You may read the report of Ernst & Young LLP elsewhere in this
prospectus with respect to the financial statements at December 31, 1996 and
1997 and for the years ended December 31, 1995, 1996 and 1997. We have derived
the summary financial data for the nine months ended September 30, 1997 and 1998
and at September 30, 1998 from our unaudited interim financial statements
included elsewhere in this prospectus which, in our opinion, include all
adjustments necessary for the fair presentation of such data for the unaudited
interim periods. The results of operations for the nine months ended September
30, 1998 do not necessarily indicate what the results of operations will be for
the entire year ending December 31, 1998. Following completion of this offering,
we expect to change our fiscal year from a calendar year to a year ending on
June 30. We will have a transitional fiscal period ending June 30, 1999. Our
first full fiscal year ending June 30 will be the year that starts July 1, 1999
and ends June 30, 2000. You should read the information in the following tables
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Consolidated Financial Statements,
included elsewhere in this prospectus.
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________________________________________________________________________________________________________
Nine months ended
Year ended December 31, September 30,
--------------------------------------------------------------------------------------------------------
1993(1) 1994 1995 1996 1997 1997 1998
------------ ----------- ----------- ----------- ----------- ----------- -----------
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In thousands,
except per share data
Statement of Income Data
Revenue
Sales(2)................$ 1,730,209 $ 2,326,104 $ 2,269,211 $ 2,336,014 $ 2,285,197 $ 1,684,523 $ 1,680,063
Other income............ 55,743 86,377 45,024 60,940 64,441 50,968 37,450
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total revenue........ 1,785,952 2,412,481 2,314,235 2,396,954 2,349,638 1,735,491 1,717,513
Costs
Costs of goods sold and
other operating
charges.............. 1,490,869 1,703,678 1,600,271 1,687,836 1,592,489 1,189,645 1,157,674
Selling, general and
administrative expense 50,338 53,546 53,537 53,354 55,353 41,109 40,689
Depreciation, depletion
and amortization...... 231,655 265,262 253,113 235,159 233,304 171,353 175,575
Interest expense........ 41,770 50,678 53,915 44,510 45,876 34,468 32,496
Taxes other than income. 144,776 204,356 200,605 187,396 188,940 143,208 147,951
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total costs.......... 1,959,408 2,277,520 2,161,441 2,208,255 2,115,962 1,579,783 1,554,385
------------ ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes............ (173,456) 134,961 152,794 188,699 233,676 155,708 163,128
Income taxes.............. (84,645) 380 22,744 35,970 49,887 35,824 38,431
-------------- ------------- ------------ ----------- ----------- ------------ -------------
Net income (loss).........$ (88,811)(3) $ 134,581 $ 130,050 $ 152,729 $ 183,78 $ 119,884 $ 124,697
============== ============= ============ =========== =========== ============ =============
Pro forma net income
per share............... $ $
Weighted average number
of common shares
outstanding........
</TABLE>
<TABLE>
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___________________________________________________________________________________________________________
At December 31, At September 30, 1998
----------------------------------------------------------- ----------------------------------------------
Pro forma as
1993 1994 1995 1996 1997 Actual Pro forma(4) adjusted(5)
---------- ---------- ---------- ---------- ---------- --------- -------------- ------------
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In thousands
Balance Sheet Data
Working capital........... $ 75,368 $ 208,079 $ 277,678 $ 358,030 $ 77,313 $ (77,615) $ (637,292) $
Total assets ............. 3,664,762 3,952,988 3,871,978 3,857,508 3,548,011 3,989,229 3,989,229
Short-term debt........... 0 132,567 78,166 46,378 55,051 105,476 666,153
Long-term debt (including
current portion)........ 435,316 450,332 442,385 449,170 397,275 430,427 430,427 430,427
Total deferred credits and
other liabilities....... 2,399,378 2,413,510 2,325,262 2,315,397 2,262,702 2,466,108 2,466,108
Stockholders' equity ..... 401,616 456,197 506,247 578,976 302,765 427,462 (132,215)
</TABLE>
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ -----------------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
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OTHER OPERATING DATA
Tons sold (in
thousands)(6)............. 52,072 74,199 72,741 77,000 75,170 55,302 56,417
Tons produced (in
thousands)................ 45,646 72,140 71,324 71,411 72,505 53,754 54,860
Productivity (tons per
manday)................... 28.35 29.60 31.22 34.57 38.46 37.34 39.99
Average production cost
($ per ton produced)...... $ 26.22 $ 22.91 $ 22.31 $ 21.87 $ 21.05 $ 21.33 $ 21.34
Average sales price of
tons produced ($ per
ton produced).............. $ 28.36 $ 27.32 $ 26.61 $ 26.29 $ 26.49 $ 26.41 $ 26.59
Coal reserves
(tons in millions)(7)..... 5,176 4,956 5,072 5,063 4,776 5,009 4,847
Number of mining
complexes (at period
end)...................... 31 30 26 26 24 24 27(8)
Number of employees
(at period end)........... 10,036 9,739 8,743 8,206 7,711 7,852 8,716
</TABLE>
<TABLE>
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------------- ----------------------
1993(1) 1994 1995 1996 1997 1997 1998
------- --------- --------- --------- --------- --------- ---------
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In thousands
OTHER FINANCIAL DATA
Capital expenditures........ $ 138,124 $ 144,438 $ 179,022 $ 169,367 $ 200,617 $ 135,330 $ 188,624
EBIT(9)..................... (135,033) 167,668 188,715 212,708 256,934 171,341 187,547
EBITDA(10).................. 96,622 432,930 441,828 447,867 490,238 342,694 363,122
Net cash provided by
operating activities...... 261,182 344,629 298,290 372,582 427,913 243,265 262,517
Net cash provided by
(used in) investing
activities................ (231,441) (357,153) (160,856) (251,236) 52,243 (74,850) (233,424)
Net cash provided by
(used in) financing
activities................ (67,074) 50,418 (140,805) (119,254) (501,354) (87,356) (9,955)
</TABLE>
- ---------------------------
(1)Results of operations for 1993 reflect the adverse effects of the ten-month
strike by employees represented by the United Mine Workers of America in
connection with the renegotiation of the National Bituminous Wage Agreement
which expired on February 1, 1993. See "Risk Factors--Union Represented Labor
Force" and "Business--Employees and Labor Relations."
(2)Includes sales of Fairmont Supply Company, other than to CONSOL, of $157
million, $179 million, $212 million, $203 million, and $217 million in 1993,
1994, 1995, 1996 and 1997, respectively, and $161 million and $132 million in
the first nine months of 1997 and 1998, respectively.
(3)Excludes cumulative effect of change in accounting principle. In 1993, we
changed accounting methods of accruing provisions for coal workers'
pneumoconiosis and workers' compensation. These changes were the result of a
reevaluation of measurement methods in light of the issuance of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112). We recorded income classified as a
cumulative effect of accounting change of $46.3 million representing income of
$70.3 million (net of contract deferrals of $67.0 million and income taxes of
$47.2 million) for the change in accounting for coal workers' pneumoconiosis,
and a charge of $23.9 million (net of income taxes of $16.1 million) for the
change in accounting for workers' compensation.
(4)Gives effect to the purchase by us of shares of our common stock owned by
DuPont Energy Company for $500 million and the payment of dividends in the
amount of $60 million and related borrowings incurred to finance the purchase
and dividend. See "Certain Relationships and Related Party Transactions."
(5)Gives effect to the receipt and application by us of an estimated $ million
in net proceeds from this offering. See "Use of Proceeds."
(6)Includes sales of coal produced by us and purchased from third parties. We
sold 3.3 million, 3.5 million, 2.7 million, 3.2 million, 3.1 million, 2.2
million and 2.1 million tons of coal that we purchased from third parties during
1993, 1994, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and
1998, respectively.
(7)Represents proved and probable reserves at period end. See "Business--Coal
Reserves" and "Glossary."
(8)In November 1998, we exchanged two mining complexes, Holden and Twin Branch,
with A.T. Massey Coal Company for the Vesta coal reserves located in
southwestern Pennsylvania.
(9)EBIT is defined as earnings, before cumulative effective of accounting
changes, from continuing operations, before deducting net interest expense
(interest expense less interest income) and income taxes. EBIT does not purport
to represent cash generated by operating activities and should not be considered
in isolation or as a substitute for measures of performance in accordance with
generally accepted accounting principles. In addition, because EBIT is not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies.
(10)EBITDA is defined as earnings, before cumulative effect of accounting
changes, from continuing operations, before deducting net interest expense
(interest expense less interest income), income taxes and depreciation,
depletion and amortization. EBITDA is commonly used to analyze companies on the
basis of operating performance, leverage and liquidity. However, it does not
purport to represent cash generated by operating activities and should not be
considered in isolation or as a substitute for measures of performance in
accordance with generally accepted accounting principles. In addition, because
EBITDA is not calculated identically by all companies, the presentation herein
may not be comparable to other similarly titled measures of other companies.
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RISK FACTORS
You should consider the following factors and the other information in this
prospectus before deciding to invest in the common stock.
HIGHLY COMPETITIVE INDUSTRY
We sell coal in markets that are highly competitive and affected by factors
beyond our control. We compete with coal producers in various regions of the
United States for domestic sales, and we compete both with domestic and overseas
producers for sales to international markets. Continued demand for our coal and
the prices that we will be able to obtain primarily will depend upon coal
consumption patterns of the domestic electric utility industry. Consumption by
the domestic utility industry is affected by the demand for electricity,
environmental and other governmental regulations, technological developments and
the price of competing coal and alternative fuel supplies including nuclear,
natural gas, oil or renewable energy sources, including hydroelectric power. We
also sell coal to overseas utilities and to the more specialized metallurgical
coal market which is significantly affected by both international demand and
competition. See "--Foreign Currency Exchange Rates" and "Business--
Competition."
PRICE DECLINES AND ADVERSE MARKET CONDITIONS
Our results of operations are highly dependent upon the prices received for our
coal. Any significant decline in prices for coal could have a material adverse
effect on our business, financial condition, results of operations and
quantities of reserves recoverable on an economic basis. If the industry
experiences significant price declines from current levels or other adverse
market conditions, we may not be able to generate sufficient cash flow from
operations to meet our obligations, including debt service obligations, make
planned capital expenditures and pay dividends. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
RELIANCE ON MAJOR CUSTOMERS
During 1997, we derived 25% of our total revenue from sales to our two largest
customers, Allegheny Energy and a consortium of utility companies, including
Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison
Company, Pennsylvania Power Company and The Toledo Edison Company, referred to
as the CAPCO companies. We currently have five contracts with Allegheny Energy
and one with CAPCO. The CAPCO contract expires December 31, 1999. Our contracts
with Allegheny Energy expire in 2001, 2002, 2004 and 2005. We have engaged in
discussions with both customers to either extend existing long-term contracts or
enter into new contracts. There can be no assurance that these customers either
will extend or enter into new long-term contracts or, in the absence of long-
term contracts, that they will continue to purchase the same amount of coal as
they have in the past or on terms, including pricing terms, as favorable to us
as under existing agreements. Based on current market conditions, we anticipate
that the contract expiring in 1999, if renegotiated, would provide for less
favorable pricing terms. The loss of such a customer or changes in the amounts
of coal that such a customer purchases from us or the terms on which purchases
are effected could have a material adverse effect on our business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and "Business--Coal
Contracts."
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RELIANCE ON MAJOR CONTRACTS
During 1997, sales under long-term contracts generated approximately 66% of our
total revenue from coal sales. These contracts contribute to the stability and
profitability of our operations by providing predictability of production
volumes and sales prices. Changes in regulations governing the electric utility
industry may make it more difficult for us to enter into long-term contracts
with our electric utility customers, as these customers may become more
sensitive to long-term price or quantity commitments in a more competitive
environment. A substantial decrease in the amount of coal sold by us pursuant to
long-term contracts could subject our revenue stream to increased volatility and
adversely affect our profitability. See "Business--Coal Contracts."
The profitability of our long-term coal supply contracts depends on a variety of
factors, varies from contract to contract and fluctuates during the contract
term, depending on contract provisions, our actual production costs and other
factors. In addition, provisions for adjustment or renegotiation of prices and
other provisions may increase our exposure to short-term coal price volatility.
If a substantial portion of our long-term contracts were modified or terminated,
we would be affected adversely to the extent that we are unable to find other
customers at the same level of profitability. Because the price of coal has
declined in recent years, some of our long-term contracts are for prices above
current spot market prices. The loss of certain of our long-term contracts could
have a material adverse effect on our business, financial condition and results
of operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Business--Coal Contracts."
From time to time we have disputes with our customers over the provisions of
long-term contracts relating to, among other things, coal quality, pricing and
quantity. We currently are involved in litigation with one customer and another
customer has made an arbitration demand. We may become involved in similar
proceedings in the future. There can be no assurance that we will be able to
resolve existing and future disputes in a satisfactory manner. See
"Business--Legal Proceedings."
RISKS INHERENT TO MINING
Our mining operations are subject to conditions or events beyond our control
that can affect the cost of mining at particular mines for varying lengths of
time. These include: fires and explosions; mining and processing equipment
failures; changes in geologic or hydrologic conditions; unexpected variations in
coal seam thickness; inability to acquire mining rights or permits; or other
disruptions to the mining process. We generally do not maintain third-party
insurance against such risks.
ABILITY TO IMPROVE PRODUCTIVITY AND REDUCE COSTS
We historically have improved productivity and reduced the costs of our
operations. Such improvements are important because they have enabled us to
maintain margins in the face of declining coal prices. We intend to continue to
reduce operating costs and improve efficiencies. However, there can be no
assurance that such efforts will be successful. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
UNION REPRESENTED LABOR FORCE
At September 30, 1998, the United Mine Workers of America represented
approximately 50% of our workforce. Of our coal production in 1997, 65% or 47.1
million tons of coal was produced at mines where the maintenance and production
workforce was represented by the United Mine Workers of America. The current
National Bituminous Coal Wage Agreement, the wage agreement which applies to
substantially all of our represented employees at our mining operations, became
effective on January 1, 1998, and continues through December 31, 2002. Certain
of our competitors have lesser levels of representation. Because of the
increased risk of strikes and other related work actions, in addition to higher
labor costs, which may be associated with
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represented operations in the coal industry, our non-represented competitors may
have a competitive advantage in areas where they compete with our represented
operations. If some or all of our current non-represented operations were to
become represented, we could incur increased risk of work stoppages and higher
labor costs. The ten-month United Mine Workers of America strike in 1993 had a
material adverse effect on our results of operations. See "Business--Employees
and Labor Relations."
TRANSPORTATION
Coal producers depend upon rail, barge, trucking, overland conveyor and other
systems to provide access to markets. One of our major rail transportation
providers, Conrail, recently was acquired by CSX Transportation, Inc. and
Norfolk Southern Corporation. During the transition period following the
acquisition, disruptions in service may occur as Conrail operations are
integrated into the operations of CSX Transportation, Inc. or Norfolk Southern
Corporation. Disruption of transportation services because of problems arising
from such integration or from weather-related problems, strikes, lock-outs or
other events could temporarily impair our ability to supply coal to customers
and could have a material adverse effect on our business, financial condition
and results of operations.
Transportation costs represent a significant portion of the total cost of coal
and, as a result, the cost of delivery is a critical factor in a customer's
purchasing decision. Although increases in transportation costs could give our
operations in northern Appalachia a competitive advantage over coal mined in
other regions, such increases could make coal a less competitive source of
energy. Such increases could have a material adverse effect on our ability to
compete with other energy sources and on our business, financial condition and
results of operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
HIGH-SULFUR COAL
A substantial portion of our reserves are of high-sulfur coal. The Clean Air Act
limits the ability of some of our customers to burn higher-sulfur coals unless
they install scrubbers, purchase emission allowances or blend high- sulfur coal
with low-sulfur coal. The development of our high-sulfur coal reserves is
dependent on the cost of such emission allowances, the cost and availability of
low-sulfur coal and whether electric utilities install scrubbers to meet the
more stringent SO2 emissions requirements of the Clean Air Act which will become
effective in 2000. See "Coal Industry Overview" and "Business--Coal Reserves."
FOREIGN CURRENCY EXCHANGE RATES
We compete in international markets with coal produced in other countries,
including principally Australia, South Africa, Colombia, Venezuela and
Indonesia. Coal is sold internationally in U.S. dollars. As a result, mining
costs in competing producing countries may be reduced in U.S. dollar terms based
on currency exchange rates. Devaluation of currencies in producing countries
could adversely affect the competitiveness of U.S. coal in international markets
and could have a material adverse effect on our business, financial condition
and results of operations. See "Business--Competition."
ACCRUALS FOR CERTAIN LONG-TERM LIABILITIES
We provide various health and welfare benefits to inactive and retired
employees. These obligations have been estimated by us based on certain
assumptions described in Notes 1, 14 and 15 of the Notes to Consolidated
Financial Statements. At September 30, 1998, the current and non-current
portions of these obligations include: post retirement medical and life
insurance ($1,289 million); coal workers' pneumoconiosis ($496 million);
workers' compensation ($248 million); salary retirement ($23 million), and long-
term disability ($28 million). These obligations are unfunded except for salary
retirement and long-term disability which are partially funded.
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We have obligations arising under various federal and state environmental laws
and regulations. These obligations are estimated by us based on permit
requirements and various assumptions concerning costs and production. At
September 30, 1998, the current and non-current portion of these obligations
include mine closing ($286 million) and reclamation ($34 million). These
obligations are unfunded.
If our assumptions do not materialize as expected, cash expenditures and costs
could be materially greater than those reflected in our financial statements.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
GOVERNMENT REGULATION
GENERAL. The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permit and
licensing requirements, air quality standards, water pollution, plant and
wildlife protection, reclamation and restoration of mining properties after
mining is completed, the discharge of materials into the environment, surface
subsidence from underground mining and the effects that mining has on
groundwater quality and availability. In addition, the industry is affected by
legislation mandating certain benefits for current and retired coal miners.
Numerous governmental permits and approvals are required for mining operations.
We may be required to prepare and present to federal, state and local
authorities data pertaining to the effect or impact that any proposed
exploration for or production of coal may have upon the environment. All
requirements imposed by any such authority may be costly and time-consuming and
may delay commencement or continuation of exploration or production operations.
The possibility also exists that new legislation or regulations and orders may
be adopted which may materially adversely affect our mining operations, our cost
structure or our customers' ability to use coal. New legislation and new
regulations under existing laws related to the protection of the environment,
which would further regulate or tax the coal industry, may also require us or
our customers to change operations significantly or incur increased costs. Such
legislation, if enacted, could have a material adverse effect on our business,
financial condition and results of operations. See "Regulation."
Impact of Clean Air Act. The Clean Air Act and corresponding state laws that
regulate emissions into the air affect coal mining operations. Direct impact on
coal mining and processing operations may occur through the Clean Air Act permit
and emissions control requirements relating to particulate matter including,
without limitation, fugitive dust. In July 1997, the U.S. Environmental
Protection Agency adopted new, more stringent National Ambient Air Quality
Standards for particulate matter and ozone which are expected to be implemented
by 2003. As a result, some states will be required to change their existing
implementation plans to attain and maintain compliance with the new National
Ambient Air Quality Standards. The extent of the potential impact of the new
National Ambient Air Quality Standards on the coal industry will depend on the
policies and control strategies associated with the state implementation process
under the Clean Air Act, but could have a material adverse effect on our
business, financial condition and results of operations.
The Clean Air Act affects coal mining operations indirectly by extensively
regulating the air emissions of SO2 and other compounds, including nitrogen
oxides, emitted by coal-fueled power plants. The Clean Air Act places limits on
SO2 emissions from electric power generation plants. Reductions in such
emissions are required in two phases: (1) the first, which began in 1995 and
applied only to certain identified facilities, is commonly referred to as "Phase
I"; and (2) the second, which is scheduled to begin in 2000 and will apply to
nearly all coal-fueled power plants, including those subject to 1995 "Phase I"
restrictions, is commonly referred to as "Phase II". The affected utilities have
been and may be able to meet these requirements by, among other methods,
switching to lower sulfur coal or other low sulfur fuels, installing pollution
control devices such as scrubbers, reducing electricity generating levels or
purchasing emission allowances from other facilities.
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Implementation of these regulations could affect adversely the demand for higher
sulfur coal, which currently accounts for a substantial portion of our sales, as
additional coal-burning electric power generation plants become subject to the
restrictions of the Clean Air Act. The extent to which the switch by utilities
to lower sulfur coal or other low sulfur fuels would materially adversely affect
us would depend upon a number of factors, including the cost structure of our
operations.
The Clean Air Act also affects coal mining operations by requiring utilities
that currently are major sources of nitrogen oxides in moderate or higher ozone
nonattainment areas to install reasonably available control technology for
nitrogen oxides, which are precursors of ozone. The U.S. Environmental
Protection Agency recently announced a proposal that would require 22 eastern
states to make substantial reductions in nitrogen oxide emissions by the year
2003. The EPA expects such states will achieve these reductions by requiring
electric power generation plants to make substantial reductions in their
nitrogen oxide emissions. Installation of reasonably available control
technology and additional measures required under the EPA proposal will make it
more costly to operate coal-fired plants and, depending on the requirements of
individual state implementation plans and the development of revised new source
performance standards, could make coal a less attractive fuel alternative in the
planning and building of electric power generation plants in the future. The
effect which such regulations or other requirements that may be imposed in the
future could have on the coal industry in general and on us in particular cannot
be predicted with certainty. No assurance can be given that the implementation
of the Clean Air Act, the new National Ambient Air Quality Standards or any
other future regulatory provisions will not materially adversely affect our
business, financial condition and results of operation.
Impact of the Framework Convention on Global Climate Change. The United States
and more than 160 other nations are signatories to the 1992 Framework Convention
on Global Climate Change which is intended to limit or capture emissions of
greenhouse gases, such as carbon dioxide. In December 1997 in Kyoto, Japan, the
signatories to the 1992 Framework Convention on Global Climate Change
established a binding set of emissions targets for developed nations, which are
commonly referred to as the "Kyoto Protocol." The specific limits vary from
country to country. Under the terms of the Kyoto Protocol, the United States
would be required to reduce emissions to 93% of 1990 levels over a five-year
period from 2008 through 2012. The Clinton Administration signed the protocol in
November 1998. Although the U.S. Senate has not yet ratified the Kyoto Protocol
and no comprehensive regulations focusing on greenhouse gas emissions have been
enacted, efforts to control greenhouse gas emissions could result in reduced use
of coal if electric power generators switch to lower carbon sources of fuel.
Such restrictions, if established through regulation or legislation, could have
a material adverse effect on our business, financial condition and results of
operations.
Clean Water Act. The federal Clean Water Act affects coal mining operations by,
among other things, imposing restrictions on effluent discharge into waters.
Regular monitoring, as well as compliance with reporting requirements and
performance standards, are preconditions for the issuance and renewal of permits
governing the discharge of pollutants into water. We believe that we have
obtained all permits required under the Clean Water Act. However, there can be
no assurance that requirements under the Clean Water Act will not materially
adversely affect our business, financial condition and results of operations.
See "Regulation."
Deregulation of the Electric Utility Industry. In October 1992, the National
Energy Policy Act gave wholesale suppliers access to the transmission lines of
electric power generators. In April 1996, the Federal Energy Regulatory
Commission issued orders establishing rules providing for open access to
electricity transmission systems, thereby initiating consumer choice in
electricity purchasing and encouraging competition in the generation of
electricity. While the underlying deregulation process is still proceeding at
the federal level, the detailed implementation and planning has been left to the
individual states. Deregulation of the power industry, when implemented, will
enable industrial, commercial and residential customers to shop for the lowest
cost supply of electricity. This fundamental change in the power industry is
expected to result in changes in ownership of generating plants, to compel
electric power generators to be more aggressive in developing and defending
market share, to compel electric power generators to be more focused on their
pricing and cost
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structures and to cause power generators to be more flexible in reacting to
changes in the market. Deregulation may result in efforts to reduce coal prices,
which could have a material adverse effect on our business, financial condition
and results of operations.
Employee and Retiree Benefit Obligations. Under the Black Lung Benefits Revenue
Act of 1977 and the Black Lung Benefits Reform Act of 1977, as amended by the
Black Lung Benefits Revenue Act of 1981 and the Black Lung Amendments of 1981,
each coal mine operator is required to make payments of pneumoconiosis (black
lung) benefits to current and former coal miners, and certain survivors of a
miner who dies from black lung disease, and to a trust fund for the payment of
benefits and medical expenses to claimants who last worked in the coal industry
prior to January 1, 1970, or where no responsible coal mine operator has been
identified for claims where a miner's last coal employment was after December
31, 1969. The trust fund is funded by an excise tax on coal (except lignite)
produced, sold or used of up to $1.10 per ton for deep-mined coal and up to
$0.55 per ton for surface-mined coal, neither amount to exceed 4.4% of the per
ton sales price. In addition to federal acts, we are also liable under various
state statutes for pneumoconiosis claims. Our pneumoconiosis (black lung)
benefits liabilities totaled approximately $496 million on our balance sheet at
September 30, 1998. The impact of these costs has not been significant for the
nine-month period ended September 30, 1998. The related cash payment for such
liability was $7 million.
In recent years, legislation on black lung reform has been introduced but not
enacted in Congress. It is possible that such legislation will be reintroduced
for consideration by Congress. Such legislation could restrict the evidence that
can be offered by a mining company to dispute claims, establish a standard for
evaluation of evidence that greatly favors black lung claimants, allow claimants
who have been denied benefits at any time since 1981 to refile their claims for
consideration under the new law, make surviving spouse benefits significantly
easier to obtain and retroactively waive repayment of preliminarily awarded
benefits that are later determined to have been improperly paid. If any of these
proposals or similar legislation is passed, the number of claimants who are
awarded benefits could significantly increase. There can be no assurance that
any such changes in black lung legislation, if approved, will not have a
material adverse effect on our business, financial condition and results of
operation.
The U.S. Department of Labor has issued proposed amendments to the regulations
implementing the federal black lung laws which, among other things, establish a
presumption in favor of a claimant's treating physician and limit a coal
operator's ability to introduce medical evidence regarding the claimant's
medical condition. If adopted, the amendments could have an adverse effect on
us, the extent of which cannot be accurately predicted.
Additionally, we are required to compensate employees for work-related injuries.
Our workers' compensation liabilities were $248 million at September 30, 1998.
The amount that was included as a cost for the nine-month period ended September
30, 1998 was $37 million, while the related cash payment for such liability was
$31 million. In addition, several states in which we operate consider changes in
workers' compensation laws from time to time. Such changes, if enacted, could
adversely affect our business, financial condition and results of operation.
The Coal Industry Retiree Health Benefits Act of 1992 requires us to make
payments to fund the cost of health benefits for our and other coal industry
retirees. We made payments of $32 million and $27 million in 1997 and for the
nine months ended September 30, 1998, respectively. See Note 14 of Notes to
Consolidated Financial Statements. As a result of a U.S. Supreme Court decision
rendered in 1998, we may be required to increase our share of such payments.
However, the magnitude of such increase, if any, cannot be determined at this
time.
Reclamation, Mine Closure and Subsidence. The Federal Surface Mining Control and
Reclamation Act of 1977 and similar state statutes require that we obtain and
periodically renew permits for mining operations and that
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our mine property be restored in accordance with specified standards and an
approved reclamation plan. States also impose on mine operators the
responsibility for repairing or compensating for damage occurring on the surface
as a result of mining operations.
We accrue for the costs of current mine disturbance and of final mine closure,
including the cost of treating mine water discharge where necessary, over the
estimated useful mining life of the property. The establishment of liability for
the current disturbance and final mine closure reclamation is based upon permit
requirements and requires various estimates and assumptions, principally
associated with costs and production levels. The reclamation costs, mine-closing
costs and other environmental liability accruals were $321 million at September
30, 1998. The amount that was included as an operating expense for the
nine-month period ended September 30, 1998 was $7 million, while the related
cash payment for such liability in such period was $22 million. Although our
management believes it is making adequate provisions for all expected
reclamation and other costs associated with mine closures, future operating
results would be adversely affected if such accruals were later determined to be
insufficient.
Impact of Federal and State Superfund Statutes on Coal Mining Operations. Risks
of environmental liability are inherent with respect to both current and past
coal mining activities. The Comprehensive Environmental Response, Compensation
and Liability Act and similar state laws create liabilities for investigation
and remediation in response to releases of substances hazardous to the
environment and for damages to natural resources. Under the Comprehensive
Environmental Response, Compensation and Liability Act and many state Superfund
statutes, joint and several liability may be imposed on waste generators, site
owners and operators and others regardless of fault. Although waste substances
generated by coal mining and processing generally are not regarded as hazardous
substances for the purposes of the Comprehensive Environmental Response,
Compensation and Liability Act, some products used by coal companies in
operations and the disposal of such products are governed by the statute. Thus,
coal mines currently or previously owned or operated by us, and sites to which
we sent waste materials, may be subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act and similar state laws.
Our current and former coal mining operations currently incur, and will continue
to incur, expenditures associated with the investigation and remediation of
environmental matters, including underground storage tanks, solid and hazardous
waste disposal and other matters under the Comprehensive Environmental Response,
Compensation and Liability Act and state environmental laws.
We have been, from time to time, the subject of administrative proceedings,
litigation and investigations relating to environmental matters. We have also
been named as a potentially responsible party at several Superfund sites. We
believe, based on various factors, that the liabilities associated with such
Superfund sites should not have a material adverse effect on our financial
condition or results of operations. However, there can be no assurance that we
will not become involved in future proceedings, litigation or investigations or
that such liabilities will not be material.
While we believe that we have accrued for the costs likely to be incurred for
these environmental matters, and that those costs are not likely to have a
material adverse effect upon our business, financial condition and results of
operations, there can be no assurance that total costs and liabilities for these
environmental matters will not increase in the future. The magnitude of the
liability and the cost of complying with these environmental laws cannot be
predicted with certainty due to the lack of specific information available with
respect to many sites, the potential for new or changed laws and regulations and
for the development of new remediation technologies and the uncertainty
regarding the timing of work with respect to particular sites. As a result,
there can be no assurance that material liabilities or costs related to
environmental matters will not be incurred in the future or that our liabilities
will not be adversely affected by such environmental liabilities or costs. In
addition, there can be no assurance that changes in laws or regulations would
not affect the manner in which we are required to conduct our operations. See
"Regulation."
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CONTROL BY RHEINBRAUN
After this offering, Rheinbraun A.G. and Rheinbraun US GmbH will together own %
of our outstanding shares of common stock ( % if the underwriters' over-
allotment option is exercised in full). These principal stockholders will be
able to direct the election of all of the members of our Board of Directors and
exercise a controlling influence over our business and affairs, including any
determinations with respect to:
. mergers or other business combinations;
. our acquisition or disposition of assets;
. our incurrence of indebtedness;
. the issuance of any additional shares of our common stock or other
equity securities; and
. the payment of dividends.
Similarly, the principal stockholders will have the power to:
. determine matters submitted to a vote of our stockholders without the
consent of our other stockholders;
. prevent or cause a change in control; or
. take other actions that might be favorable to the principal
stockholders.
In the foregoing situations or otherwise, various conflicts of interest between
us and our principal stockholders could arise. Ownership interests of our
directors or officers in voting securities of our principal stockholders or
their affiliates or service as a director or officer or other employee of both
us and one of our principal stockholders or one of their affiliates could create
or appear to create potential conflicts of interest when directors and officers
and employees are faced with decisions that could have different implications
for us and our principal stockholders. See "Management" and "Principal
Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have million shares of our common stock issued and
outstanding ( million shares if the underwriters' over-allotment option is
exercised in full), of which the million shares offered hereby will generally be
freely tradeable without restriction by persons other than "affiliates" of
CONSOL. DuPont Energy Company will own shares of our common stock, and has
agreed not to dispose of such shares for a period of 180 days after the date of
this prospectus without the prior written consent of J.P. Morgan Securities Inc.
See "Underwriting." Under a registration rights agreement, DuPont will have two
demand registration rights at DuPont Energy Company's expense prior to December
31, 2001. The shares of our common stock held by Rheinbraun A.G. and Rheinbraun
US GmbH will be deemed "restricted" securities within the meaning of the
Securities Act of 1933, and as such may not be sold in the absence of
registration under the Securities Act of 1933 or an exemption from the
Securities Act of 1933, including the exemption contained in Rule 144 under the
Securities Act of 1933. Each of Rheinbraun A.G. and Rheinbraun US GmbH also has
agreed not to dispose of its shares for a period of 180 days after the date of
this prospectus without the prior written consent of J.P. Morgan Securities Inc.
We cannot predict the effect, if any, that future sales of shares of our common
stock, or the availability of such shares for sale would have on the market
price prevailing from time to time. Nevertheless, sales by us, Rheinbraun A.G.,
Rheinbraun US GmbH or DuPont Energy Company of substantial amounts of our common
stock in the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices for our common stock offered in this
offering.
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Such a reduction in the market price of our common stock could impair our
ability to raise additional capital through future public offerings of our
equity securities. See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for our common stock, and
there can be no assurance that an active public market for our common stock will
develop or be sustained after this offering. The initial public offering price
will be determined by negotiation between us and the representatives of the
underwriters based upon several factors. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The trading price of our common stock could be subject to wide fluctuations in
response to, among other things, the following factors:
. variations in operating results;
. expectations of securities analysts;
. technological innovations by us or our competitors;
. changes in financial estimates by securities analysts; or
. the operating and stock price performance of other companies that
investors may consider comparable to us.
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies
which are traded on the market. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our actual
performance.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to identify the applicable year and is an issue which
exists for all companies that rely on computers as the year 2000 approaches. The
failure to correct any such programs may result in incorrect results when
computers perform arithmetic operations, comparisons or data field sorting and
some non-information systems functions that rely on computers making
calculations. Based on recent assessments, we have determined that we will be
required to modify or replace some portions of our software, and, to a lesser
extent, our hardware so that those systems will properly utilize dates beyond
December 31, 1999. We do not expect costs in connection with any such
modifications and replacements to be material. However, if such modifications
and replacements are not made, or are not completed in a timely manner, the year
2000 issue may have a material adverse effect on our business, results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Year 2000 Issue."
FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" (as defined in
Section 27A of the Securities Act of 1933) that are based on the beliefs of our
management, as well as assumptions made by, and information currently available
to, our management. The words "anticipates," "believes," "estimates," "expects,"
"plans," "intends" and similar expressions are intended to identify these
forward-looking statements, but are not the exclusive means of identifying them.
These forward-looking statements reflect the current views of our management and
are subject to certain risks, uncertainties and contingencies which could cause
our actual results, performance or achievements to differ materially from those
expressed in, or implied by, these statements. These risks, uncertainties and
contingencies include, but are not limited to, the following:
19
<PAGE>
. the success or failure of our efforts to implement our business
strategy;
. reliance on major customers and long-term contracts;
. actions of our competitors and our ability to respond to such actions;
. risks inherent to mining;
. the effect of government regulation; and
. the other factors discussed above under the heading "Risk Factors" and
elsewhere in this prospectus.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
20
<PAGE>
THE COMPANY
CONSOL Energy Inc. ("CONSOL") was organized as a Delaware corporation in 1991.
CONSOL is a holding company for 64 direct and indirect wholly owned operating
subsidiaries, including Consolidation Coal Company and CONSOL Inc. Consolidation
Coal Company is the principal operating subsidiary of CONSOL Energy, Inc. and
CONSOL Inc. is the direct holding company subsidiary that provides executive,
management and administrative services to CONSOL.
The earliest predecessor of CONSOL, Consolidation Coal Company, was formed on
March 9, 1860 with the merger of several small western Maryland coal holdings.
Formal incorporation was delayed until April 19, 1864 because of the Civil War.
By 1927, Consolidation Coal Company had become the largest bituminous coal
producer in the United States. Consolidation Coal Company merged with Pittsburgh
Coal Company in 1945 to form the then largest coal company in the United States.
During the next 20 years, Consolidation Coal Company continued to grow through
acquisitions. In 1966, Continental Oil Company ("Conoco"), a vertically
integrated petroleum company, acquired Consolidation Coal Company. E.I. du Pont
de Nemours and Company ("DuPont") acquired Conoco in 1981. In 1991, RWE A.G.,
through its direct and indirect wholly owned subsidiaries Rheinbraun A.G. and
Rheinbraun U.S. GmbH (collectively, "Rheinbraun"), purchased a 50% equity
interest in CONSOL. RWE A.G. is a leading international energy-based industrial
conglomerate headquartered in Germany and is the fifth largest industrial group
in Germany based on annual sales. DuPont held its remaining 50% interest in
CONSOL through DuPont Energy Company ("DEC"), its wholly owned subsidiary.
In November 1998, CONSOL purchased shares of its common stock ("Common
Stock") from DEC. After the purchase, and before this offering (the "Offering"),
Rheinbraun owned 94% and DEC owned 6% of the outstanding shares of Common Stock.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to CONSOL from the Offering, after underwriting discounts,
commissions and expenses payable by CONSOL, are estimated to be approximately $
million (assuming an initial public offering price of $ per share and no
exercise of the underwriter's over-allotment option). Such net proceeds will be
used to repay a portion of the commercial paper issued by CONSOL in order to
finance:
. the November 1998 purchase of shares of Common Stock from DEC,
. the payment of a dividend prior to the Offering and
. the September 1998 acquisition of Rochester & Pittsburgh Coal Company
("R&P") and the refinancing of certain indebtedness incurred by R&P.
The commercial paper to be repaid has maturities of up to 90 days and bears
interest at varying rates.
DIVIDEND POLICY
The Board of Directors currently intends to declare and pay quarterly dividends
on Common Stock. It is expected that the first quarterly dividend after the
Offering will be $ per share (a rate of $ per share annually) and will be paid
in the third quarter of 1999. The declaration and payment of dividends by CONSOL
is subject to the discretion of the Board of Directors, and no assurance can be
given that CONSOL will pay such dividend or any further dividends. The
determination as to the payment of dividends will depend upon, among other
things, general business conditions, CONSOL's financial results, contractual and
legal restrictions regarding the payment of dividends by CONSOL, the credit
ratings of CONSOL, planned investments by CONSOL and such other factors as the
Board of Directors deems relevant.
CONSOL paid ordinary cash dividends to its stockholders of $80 million in each
of 1995, 1996 and 1997. CONSOL paid a $60 million dividend in November 1998 and
expects to pay a $20 million dividend in December 1998. CONSOL also paid an
extraordinary cash dividend to its stockholders of $380 million in 1997. The
dividends historically paid by CONSOL are not indicative of its future dividend
policy, particularly because CONSOL was closely held prior to the Offering. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
22
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of CONSOL at
September 30, 1998 (1) on an actual basis, (2) on a pro forma basis reflecting
(A) the purchase by CONSOL of shares of Common Stock for $500 million held by
DEC and the payment, prior to the Offering, of a dividend in the amount of $60
million and (B) borrowings incurred to purchase the shares and pay the dividend
and (3) on a pro forma, as adjusted basis reflecting the Offering and the
application by CONSOL of the estimated net proceeds therefrom. See "Principal
Stockholders--Certain Transactions."
<TABLE>
<CAPTION>
---------------------------------------------
At September 30, 1998
---------------------------------------------
Pro forma
Actual Pro forma as adjusted
--------- ------------- -------------
Dollars in thousands
<S> <C> <C> <C>
Short-term debt............................................................ $ 105,476 $ 665,153 $
========= ========= =========
Current portion of long-term debt.......................................... $ 108,540 $ 108,540 $ 108,540
Long-term debt
Notes due 2002........................................................ $ 66,000 $ 66,000 $ 66,000
Notes due 2004........................................................ 45,000 45,000 45,000
Notes due 2007........................................................ 44,784 44,784 44,784
Baltimore Port Facility revenue
bonds in series due 2010 and 2011................................. 102,865 102,865 102,865
Variable rate notes payable
at various dates through 2001..................................... 2,119 2,119 2,119
Advance royalty commitments........................................... 26,556 26,556 26,556
Long-term capitalized leases.......................................... 22,164 22,164 22,164
Other long-term notes maturing
at various dates through 2007..................................... 12,399 12,399 12,399
--------- --------- ---------
Total long-term debt.............................................. 321,887 321,887 321,887
Stockholders' equity
Common Stock, $1.00 par value, 100,000 shares authorized,
issued and outstanding, actual; 53,000 shares authorized,
issued and outstanding, pro forma; shares authorized
and shares issued and outstanding, pro forma as
adjusted(1)....................................................... 100 53
Capital in excess of par value........................................ 802,904 302,951
Retained (deficit).................................................... (375,542) (435,219) (435,219)
--------- --------- ---------
Total stockholders' equity.......................................... 427,462 (132,215)
--------- --------- ---------
Total capitalization......................................... $ 749,349 $ 189,672 $
========= ========= =========
</TABLE>
- -------------------
(1)Excludes shares of Common Stock issuable upon exercise of options to be
granted under the Company's 1998 Equity Incentive Plan upon consummation of the
Offering. Also excludes an additional shares of Common Stock reserved for
future issuance under the 1998 Equity Incentive Plan. See "Management."
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and operating
data of CONSOL for the periods indicated. The selected consolidated financial
data for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been
derived from the consolidated financial statements of CONSOL which financial
statements have been audited by Ernst & Young LLP, independent auditors. The
report of Ernst & Young LLP with respect to the financial statements at December
31, 1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997
appears elsewhere in this Prospectus. The selected financial data for the nine
months ended September 30, 1997 and 1998 and at September 30, 1998 have been
derived from CONSOL's unaudited interim financial statements included elsewhere
in this Prospectus which, in the opinion of CONSOL, include all adjustments
necessary for the fair presentation of such data for the unaudited interim
periods. The results of operations for the nine months ended September 30, 1998
are not necessarily indicative of the results of operations to be expected for
the entire year ending December 31, 1998. Following completion of the Offering,
CONSOL expects to change its fiscal year from a calendar year to a year ending
on June 30. CONSOL will have a transitional fiscal period ending June 30, 1999.
CONSOL's first full fiscal year ending June 30 will be the year that starts July
1, 1999 and ends June 30, 2000. The information in the following table should be
read in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Consolidated Financial Statements
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Nine months ended
Year ended December 31, September 30,
-----------------------------------------------------------------------------------------------------
1993(1) 1994 1995 1996 1997 1997 1998
------------ ----------- ----------- ----------- ----------- ----------- -----------
In thousands,
except per share data
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data
Revenue
Sales(2)................... $ 1,730,209 $ 2,326,104 $ 2,269,211 $ 2,336,014 $ 2,285,197 $ 1,684,523 $ 1,680,063
Other income............... 55,743 86,377 45,024 60,940 64,441 50,968 37,450
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total revenue........... 1,785,952 2,412,481 2,314,235 2,396,954 2,349,638 1,735,491 1,717,513
Costs
Costs of goods sold and
other operating charges.. 1,490,869 1,703,678 1,600,271 1,687,836 1,592,489 1,189,645 1,157,674
Selling, general and
administrative expense... 50,338 53,546 53,537 53,354 55,353 41,109 40,689
Depreciation, deplexion
and amortizationtion..... 231,655 265,262 253,113 235,159 233,304 171,353 175,575
Interest expense........... 41,770 50,678 53,915 44,510 45,876 34,468 32,496
Taxes other than income.... 144,776 204,356 200,605 187,396 188,940 143,208 147,951
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total costs............. 1,959,408 2,277,520 2,161,441 2,208,255 2,115,962 1,579,783 1,554,385
------------ ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes............... (173,456) 134,961 152,794 188,699 233,676 155,708 163,128
Income taxes................. (84,645) 380 22,744 35,970 49,887 35,824 38,431
------------ ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............ $ (88,811)(3) $ 134,581 $ 130,050 $ 152,729 $ 183,789 $ 119,884 $ 124,697
============ =========== =========== =========== =========== =========== ===========
Pro forma net income
per share $ $
Weighted average number
of common shares
outstanding........
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
At December 31, At September 30, 1998
--------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 Actual Pro forma(4)
---------- ---------- ---------- ---------- ---------- ---------- ------------
In thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital.............................. $ 75,368 $ 208,079 $ 277,678 $ 358,030 $ 77,313 $ (77,615) $ (637,292)
Total assets ................................ 3,664,762 3,952,988 3,871,978 3,857,508 3,548,011 3,989,229 3,989,229
Short-term debt.............................. 0 132,567 78,166 46,378 55,051 105,476 665,183
Long-term debt (including current
portion..................................... 435,316 450,332 442,385 449,170 397,257 430,427 430,427
Total deferred credits and other liabilities. 2,399,378 2,413,510 2,325,262 2,315,397 2,262,702 2,466,108 2,466,108
Stockholders' equity ........................ 401,616 456,197 506,247 578,976 302,765 427,462 (132,215)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Nine months ended
Year ended December 31, September 30,
------------------------------------------------------------------ ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- -------- ------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Operating Data
Tons sold (in thousands)(5)......... 52,072 74,199 72,741 77,000 75,170 55,302 56,417
Tons produced (in thousands)........ 45,646 72,140 71,324 71,411 72,505 53,754 54,860
Productivity (tons per manday)...... 28.35 29.60 31.22 34.57 38.46 37.34 39.99
Average production cost
($ per ton produced)............. $ 26.22 $ 22.91 $ 22.31 $ 21.87 $ 21.05 $ 21.33 $ 21.34
Average sales price of tons
produced ($ per ton
produced)........................ $ 28.36 $ 27.32 $ 26.61 $ 26.29 $ 26.49 $ 26.41 $ 26.59
Coal reserves (tons in
millions)(6)..................... 5,176 4,956 5,072 5,063 4,776 5,009 4,847
Number of mining complexes
(at period end).................. 31 30 26 26 24 24 27(7)
Number of employees
(at period end).................. 10,036 9,739 8,743 8,206 7,711 7,852 8,716
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Nine months ended
Year ended December 31, September 30,
------------------------------------------------------------------ ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- --------- --------- --------- --------- ---------- -----------
In thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data
Capital expenditures................ $ 138,124 $ 144,438 $ 179,022 $ 169,367 $ 200,617 $ 135,330 $ 188,624
EBIT(8)............................. (135,033) 167,668 188,715 212,708 256,934 171,341 187,547
EBITDA(9)........................... 96,622 432,930 441,828 447,867 490,238 342,694 363,122
Net cash provided by operating
activities....................... 261,182 344,629 298,290 372,582 427,913 243,265 262,517
Net cash provided by (used in)
investing activities............. (231,441) (357,153) (160,856) (251,236) 52,243 (74,850) (233,424)
Net cash provided by (used in)
financing activities............. (67,074) 50,418 (140,805) (119,254) (501,354) (87,356) (9,955)
</TABLE>
- ---------------------------
(1)Results of operations for 1993 reflect the adverse effects of the ten-month
strike by employees represented by the United Mine Workers of America ("UMWA")
in connection with the renegotiation of the National Bituminous Coal Wage
Agreement (the "NBCWA") which expired on February 1, 1993. See "Risk Factors--
Union Represented Labor Force" and "Business--Employees and Labor Relations."
(2)Includes sales of Fairmont Supply Company, other than to the Company, of $157
million, $179 million, $212 million, $203 million, and $217 million in 1993,
1994, 1995, 1996 and 1997, respectively, and $161 million and $132 million in
the first nine months of 1997 and 1998, respectively.
(3)Excludes cumulative effect of change in accounting principle. In 1993, CONSOL
changed accounting methods of accruing provisions for coal workers'
pneumoconiosis and workers' compensation. These changes were the result of a
reevaluation of measurement methods in light of the issuance of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112). CONSOL recorded income classified as a
cumulative effect of accounting change of $46.3 million representing income of
$70.3 million (net of contract deferrals of $67.0 million and income taxes of
$47.2 million) for the change in accounting for coal workers' pneumoconiosis,
and a charge of $23.9 million (net of income taxes of $16.1 million) for the
change in accounting for workers' compensation.
(4)Gives effect to the purchase by CONSOL of shares of Common Stock owned by
DEC for $500 million and the payment of dividends in the amount of $60 million
and related borrowings incurred to finance the purchase and dividend. See
"Certain Relationships and Related Party Transactions."
(5)Includes sales of coal produced by CONSOL and purchased from third parties.
CONSOL sold 3.3 million, 3.5 million, 2.7 million, 3.2 million, 3.1 million, 2.2
million and 2.1 million tons of coal that we purchased from third parties during
1993, 1994, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and
1998, respectively.
(6)Represents proved and probable reserves at period end. See "Business--Coal
Reserves" and "Glossary."
(7)In November 1998, CONSOL exchanged two mining complexes, Holden and Twin
Branch, with A.T. Massey Coal Company for the Vesta coal reserves located in
southwestern Pennsylvania.
(8)EBIT is defined as earnings, before cumulative effect of accounting changes,
from continuing operations, before deducting net interest expense (interest
expense less interest income) and income taxes. EBIT does not purport to
represent cash generated by operating activities and should not be considered in
isolation or as a substitute for measures of performance in accordance with
generally accepted accounting principles. In addition, because EBIT is not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies.
(9)EBITDA is defined as earnings, before cumulative effect of accounting
changes, from continuing operations, before deducting net interest expense
(interest expense less interest income), income taxes and depreciation,
depletion and amortization. EBITDA is commonly used to analyze companies on the
basis of operating performance, leverage and liquidity. However, it does not
purport to represent cash generated by operating activities and should not be
considered in isolation or as a substitute for measures of performance in
accordance with generally accepted accounting principles. In addition, because
EBITDA is not calculated identically by all companies, the presentation herein
may not be comparable to other similarly titled measures of other companies.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
CONSOL ranks among the largest coal companies in the United States based upon
total revenue, net income and operating cash flow. CONSOL is the largest U.S.
producer of high-Btu bituminous coal, the largest producer of coal east of the
Mississippi River, the largest producer from underground mines and the largest
U.S. exporter of coal to international markets. Production in 1997 totalled 73
million tons. CONSOL accounted for 7% of total domestic tons produced and for
12% of tons produced in the eastern United States during 1997. CONSOL currently
operates 25 mining complexes. At December 31, 1997, CONSOL had 4.8 billion tons
of proved and probable coal reserves, the second largest reserve base among U.S.
coal producers.
CONSOL has increased earnings over the last five years by (1) reducing unit
costs of production through productivity improvements, (2) expanding CONSOL
mines by investing in technology, thereby using the resulting production
increases to replace older, higher cost mines with depleted reserves, (3)
investing in acquisitions that complement existing operations, and (4)
successfully selling coal at prices that have enabled CONSOL to maintain margins
despite the expiration of above-market sales contracts. CONSOL will attempt to
continue to use these methods in the future.
CONSOL has maintained the delivered-cost competitiveness of its coals by
increasing productivity. CONSOL operates 25% of all longwall mining systems in
the United States, more than any other coal producer. The distinguishing
characteristic of longwall mines relative to other types of mines is a low
variable-cost structure due to highly mechanized operations. Expansion of
production from these mines can be achieved at low incremental cost. This has
allowed CONSOL to generate positive cash margins even under pricing pressures.
While tons produced by CONSOL have increased in each of 1995, 1996 and 1997,
CONSOL reduced employment at its mining complexes in operation by 11.8% from
December 31, 1995 through December 31, 1997 and the number of mining complexes
in operation from 30 to 24. During the same period, net income increased in each
year, from $130 million in 1995 to $153 million in 1996 and $184 million in
1997, as did net cash provided by operating activities which increased from $298
million in 1995 to $373 million in 1996 and $428 million in 1997.
CONSOL expects to continue to reduce its costs in the future. CONSOL currently
is expanding the preparation plant that serves the Bailey and Enlow Fork
operation and plans to improve underground haulage to ultimately increase
production nearly 25% from what already is a record level. CONSOL replaced track
haulage with more efficient belt haulage at its McElroy mine in 1997 and its
Blacksville mine in 1998. Also at the McElroy mine, CONSOL is constructing a raw
coal silo that will allow greater efficiency at both the plant and in the mine.
At the Blacksville mine, CONSOL plans to accelerate the lifting of coal from the
vertical shaft in the mine, which is the current bottleneck. CONSOL intends to
convert the Shoemaker mine to an all-belt haulage mine to further reduce its
costs. CONSOL has plans to replace the Cardinal River mine with the lower-cost
Cheviot mine subject to satisfactory market conditions. In 1999, the higher-cost
Powhatan mine will deplete its reserves and it is anticipated that the expanded
McElroy and Shoemaker mines will more than offset the production loss and do so
at lower costs. CONSOL incorporates such improvements routinely in its plans to
continue to reduce cost.
CONSOL also will increase its production through acquisitions where CONSOL
believes it has a competitive advantage and can generate value from
underperforming assets. In September 1998, CONSOL acquired R&P. R&P's principal
asset is Mine No. 84, which has similar characteristics to the Bailey and Enlow
Fork mines, and has the potential to become a highly efficient mine.
26
<PAGE>
CONSOL has successfully marketed its coal production, and has been able to
maintain margins despite the implementation in 1995 of the first phase of the
Clean Air Act, as amended (the "Clean Air Act"). The second phase of the
implementation of the Clear Air Act will take effect in the year 2000. CONSOL
plans to sell a significant portion of its high-sulfur coal production after
2000 to scrubbed plants or to export markets. Its medium-sulfur coals, such as
coal produced at the Bailey, Enlow Fork and Mine 84 mines, will be targeted to
power plants that are unscrubbed but that can continue to burn such coals with
sulfur dioxide allowances.
CONSOL believes that many of the unscrubbed power plants also will retrofit
scrubbers when economical. Because of potential further tightening of clean air
regulations, particularly for sulfur dioxide and for mercury control, scrubbers
may be required. To the extent that plants install scrubbers, the cost of
operating a scrubber is approximately $.09 to $.12 per million Btus. In
addition, technologically-advantaged clean power plants using high- Btu, low-
delivered-cost coals are expected to be more competitive than plants generating
electricity with natural gas. Because scrubbers are needed for all new coal-
fired power plants and may be required for existing coal fired plants to
continue to operate under tighter air regulations, CONSOL's coals should sustain
their advantage over low-sulfur coal that is produced farther from CONSOL's
markets and, as a result, have higher transportation costs.
LONG-TERM CONTRACTS
During 1997, approximately 66% of CONSOL's total revenue from coal sales
(representing 46.9 million tons) resulted from sales under long-term contracts
(in excess of one year). These contracts contribute to the stability and
profitability of CONSOL's operations by providing predictability of production
volumes and sales prices. In addition, because the price of coal has declined in
recent years, some of CONSOL's long-term contracts are at prices above current
spot market. CONSOL's long-term contracts, existing at September 30, 1998, have
remaining terms ranging from one to 18 years and provide, in the aggregate, for
46 million tons, 42 million tons and 24 million tons to be delivered in 1998,
1999 and 2000, respectively, subject generally, to the satisfaction of certain
conditions and each contracting party's right to vary tons delivered.
CONSOL's net income primarily is generated by low-cost mining operations with
sales volumes at market prices. However, CONSOL has fixed-price and base-price-
plus-escalation steam coal contracts that are above or below current market
prices. The following table sets forth for such contracts that were in effect in
1997 (1) the number of tons deliverable, (2) the weighted average price per ton
paid or estimated to be payable and (3) the number of contracts. Where contracts
have price reopener provisions, such contracts have been excluded from the table
after the date on which they revert to market prices.
<TABLE>
<CAPTION>
Base-Price-Plus Escalation and Fixed-Price Sales Contracts
--------------------------------------------------------
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sales volumes 35.0 28.4 25.5 12.8 11.3 8.9
(Millions of tons)
Weighted average price $27.70 $28.90 $29.20 $27.20 $28.60 $31.10
(Free on board at mine)
Number of Contracts 37 25 19 10 9 8
</TABLE>
Contracts that provided for the sale of 22 million tons in 1997 expire or revert
to market price prior to the year 2000. These contracts generated total revenues
of $620 million in 1997. Based on CONSOL's estimate of market prices in 1997, if
sales under these contracts had been at market prices, CONSOL's revenues and net
27
<PAGE>
income in 1997 would have been reduced by approximately $120 million and $75
million, respectively. During the past five years, CONSOL has been able to
offset the effects of the expiration of long-term contracts through cost savings
and productivity improvements. CONSOL anticipates that it will be able to
mitigate the impact of the expiration of such contracts. However, there cannot
be any assurance that it will be able to do so, particularly with the larger
volume expiring in 2000, and the inability to reduce costs and improve
productivity could have a material adverse effect on CONSOL's business,
operations and financial condition.
CHANGE OF FISCAL YEAR
Following completion of the Offering, CONSOL expects to change its fiscal year
from a calendar year to a year ending on June 30. CONSOL will have a
transitional fiscal period ending June 30, 1999. CONSOL's first full fiscal year
ending June 30 will be the year that starts July 1, 1999 and ends June 30, 2000.
CONSOL is undertaking this change in order to align its fiscal year with that of
Rheinbraun. CONSOL is a consolidated subsidiary of Rheinbraun.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Revenue. Sales decreased 0.3% to $1,680 million for the nine months ended
September 30, 1998 (the "1998 Period") from $1,685 million for the nine months
ended September 30, 1997 (the "1997 Period). The decrease of $5 million was due
mainly to a decrease in sales of industrial supplies by $29 million due to a
loss of a sales contract and a decrease in sales of purchased coal by $10
million reflecting decreased volume due to a loss of a contract and a general
decrease in purchased coal sold to the export market. These decreases were
offset by increased produced coal sales of $37 million due mainly to a 2.3%
increase in the volume of coal sold. Coal sales prices for the 1998 Period were
comparable to those for the 1997 Period.
Other income, which consists of interest income, gain (loss) on the disposition
of assets, service income, royalty income, rental income and certain other
income, decreased 27.5% to $37 million for the 1998 Period compared with $51
million for the 1997 Period. The decrease of $14 million was due primarily to a
decrease in interest income resulting from a lower level of investment in
marketable securities and a decrease in the gain on sale of assets, partially
offset by a one-time payment received in 1998 pursuant to an agreement that
compensated CONSOL for not mining certain coal reserves.
Costs. Cost of goods sold and other operating charges decreased 2.7% to $1,158
million for the 1998 Period compared with $1,190 million for the 1997 Period.
The decrease of $32 million primarily reflected lower costs as a result of
decreased industrial supply sales and decreased purchased coal sales. Coal mine
productivity (calculated in tons per manday) increased 7.1% for the 1998 Period
compared with the 1997 Period. The productivity increase was driven, in part, by
increases in production at the McElroy mine, which completed installation of a
new belt haulage system at the end of 1997, and the Enlow Fork mine, which
installed a new longwall early in 1998.
Selling, general and administrative expenses remained stable at $41 million for
the 1998 Period and for the 1997 Period.
Depreciation, depletion and amortization increased 2.9% to $176 million for the
1998 Period compared with $171 million for the 1997 Period. The increase of $5
million was primarily due to the increase in equipment placed in service in the
1998 Period.
28
<PAGE>
Interest Expense decreased 5.9% to $32 million for the 1998 Period compared with
$34 million for the 1997 Period. The decrease of $2 million was primarily due to
a decrease in the average principal amount of long-term debt outstanding during
the period and more interest expense capitalized in the 1998 Period than in the
1997 Period. This decrease was partially offset by higher interest costs for
short term commercial paper due to higher principal balances outstanding during
the 1998 Period compared to the 1997 Period.
Taxes other than income increased 3.5% to $148 million for the 1998 Period
compared with $143 million for the 1997 Period. The increase of $5 million was
primarily the result of an increase in production related taxes due to increased
production volumes and the exhaustion of the West Virginia Business Investment
and Jobs Expansion Tax Credit carryforward utilized in 1997. This increase was
partially offset by a reduction of property tax expense due primarily to reduced
assessments at recently closed facilities.
Income Taxes. Income taxes increased 5.6% to $38 million for the 1998 Period
compared with $36 million for the 1997 Period, reflecting increased earnings in
the 1998 Period. The estimated effective tax rate was 23.6% for the 1998 Period
compared to 23.0% compared to the 1997 Period.
1997 COMPARED WITH 1996
Revenue. Sales decreased 2.2% to $2,285 million for 1997 compared with $2,336
million for 1996. The decrease of $51 million primarily was due to a decrease in
the volume of U.S. metallurgical and international steam coal sold, partially
offset by an improvement in average sales price per ton.
Other income increased 4.9% to $64 million for 1997 compared with $61 million
for 1996. The increase of $3 million primarily was due to an increase in royalty
income from a coal lease in Kentucky that began generating revenue in September
1996 and continued to generate revenue for the full year of 1997.
Costs. Cost of goods sold and other operating charges decreased 5.7% to $1,592
million for 1997 compared with $1,688 million for 1996 primarily as a result of
lower volume of CONSOL-produced coal sold in 1997 and lower average production
costs per ton. Coal mine productivity increased 11.3% in 1997 compared with
1996, and nine mines set production records in 1997. The productivity
improvement is attributable mainly to investment in a longwall mining system at
Shoemaker, in underground coal haulage at McElroy, and in an underground storage
bunker at Buchanan.
Selling, general and administrative expenses increased 3.8% to $55 million for
1997 compared with $53 million for 1996. The increase of $2 million primarily
was due to an increase in salaries and related benefits.
Depreciation, depletion and amortization decreased 0.9% to $233 million for 1997
compared with $235 million for 1996.
Interest expense increased 2.2% to $46 million for 1997 compared with $45
million for 1996. The increase of $1 million reflected interest charges related
to disputed coal royalty payments offset by lower average debt levels resulting
from the repayment of $44 million of long-term debt during 1997.
Taxes other than income increased 1.1% to $189 million for 1997 compared with
$187 million in 1996. The increase of $2 million resulted from increases in
severance taxes and required tax payments for pneumoconiosis (black lung)
benefits, which arose because of higher production. The increase in severance
taxes also resulted from the expiration in December 1996 of the West Virginia
Business and Job Expansion Tax Credit representing a portion of the tax credit
that was carried forward to 1997. The increase in taxes was partially offset by
a reduction in property tax expense as a result of mine closures.
29
<PAGE>
Income Taxes. Income taxes increased 38.9% to $50 million for 1997 compared with
$36 million for 1996. The increase of $14 million resulted primarily from
increased earnings and an increase in the effective tax rate from 19.1% in 1996
to 21.3% in 1997. The increased effective tax rate for 1997 primarily was
influenced by a decline in the impact of percentage depletion.
1996 COMPARED WITH 1995
Revenue. Sales increased 3.0% to $2,336 million for 1996 compared with $2,269
million for 1995. The increase of $67 million resulted from an increase of 5.9%
in the volume of coal sold. Volumes improved because of continued growth in the
U.S. economy and colder than normal temperatures in the first quarter which
boosted demand for steam coal from electricity generators. Record sales volumes
were recorded for CONSOL.
Other income increased 35.6% to $61 million for 1996 compared with $45 million
for 1995. The increase primarily reflected aggregate gains on sales of assets of
$14 million in 1996 compared to aggregate losses of $5 million on such sales in
1995. The loss in 1995 was influenced by the sale of gas properties in Virginia.
Costs. Cost of goods sold and other operating charges increased 5.5% to $1,688
million for 1996 compared with $1,600 million for 1995. The increase of $88
million primarily reflected increased volume of coal sales during 1996 offset in
part by lower average production costs per ton. Coal mine productivity improved
10.7%. Eight mines set productivity records and nine mines set production
records, including Enlow Fork, which produced 8.7 million tons, the most ever
for a U.S. underground mine. Productivity at Loveridge was enhanced following
the installation of a new longwall mining system.
Selling, general and administrative expenses remained stable at $53 million for
1996 and 1995.
Depreciation, depletion and amortization decreased 7.1% to $235 million for 1996
compared with $253 million for 1995. The decrease of $18 million primarily was
due to the amortization in full of certain capitalized mining costs and to the
sale of certain gas properties in 1995.
Interest expense decreased 16.7% to $45 million for 1996 compared with $54
million for 1995. The decrease of $9 million primarily was due to the lower
average principal amount and lower effective interest rates during 1996 compared
with 1995.
Taxes other than income decreased 7.0% to $187 million for 1996 compared with
$201 million for 1995. The decrease of $14 million was due primarily to the
enactment of the Virginia Coalfield Employment Enhancement Tax Credit in 1996,
which encouraged the creation and maintenance of coal mining jobs, and reduced
severance tax due to mines that were closed in 1995.
Income Taxes. Income taxes increased 56.5% to $36 million for 1996 compared with
$23 million for 1995. The increase of $13 million primarily was due to the
increase in earnings and an increase in the effective tax rate from 14.9% for
1995 to 19.1% for 1996. The effective tax rate increase resulted from a
reduction in alternative fuel tax credits because of the sale in 1995 of coalbed
methane gas operations that were eligible for such credit.
LIQUIDITY AND CAPITAL RESOURCES
CONSOL generally has satisfied its working capital requirements and funded its
capital expenditures and debt-service obligations from cash generated from
30
<PAGE>
operations. CONSOL believes that cash generated from operations and its
borrowing capacity will be sufficient to meet its working capital requirements,
anticipated capital expenditures (other than major acquisitions), scheduled debt
payments and anticipated dividend payments for at least the next several years.
Nevertheless, the ability of CONSOL to satisfy its debt service obligations, to
fund planned capital expenditures or pay dividends will depend upon its future
operating performance, which will be affected by prevailing economic conditions
in the coal industry and financial, business and other factors, certain of which
are beyond CONSOL's control.
CONSOL frequently evaluates potential acquisitions. In the past, CONSOL has
funded acquisitions primarily with cash generated from operations, but CONSOL
may consider a variety of other sources, depending on the size of any
transaction, including debt or equity financing. There can be no assurance that
such additional capital resources will be available to CONSOL on terms which
CONSOL finds acceptable, or at all.
OPERATING CASH FLOWS
Net cash provided by operating activities was $298 million, $373 million and
$428 million in 1995, 1996 and 1997, respectively, and $243 million and $263
million in the 1997 Period and the 1998 Period, respectively. The increases in
net cash provided by operating activities reflect increases in net income and
changes in certain working capital requirements.
CAPITAL EXPENDITURES
Capital expenditures were approximately $179 million, $169 million and $201
million in 1995, 1996 and 1997, respectively. CONSOL made such expenditures for
replacement of mining equipment, the expansion of mining capacity and projects
to improve the efficiency of mining operations. During the 1998 Period, CONSOL
spent approximately $189 million for capital expenditures excluding the costs
associated with the acquisition of R&P. Capital expenditures included $42
million for replacement of longwall equipment, $31 million for expansion of the
Bailey preparation plant, $20 million for drilling new wells and installing
associated gas gathering equipment for CONSOL's coalbed methane joint venture
and $96 million for other maintenance-of- production projects, including air
shafts, replacement equipment and equipment rebuilds. Capital expenditures
during the fourth quarter of 1998 will be for maintenance of production. CONSOL
anticipates that it will spend approximately an additional $47 million for
capital expenditures during the fourth quarter of 1998. CONSOL spent
approximately $150 million for the acquisition of R&P and $50 million to repay
certain indebtedness of R&P. CONSOL used cash generated from operations and cash
made available from the issuance of commercial paper to fund capital
expenditures in the second half of 1998, the acquisition of R&P and the
repayment of indebtedness of R&P.
DEBT
At September 30, 1998, CONSOL had total long-term debt of $430 million,
including current portion of long-term debt of $109 million. Such long-term debt
consisted of (1) an aggregate principal amount of $256 million of unsecured
notes which bear interest at rates ranging from 7.88% to 8.28% per annum and are
due at various dates between 1999 and 2007, (2) an aggregate principal amount of
$103 million of two series of industrial revenue bonds which were issued in
order to finance CONSOL's Baltimore port facility (the "Baltimore Bonds") and
bear interest at the rate of 6.5% per annum and mature in 2010 and 2011, (3) an
aggregate principal amount of $3 million of variable rate notes due at various
dates through 2001, (4) $28 million in advance royalty commitments, (5) an
aggregate principal amount of $14 million of notes maturing at various dates
through 2007 and (6) an aggregate principal amount of $26 million of capital
leases. An aggregate principal amount of $109 million in long-term debt will
come due during 1999. In addition, at September 30, 1998, CONSOL had an
aggregate principal amount of $105 million of commercial paper outstanding which
had maturities ranging up to 30 days and bore interest at varying rates.
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<PAGE>
CONSOL issued $600 million in commercial paper in November, 1998 in order to
fund the purchase of shares from DEC, a dividend of $60 million and the
acquisition of R&P and the refinancing of certain indebtedness incurred by R&P.
The commercial paper pays interest at varying rates and will be retired in part
with the net proceeds of the Offering. At November 30, 1998, there was $543
million principal amount of commercial paper outstanding.
CONSOL has a Senior Credit Facility available to it under which it may borrow up
to $700 million. At November 30, 1998, there were no borrowings outstanding
under the Senior Credit Facility. To date, CONSOL has used the Senior Credit
Facility to support the payment of its commercial paper. However, CONSOL could
borrow amounts under the Senior Credit Facility for other purposes. Borrowings
under this facility bear interest based on the London Interbank Offer Rate or
the Prime Rate at CONSOL's option. Funds may be borrowed for periods ranging
from one to 360 days, depending upon the interest rate selected by CONSOL.
CONSOL has not engaged in any hedging transactions since 1995.
STOCKHOLDERS' EQUITY AND DIVIDENDS
CONSOL had stockholders' equity of $303 million and $427 million at December 31,
1997 and September 30, 1998, respectively. CONSOL paid ordinary cash dividends
of $80 million during each of 1995, 1996 and 1997. CONSOL paid a dividend of $60
million in November 1998 and expects to pay a $20 million dividend in December
1998. CONSOL also paid an extraordinary cash dividend to its stockholders of
$380 million in 1997. The Board of Directors currently intends to pay quarterly
dividends on the Common Stock. It is expected that the first quarterly dividend
will be $ per share (a rate of per share annually) and will be declared and paid
in the third quarter of 1999. Current outstanding indebtedness of CONSOL does
not restrict CONSOL's ability to pay cash dividends.
ACCRUALS FOR CERTAIN LONG-TERM LIABILITIES
CONSOL has accrued for the costs it will incur in the future to satisfy certain
obligations. CONSOL had accrued $2,484 million, $2,460 million, $2,433 million
and $2,466 million at December 31, 1995, 1996, 1997 and September 30, 1998,
respectively, for deferred credits and other liabilities. The most significant
of these accruals are post retirement health care benefits, workers'
compensation, pneumoconiosis (black lung) benefits and costs associated with
closing mines. These obligations are unfunded. The accruals of these items are
based on estimates of future liabilities, which estimates are periodically
reviewed in light of CONSOL's experience, changes in mining plans and
legislation and other developments. Thus, from time to time, CONSOL's results of
operations may be significantly affected by changes to such deferred credits and
other liabilities. See Notes 14 and 15 of the Notes to Consolidated Financial
Statements.
CONSOL provides medical and life insurance benefits to retired employees not
covered by the Coal Industry Retiree Health Benefit Act of 1992. Substantially
all of CONSOL's employees may become eligible for these benefits if they have
worked ten years and attained the age of 55. The associated plans are unfunded.
CONSOL had accrued $1,145 million, $1,144 million, $1,145 million and $1,289
million at December 31, 1995, 1996 and 1997 and September 30, 1998,
respectively. The net costs of maintaining CONSOL's post retirement benefits
plans were $47 million, $54 million, $61 million and $55 million during 1995,
1996, 1997 and the 1998 Period, respectively. CONSOL used a 7.5% annual rate
increase in per capita cost of covered health care benefits in determining such
costs for 1997. CONSOL had assumed that the rate of such increases will
gradually decline to 4.5% in 2003 and remain level thereafter. An increase in
the assumed health care cost trend rates by 1% in each year would increase the
accumulated post retirement benefit obligation at December 31, 1997 by $85
million and increase the aggregate of the service and interest cost component of
net cost of maintaining CONSOL's post retirement benefits plan for 1997 by $8
million.
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CONSOL is required to pay pneumoconiosis (black lung) benefits to eligible
employees and former employees and their dependents under the Black Lung
Benefits Act of 1969 (the "1969 Black Lung Act") and the Black Lung Benefits
Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977 (the "1977
Black Lung Acts"). CONSOL is also liable under various state statutes for
pneumoconiosis claims. CONSOL provides self-insured accruals for present and
future liabilities for such benefits and determines such liabilities by
employing the projected unit credit method. Under this method, the costs
determined by the actuarial study are amortized over the employees' requisite
service periods. CONSOL amortizes the actuarial gains and losses over the
remainder of the average service life of the employees, which approximates 15.4
years. CONSOL had accrued $518 million, $518 million, $511 million and $496
million for such benefits at December 31, 1995, 1996, 1997 and September 30,
1998, respectively. The cost of providing such benefits was $6 million, $12
million and $4 million during 1995, 1996, 1997, respectively. The impact of
these costs has not been significant for the 1998 Period. Actual claims paid by
CONSOL could change significantly if current legislation is amended or if new
legislation is enacted. See "Regulation--Employee and Retirement Benefits--Black
Lung Legislation" and Note 14 of Notes to Consolidated Financial Statements.
CONSOL estimates and accrues for costs associated with closing mines and the
perpetual care of mines over the productive life of mines on a units-of-
production basis. CONSOL had accrued $246 million, $244 million, $250 million
and $286 million at December 31, 1995, 1996, 1997 and September 30, 1998,
respectively, for such costs.
CONSOL accrues for workers' compensation claims resulting from traumatic
injuries based on historical claims rates and periodically adjusts these
estimates based on the estimated costs of claims made. CONSOL had accrued $225
million, $215 million, $211 million and $248 million at December 31, 1995, 1996,
1997 and September 30, 1998, respectively, for such costs.
INFLATION
Inflation in the United States has been relatively low in recent years and did
not have a material impact on CONSOL's results of operations for the 1998 Period
or the years ended December 31, 1995, 1996 or 1997.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year (the "Year 2000 Issue").
Any of CONSOL's computer programs or hardware that have date- sensitive software
or embedded chips may recognize a date using "00" as the year 1900 rather than
the year 2000. The failure to correct any such programs or hardware could result
in system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. Based on recent
assessments, CONSOL has determined that it will be required to modify or replace
some portions of its software, and, to a lesser extent, its hardware so that
those systems will properly utilize dates beyond December 31, 1999. CONSOL
believes that with modification and replacement of existing software and
hardware, the Year 2000 Issue can be substantially mitigated. However, if such
modifications and replacements are not made, or are not completed on a timely
basis, which CONSOL currently does not anticipate, the Year 2000 Issue could
have a material impact on the operations of CONSOL.
CONSOL's plan to resolve Year 2000 Issues involves four phases: assessment,
remediation, testing and implementation. In September 1997, CONSOL formed a
committee to address this issue. The committee has completed its assessment of
all material information technology systems that would be affected by the Year
2000 Issue if not modified and has initiated a program to modify or replace
portions of its software so that CONSOL's computer systems will function
properly in the year 2000 and thereafter. To date, CONSOL is
33
<PAGE>
50% complete on the remediation and testing phase of the systems. CONSOL expects
software reprogramming and replacement, testing and implementation to be
completed by the second quarter of 1999.
CONSOL is in the process of assessing its operating equipment that uses
microprocessors to determine the extent that they are at risk for Year 2000
problems. This equipment includes coal mining, processing and loadout equipment.
The remediation of operating equipment depends primarily on the manufacturers of
that equipment for modifications. CONSOL is also in the process of assessing the
extent to which its suppliers of other products and services will be able to
supply CONSOL through the Year 2000. CONSOL has initiated formal communications
with all of its significant equipment vendors and other suppliers. CONSOL has
not obtained timetables of expected completion dates of modification, testing
and implementation from all of the vendors and suppliers. CONSOL does not
control its suppliers and vendors, but is attempting to have such timetables
submitted in the first quarter of 1999. The effect on CONSOL's operations of not
having these systems remediated, while not estimable at this time, could be
significant.
CONSOL conducts transactions that interface directly with systems of suppliers
and customers. There is no guarantee that the systems of other companies on
which CONSOL's systems rely will be timely converted and would not have an
adverse effect on CONSOL's systems. Furthermore, there can be no assurance that
CONSOL's suppliers will not experience material business disruptions that could
affect CONSOL as a result of the Year 2000 problem. CONSOL plans to complete
communications with important suppliers and customers, which do not have system
interfaces, as to their Year 2000 readiness in the first quarter of 1999. The
communications to date from such third parties to CONSOL's inquiries do not
indicate that these third parties expect, at this time, to be non- compliant by
the Year 2000 based on their progress to date. However, the inability of a
substantial number of third parties to complete their Year 2000 resolution
process could materially impact CONSOL. For example, the failure to be Year 2000
compliant by banks with whom CONSOL has material banking relationships could
cause significant disruptions in CONSOL's ability to make payments, deposit
funds and make investments, which could have a material adverse effect on
CONSOL's financial condition.
CONSOL is utilizing both internal and external resources to reprogram or
replace, test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated to be less
than $2 million and is being expensed as incurred and funded through operating
cash flows. In 1998, CONSOL expects to expense $539,000 related to all phases of
the Year 2000 project.
CONSOL has not established contingency plans in case of failure of its
information technology systems since it expects to have its material systems in
place by the second quarter of 1999. In connection with CONSOL's assessment of
third party readiness and operating equipment, in the first quarter of 1999
CONSOL will evaluate the necessity of contingency plans based on the level of
uncertainty regarding such compliance. In the event CONSOL's intermediaries or
vendors do not expect to be Year 2000 compliant, CONSOL's contingency plan may
include replacing such intermediaries or vendors or conducting the particular
operations itself.
CONSOL plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, and other
factors. Estimates on the status of completion and the expected completion dates
are based on progress to date compared to the timetable established by its Year
2000 committee. CONSOL has not employed the services of independent contractors
to verify CONSOL's assessment and estimates related to the Year 2000 problem.
There can be no guarantee that these estimates will be achieved and actual
results could differ materially from these plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
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<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued which
establishes new rules for the reporting and display of comprehensive income and
its components. CONSOL adopted this statement for the year ending December 31,
1998. CONSOL has no significant items of other comprehensive income.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131) was issued which establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise." The new standard requires that comparative
information from earlier years be restated to conform to requirements. CONSOL
adopted this standard for 1997.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued which improves and standardizes disclosures
by eliminating certain existing reporting requirements and adding new
disclosures. The statement addresses disclosure issues only and does not change
the measurement of recognition provisions specified in previous statements. The
statement supersedes the disclosure requirements of SFAS No. 87, "Employer's
Accounting for Pensions," SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." CONSOL intends to adopt this statement for the year ending December
31, 1998.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued which establishes accounting procedures for derivative
instruments including certain derivative instruments embedded in other contracts
and hedging activities. This statement amends SFAS No. 52, "Foreign Currency
Translation" to permit special accounting for a hedge of a foreign currency
forecasted transaction with a derivative. It supersedes SFAS No. 80, "Accounting
for Futures Contracts, SFAS No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk", SFAS No. 119 "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." It also amends
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" to include
the disclosure provisions about concentration of credit risk from Statement 105.
CONSOL intends to adopt this statement for the year ending December 31, 1998. No
effect from this adoption is anticipated.
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COAL INDUSTRY OVERVIEW
Coal is one of the world's major energy sources. The International Energy Agency
estimates that nearly 20% of the world's total primary energy supply came from
coal in 1996. In most parts of the world, coal is primarily used for the
generation of electricity. World-wide, coal combustion accounted for 37% of the
generation of electricity in 1996. In the United States, coal combustion
accounted for 57% of electricity generation in 1997.
The major coal producers in the world are China, the United States, Russia,
Ukraine, India, Australia and South Africa. More than 60 countries produce coal.
The United States has the largest reserve base, with an estimated 29% of the
world's recoverable bituminous and subbituminous coal reserves, followed by
Russia, China, India, South Africa and Australia.
U.S. COAL MARKETS
Production of coal in the United States has increased from 434 million tons in
1960 to 1.1 billion tons in 1997. The following table shows actual consumption
of U.S. produced coal during 1996 and 1997 and projected consumption through
2015.
HISTORICAL AND PROJECTED U.S. COAL CONSUMPTION
<TABLE>
<CAPTION>
=============================================================================
CAGR/(1)/
1996-
SECTOR 1996 1997 2000P 2005P 2010P 2015P 2015
- ------------------------------------ ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
in millions of tons
Utility............................. 873.2 898.1 940.0 985.2 1,041.7 1,103.5 1.2 %
Industrial.......................... 68.2 68.2 67.6 67.6 66.1 66.4 (0.1)
Non-utility generators.............. 19.6 18.8 20.8 21.2 21.8 22.2 0.7
Coke plants/steel mills
Metallurgical quality............ 31.7 29.2 30.4 18.8 17.9 14.6 (4.2)
Steam quality.................... 5.0 6.9 8.8 14.7 15.0 17.0 6.7
------- ------- ------- ------- ------- -------
Total domestic................ 997.7 1,021.2 1,067.6 1,107.5 1,162.5 1,223.7 1.1
------- ------- ------- ------- ------- -------
Export.............................. 90.5 85.8 88.0 88.1 91.6 94.8 0.2
------- ------- ------- ------- ------- -------
Total......................... 1,088.2 1,107.0 1,155.6 1,195.6 1,254.1 1,318.5 1.0 %
======= ======= ======= ======= ======= =======
</TABLE>
- -----------------------------
Source: RDI, Outlook for Coal, Winter 1997-1998.
(1)Compound annual growth rate
GENERATION OF ELECTRICITY
Coal is the predominant fuel used in the generation of electricity. Over the
past 20 years, generators of electricity have increased consumption of coal from
less than 500 million tons per year in 1977 to almost 900 million tons in 1997.
Coal's share of the fuel market for electricity generation has risen from 46% to
57% during that period. The increase in consumption was due in part to changes
in attitudes toward fuel supply security following the Arab oil embargoes during
the 1970s. More important, coal has a low delivered cost relative to other
competing fuels. The following table shows a comparison of the average
generating costs of electricity for each primary fuel.
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<PAGE>
AVERAGE PRODUCTION COSTS OF ELECTRICITY GENERATION
===============
$/megawatt Hour
Coal................................... $17.40
Natural Gas............................ $33.67
Nuclear................................ $20.02
Hydro.................................. $ 0.65
- -----------------------------
Source: RDI Database
On average, coal-fired electricity generation is less expensive than generation
from natural gas or nuclear power. Hydro-electric power is inexpensive but
cannot grow due to a lack of suitable new dam sites.
RDI expects generators of electricity to increase their demand for coal as
demand for electricity increases. Because coal-fired generation is used in most
cases to meet base-load requirements, coal consumption has generally grown at
the pace of growth in demand for electricity.
The following table shows fuel source comparisons for the generation of
electricity in terms of kilowatts generated.
DOMESTIC ELECTRICITY FUEL SOURCES COMPARISON
=======================
1990 1996 1997
------ ------ ------
Coal............................................. 55% 56% 57%
Nuclear.......................................... 21 22 20
Hydro............................................ 10 11 11
Natural Gas...................................... 9 9 9
Other............................................ 2 3
------ ------ ------
Total...................................... 100% 100% 100%
====== ====== ======
- -----------------------------
Source: Department of Energy, EIA Monthly Energy Review, February 1998.
EXPORTS
Current world seaborne trade in hard coal is about 480 million tons, with about
61% used to generate heat and produce steam, and about 39% used in steel-making
processes. Of the world's coal producing countries, only the United States,
Australia and South Africa are significant exporters. Prior to 1984, the United
States was the world's leading exporter of coal, but in the past decade that
role has diminished and traditional markets for U.S. coal exports have changed.
In general, the United States is a swing producer of coal for international
markets. Higher labor costs and transportation costs in the United States tend
to make U.S. coals less competitive when ample supplies of coal from other
producing areas are available. When supplies are restricted, for example because
of a strike of workers in a producing country, U.S. coal tends to fill the gap
because of the ability of U.S. producers to ship large amounts of coal on short
notice. The quality of U.S. coals, particularly the heat content, ash and coking
capabilities of Appalachian coals, and the well developed transportation
infrastructure in the East, are advantages for the United States. CONSOL
believes that its high-Btu, low ash coals from northern Appalachia and CONSOL's
control of a major export terminal at Baltimore position it to take advantage of
steam coal market opportunities overseas when they occur.
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The U.S. Department of Energy estimates that the United States exported 83.5
million tons of coal in 1997. The most coal ever exported by the United States
was in 1981 when exports reached 112.5 million tons. Since 1990, exports have
averaged 90.7 million tons per year. More than 98% of the coal exported by the
United States is bituminous coal, most of which is mined in northern and central
Appalachia. The remainder of the coal exported is anthracite and lignite. In
1997, Canada (14.5 million tons), Japan (7.9 million tons), and Brazil (7.5
million tons) were the three largest purchasers of U.S. coal overseas.
Metallurgical coal historically has been the principal type of coal exported
from the United States. In 1997, more than 63% of the coal exported was
bituminous, metallurgical-grade coal used in steel making. The remainder of the
coal is used for the generation of electricity, cement making and other
industrial processes. Major international purchasers of U.S. metallurgical coals
are Brazil, Canada, Japan, Italy, The Netherlands, Belgium and France.
CONSOL expects growth in steel making and metallurgical coal consumption in
Brazil, India, Korea and Taiwan to offset a slight decline in metallurgical coal
use in Europe. Europe will continue to be a primary market for U.S.
metallurgical coal because of the transportation advantage U.S. coals have over
coals from Canada or Australia. In addition, aging European coke ovens
increasingly will need high quality, low-expansion coals which produce high
carbon content and low porous structure coke. These features are common in
CONSOL's low-volatile metallurgical coal produced in Virginia. In addition,
CONSOL expects its premium low-volatile metallurgical coal to continue to play
an important role in the coking coal blends of the future. These coals enhance
the strength of the coke produced. This is particularly important to large blast
furnaces operated with low coke rates and with high pulverized-coal, oil or gas
injection rates.
COAL IMPORTS
Coal imports into the United States represent a de minimis percentage of the
total U.S. market for coal. In 1997, total consumption of coal in the United
States was 1,021.2 million tons while imports of coal from overseas were 7.4
million tons, or 0.7%. The largest exporter of coal to the United States was
Colombia with 3.0 million tons in 1997. Imported coal typically competes only in
coastal markets in the eastern United States.
COAL PRODUCTION
U.S. coal production was a record 1,088.6 million tons in 1997. During 1996, the
most recent year for which complete data is available, bituminous coal accounted
for 59% of production, subbituminous coal accounted for 32%, lignite accounted
for 8% and anthracite accounted for 1%.
38
<PAGE>
The following table shows principal U.S. production statistics for the period
1990 to 1997.
U.S. PRODUCTION STATISTICS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
CATEGORY 1990 1991 1992 1993 1994 1995 1996 1997
- ---------------------- ---------- --------- --------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL TONS
(in millions) 1,026.3 995.9 997.5 945.4 1,033.5 1,032.9 1,063.8 1,088.6
PERCENTAGE OF TOTAL TONS
East 61.2 59.3 59.0 54.5 54.8 52.7 52.9 53.0
West 38.8 40.7 41.0 45.5 45.2 47.3 47.1 47.0
Underground 41.3 40.9 40.8 37.1 38.6 38.4 38.5 38.5
Surface 58.7 59.1 59.2 62.9 61.4 61.6 61.5 61.5
NUMBER OF MINES
Total 3,430 3,022 2,746 2,475 2,354 2,104 1,903 1,810
Underground 1,690 1,489 1,354 1,196 1,143 977 885 810
Surface 1,740 1,533 1,392 1,279 1,211 1,127 1,018 1,000
NUMBER OF MINE
EMPLOYEES
Total 131,306 120,602 110,196 101,322 97,590 90,252 83,462 78,000
Underground 84,154 78,050 70,907 64,604 61,652 57,879 53,796 51,000
Surface 47,152 42,552 39,289 36,718 35,938 32,373 29,666 27,000
AVERAGE PRODUCTION PER
MINE (in thousands
of tons)
Total 300 330 363 382 439 491 559 N.A.(1)
Underground 251 273 301 268 349 406 463 N.A.(1)
Surface 347 384 424 465 524 565 642 N.A.(1)
</TABLE>
- ------------------------------------
Source: U.S. Department of Energy/Energy Information Agency/National Mining
Association
(1)Information was not available at the date of this Prospectus.
U.S. coal production increased 3.5% from 1990 to 1996, while the number of
operating mines declined 44.5% during the same period. In part, this reflected a
shift from smaller, high-cost operations to larger, more efficient,
technologically advanced, lower-cost operations. In particular, the production
attributable to large, capital intensive underground mines in the East and large
surface mines in the Powder River Basin in the West has grown. The cost
structure of these mines has contributed to a steady decline in steam coal
prices that has allowed coal to maintain more than half of the market in the
United States for fuel used in generating electricity.
39
<PAGE>
MINING METHODS
Coal is mined by underground or surface methods depending upon several factors,
including the location of the coal seam and the geology of the surrounding area.
In general, coal that is more than 200 feet below the surface is mined by
underground, or "deep" mining methods. Seams closer to the surface are extracted
by surface mining.
Underground mining accounted for 39% of total U.S. coal production in 1996.
There are two principal methods of underground mining: continuous mining, which
accounted for 45% of underground coal produced in 1996, and longwall mining,
which accounted for 47% of underground coal produced in 1996. In continuous
mining, coal is mined by the room-and-pillar system. This involves the
excavation of a series of "rooms" into the coal seam, leaving "pillars" or
columns of coal to help support the mine roof. Mining conditions in certain
areas may allow the coal pillars to be extracted during the "retreat" phase of
mining. A mining machine called a continuous miner tears at the coal in the
seam. Typically, the coal is loaded onto shuttle cars which transport the coal
to a conveyor belt or to rail cars for transport to the surface. The use of
shuttle cars to transport coal from the "section" where mining is taking place
to the belt or rail transportation system, is a bottleneck in the production
cycle and results in lost mining time at the coal seam while the continuous
miner waits for shuttle cars to remove the coal from the working area.
Where geology is favorable, the most efficient method of underground extraction
of coal is with longwall mining systems. With these systems, two sets of
parallel "entries" up to 10,000 feet in length are excavated by continuous
miners on either side of a block of coal to be mined by the longwall equipment.
The entries are joined together at the far end by crosscuts in the coal. The
block of coal thus outlined is called a "panel," and the 1000-1200 foot
dimension of the panel (hence the name "longwall") is referred to as the "face"
where the longwall mining machine will begin cutting coal. A rotating shearer on
a mining machine moves back and forth across the width of the face, cutting and
transporting coal from the face in one operation. The longwall machine has its
own moveable electro- hydraulic roof supports that are advanced down the length
of the block of coal as the shearer cuts the coal away. This method of mining
removes all the coal in the panel without leaving coal in place for roof
support. Mining by longwall methods has revolutionized underground mining
operations in the last 20 years. Over that period, the share of coal mined
underground by longwall mining machines has increased from less than 10% to 47%.
Surface mining consists of the following operations: removal of the covering
layer of rock and soil, called overburden, extraction of the coal using power
shovels, which load the coal into trucks to transport the coal from the "pit,"
backfilling the excavation with earth, and restoring the site to its approximate
original vegetation and appearance. In smaller surface mines, bulldozers and
front-end loaders are often used to remove overburden.
Front-end loaders can also be used to load coal.
After mining, coal often is prepared for shipment in a preparation plant. This
facility utilizes sizing, gravity, centrifugal force and chemical baths to
separate the coal from the non-combustible rock material. This cleaning process
upgrades the quality and heat value of the coal by removing or reducing pyritic
sulfur deposits, rock, clay and other non-combustible, ash producing material.
After cleaning, coal is transported to the customer immediately or stored on the
ground or in large, concrete silos for transportation to customers later.
COAL PRODUCING REGIONS
Coal is mined from coalfields throughout the United States, with the major
production centers located in northern Appalachia, central Appalachia, the
Illinois Basin, the Powder River Basin and in other western coalfields.
40
<PAGE>
[Map of the U.S. indicating the locations of major coal basins]
NORTHERN APPALACHIA
Medium- and high-sulfur coal is found in the northern Appalachia coalfields of
western Pennsylvania, southeastern Ohio and northern West Virginia. Production
in the region was approximately 156 million tons in 1997, up from 147 million
tons in 1996. In 1997, 121 million tons were sold to electric utilities. Coal
production has increased slightly in recent years and production has shifted
from high-cost, inefficient, low-volume operations to lower cost, more
efficient, high-volume operations. As a result, much of the production in this
region is concentrated in a few highly productive longwall mining operations in
southwestern Pennsylvania and northern West Virginia. The coal from northern
Appalachia has a heat content ranging from 12,500 to 13,000 Btus per pound and
generally has medium- to high-sulfur content.
Coal producers in southwestern Pennsylvania enjoy strong competitive advantages
for markets within the state, due to the proximity of many power plants to the
coal producing region. Power plants located along the Monongahela and Ohio
rivers have access to a wide variety of coals, particularly those produced in
West Virginia.
Two other markets in which southwestern Pennsylvania and northern West Virginia
coal producers enjoy a transportation advantage are utility companies with
plants in New York and Maryland that can burn medium- to high-sulfur coal and
are served by railroads. Railroads also offer this coal good access into Ohio
and other Great Lake states.
CENTRAL APPALACHIA
The central Appalachia region includes coalfields in eastern Kentucky,
southwestern Virginia and central and southern West Virginia. Production in
central Appalachia was 288 million tons in 1997 compared with 279 million tons
in 1996. In 1997, 175 million tons produced in central Appalachia were sold to
electric utilities principally in the southeast United States. Central
Appalachia operations also sell to the export market and to industrial
customers. Geologic conditions in central Appalachia led to the creation of over
100 significant coalbeds, 60 of which currently are mined. A variety of mining
techniques are used as seams are found on mountaintops and below valley floors.
The coal from central Appalachia has an average heat content of 12,500 Btus per
pound and generally has low-sulfur content.
The southeast United States has significant potential for the growth of coal
demand. Much of the demand growth in the 1980s was attributable to new
coal-fired power plants. At the same time, however, nuclear plants were being
brought on-line by some utilities. Thus, some utilities were reducing the use of
existing coal plants because of new nuclear plants while other utilities were
increasing coal burn because of new plants. The result is that some utilities
have excess coal-fired capacity despite the growth of electricity demand over
the past ten years.
ILLINOIS BASIN
The Illinois Basin is located under most of Illinois, western Indiana and
western Kentucky. Production in the basin was 112 million tons in 1997 and in
1996. In 1997, 103 million tons were sold to electric utilities. With the
depletion of surface minable reserves, mining today is predominantly done
underground. Coal production in the area has experienced significant
consolidation in the past several years. The Illinois Basin is a declining
production center due to the region's relatively high-sulfur coal and
competition from lower-sulfur western coal. Production in the Illinois Basin
peaked at 141 million tons in both 1984 and 1990. Since 1990, production has
decreased by 20%. In 1996, production stabilized in several of the Illinois
Basin's sub-regions, including central Illinois, due to stabilized demand and
limited capacity. The coal from the Illinois Basin has a heat content ranging
from 10,000 to 12,000 Btus per pound and generally has medium- to high-sulfur
content.
41
<PAGE>
The principal utility markets for Illinois Basin coal are the rail- or
truck-served plants located within the coal producing states of Illinois,
Indiana, and Kentucky that comprise the region and in the neighboring states of
Missouri, Iowa, Kansas, and Wisconsin. Barge-served plants on the lower Ohio,
Cumberland, Tennessee and Mississippi rivers, as well as a few plants in Florida
and along the Gulf Intracoastal waterway are also important markets.
The close proximity of the Illinois Basin to the mouth of the Ohio, Tennessee
and Cumberland rivers and the Port of New Orleans provides the region with
several advantages in serving its primary markets when compared to Northern
Appalachia or other high sulfur producing regions. A shorter transit time for
western Kentucky and southern Illinois coal to these markets minimizes transit
costs.
POWDER RIVER BASIN
The Powder River Basin is located in northeastern Wyoming and southeastern
Montana. Production in 1997 was 306 million tons compared with 299 million tons
in 1996. In 1997, 306 million tons were sold to electric utilities. Quality
varies between lignite and subbituminous coals, with current production of
subbituminous coal averaging 9,100 Btus per pound and 0.5% sulfur in Montana, to
8,600 Btus per pound and 0.3% sulfur in Wyoming.
WESTERN BITUMINOUS COAL REGIONS
The western bituminous coal regions include the Hanna Basin in Wyoming, the
Uinta Basin of northwestern Colorado and Utah, the Four Corners Region in New
Mexico and Arizona and the Raton Basin in southern Colorado. Production in 1997
was 116 million tons compared with 110 million tons in 1996. In 1997, 95 million
tons were sold to electric utilities. These regions produce high quality,
low-sulfur steam coal for selected markets in the region, for export through
West Coast ports and for shipments to some Midwestern power plants for which
Powder River Basin's subbituminous coals are not suitable. Coal from the western
bituminous coal region has a heat content ranging from 9,000 to 11,500 Btus per
pound and generally has low-sulfur content.
COAL CHARACTERISTICS
There are four types of coal: anthracite, bituminous, subbituminous and lignite.
Each has characteristics that make it more or less qualified for different end
uses. In general, coal is characterized by end use as either "steam coal" or
"metallurgical coal." Steam coal is used by utilities for electricity generation
and by industrial activities to produce steam, electricity, or both.
Metallurgical coal is converted into coke, which is used in the production of
steel. Heat value, sulfur content and transportation costs are the most
important variables in the marketing of steam coal.
HEAT VALUE
The heat value of coal is commonly measured in British thermal units, or Btus.
Coal found in the eastern and midwestern regions of the United States tends to
have a heat content ranging from 10,000 to 14,000 Btus per pound. Most coal
found in the western United States yields less than 11,000 Btus per pound. By
comparison, one barrel of crude oil contains between 4.8 million and 5.4 million
Btus and one cubic foot of natural gas contains between 950 and 1,050 Btus.
Anthracite coal has a heat content as high as 15,000 Btus per pound. A limited
amount of anthracite deposits is located primarily in northeastern Pennsylvania,
and is used primarily for industrial and home heating purposes.
42
<PAGE>
Bituminous coal has a heat content that ranges from 10,500 to 14,000 Btus per
pound. This coal is located primarily in Appalachia, the midwestern United
States, Colorado, Arizona and Utah, and is the type most commonly used for
electric power generation in the United States. Bituminous coal is used for
utility and industrial steam purposes, and as a feedstock for coke.
Subbituminous coal has a heat content that ranges from 7,800 to 9,500 Btus per
pound. Most subbituminous reserves are located in Montana, Wyoming, Colorado,
New Mexico, Washington and Alaska. Subbituminous coal is used almost exclusively
by electric utilities and some industrial consumers.
Lignite has a heat content that generally ranges from 6,500 to 8,300 Btus per
pound. Major lignite operations are located in Texas, North Dakota, Montana and
Louisiana. Lignite is used almost exclusively in power plants located adjacent
to or near such mines because any significant transportation costs, coupled with
mining costs, would render its use uneconomical.
SULFUR
The sulfur content of a coal deposit can vary from seam to seam and within each
seam. When coal is burned, it produces sulfur dioxide, a regulated pollutant,
the amount of which varies depending upon the chemical composition and the
concentration of sulfur in the coal. Low-sulfur coal has a variety of
definitions, but it generally refers to coal with a sulfur content of 1% or less
by weight.
During the past two decades, air quality laws have created some market
advantages for lower-sulfur coals by imposing restrictions on the amount of
sulfur dioxide that can be released into the atmosphere when coal is burned. The
restrictions usually require high-sulfur coal users to install scrubbers or to
buy pollution allowances under the Clean Air Act. CONSOL believes that future
demand for coal will be influenced by the heat content of the coal and by the
proximity of the coal to major electricity generating stations more than by the
sulfur content of the coal. See "Business--Competitive Strengths--High-Quality,
Strategically-Located Reserve Base."
ASH
Ash is the inorganic residue remaining after combustion of coal. As with sulfur
content, ash content varies from seam to seam and within seams. Ash content is
an important characteristic of coal because power plants must handle and dispose
of ash following combustion.
MOISTURE
Moisture content of coal varies by the type of coal, the region where it is
mined and the location of coal within a seam. In general, high moisture content
decreases the heat value and increases the weight of the coal, making it more
expensive to transport.
COKING PROPERTIES OF METALLURGICAL COAL
When some types of coal are super-heated in the absence of oxygen, they form a
hard, dry, caking product called coke, which is chiefly used in the steel
production process as a fuel and reducing agent to smelt iron ore in a blast
furnace.
43
<PAGE>
COST STRUCTURE
Coal Prices
Coal prices vary dramatically among coals and are affected primarily by the
marginal cost of production and transportation costs to the customer. Factors
that influence coal prices are geological characteristics (such as seam
thickness, overburden ratios and depth to underground reserves), transportation
costs, regional coal production capacity relative to demand and coal quality
characteristics including heat value, ash, moisture and sulfur content.
Industrial coal generally costs more to produce and is shipped in smaller
volumes than steam coal from the same region used by generators of electricity.
As a result, industrial coal's prices are $3 to $5 dollars per ton higher.
Metallurgical coal, with higher carbon content and lower ash content generally
costs more to mine and typically has prices $4 to $10 per ton higher than steam
coal produced from the same region. Even higher prices are paid for premium
metallurgical coal.
The following table summarizes steam coal prices for the generation of
electricity by supply region.
HISTORICAL STEAM COAL SPOT PRICE
<TABLE>
<CAPTION>
Nominal Dollars per Ton, Free on Board at Mine POUNDS SO/2/
BTUS PER PER MILLION ESTIMATED
REGION/BASIN POUND BTUS 1996 1997 1998
- ----------------------------------- ---------------------- ---------------- ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Central Appalachia................. greater than 12,500 less than 1.2 $25.85 $25.01 $26.79
greater than 12,500 1.21-1.70 24.98 24.74 26.03
greater than 12,500 1.71-2.5 24.16 23.86 25.15
less than 12,500 less than 1.2 21.89 21.39 22.47
less than 12,500 1.21-1.70 21.36 20.14 21.62
less than 12,500 1.71-2.5 20.80 21.14 20.80
Northeastern Appalachia............ greater than 12,750 1.2-2.5 $25.49 $25.68 $25.68
greater than 12,750 greater than 2.5 22.48 24.08 23.75
Illinois Basin..................... greater than 11,000 greater than 2.5 $19.19 $20.80 $19.50
less than 11,000 greater than 2.5 17.18 19.51 17.17
Southern Powder River Basin........ greater than 8,800 less than 1.2 $ 4.19 $ 4.00 $ 4.40
less than 8,800 less than 1.2 3.69 3.74 3.49
Northern Powder River Basin........ greater than 8,800 less than 1.2 $ 6.16 $ 6.25 $ 6.38
Four Corners....................... greater than 9,500 less than 1.2 $15.50 $15.25 $15.00
</TABLE>
- -----------------------------
Source: RDI, Outlook for Coal, Winter 1997-1998.
44
<PAGE>
TRANSPORTATION
Coal for domestic consumption generally is sold at the mine and transportation
costs are normally borne by the purchaser. Export coal is usually sold at the
loading port. Coal producers are responsible for shipment to the export
coal-loading facility and the buyer pays the ocean freight. Coal for electricity
generation is purchased on the basis of its delivered cost per million Btus.
Most utilities arrange long-term shipping contracts with rail or barge companies
to assure stable delivered costs.
Transportation is often a large component of the buyer's cost. Although the
customer pays the freight, transportation cost is still important to coal mining
companies because the customer may choose a supplier largely based on the cost
of transportation. According to RDI, in 1995, transportation costs represented
69%, 28% and 25% of the overall delivered cost of coal produced in the western
United States, eastern United States and midwestern United States, respectively.
According to the National Mining Association in 1997, approximately 77% of all
U.S. coal was shipped by rail or barge, making these modes the keys to domestic
coal distribution. Trucks and overland conveyors are used to haul coal over
shorter distances. Lake carriers and ocean carriers transport coal to export
markets. Some domestic coal is shipped over the Great Lakes to domestic markets.
Railroads move more coal than any other commodity, and in 1996 coal accounted
for 22% of total U.S. rail freight revenue and 44% of total rail freight
tonnage.
DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY
In October 1992, the National Energy Policy Act was signed in the United States,
giving wholesale suppliers access to the transmission lines. In April 1996, the
Federal Energy Regulatory Commission ("FERC") issued orders establishing rules
providing for open access to electricity transmission systems, thereby
encouraging competition in the generation of electricity. While broad
deregulation legislation is still being considered at the federal level, a
number of states have taken significant deregulation initiatives as provided for
by the FERC.
Deregulation of the electric utility industry, if and where implemented, would
enable industrial, commercial and residential customers to shop for the lowest
cost supply of power and the best available service. This fundamental change in
the industry is expected to compel electric utilities to be more aggressive in
developing and defending market share, to be more focused on their cost and
pricing structure, and to be more flexible in reacting to changes in the market.
CONSOL believes that the move toward a competitive market for electricity should
prove beneficial to coal demand. According to RDI, 21 of the 25 lowest cost
electric generating stations are coal fired. As deregulation occurs and
competition among generators increases, electricity generators will become
increasingly sensitive to fuel costs because such costs typically represent
about 78% of the variable cost of generating electricity from fossil fuels.
45
<PAGE>
BUSINESS
OVERVIEW
CONSOL ranks among the largest coal companies in the United States based upon
total revenue, net income and operating cash flow. CONSOL is the largest U.S.
producer of high-Btu bituminous coal, the largest coal producer east of the
Mississippi River, the largest producer of coal from underground mines and the
largest U.S. exporter of coal to international markets. Production in 1997
totalled 73 million tons. CONSOL accounted for 7% of total domestic tons
produced and for 12% of tons produced in the eastern United States during 1997.
CONSOL's consistent financial performance has enabled it to establish a strong
history of cash generation and dividend payments.
In 1997, CONSOL sold 68% of the tons of coal it produced directly to domestic
electricity generators, 16% to domestic industrial customers, domestic steel
mills and trading companies and 16% directly to export markets. The electricity
generating market is, by far, the most important market for U.S. coal producers
and for CONSOL, and coal is the fuel of choice for base-load power plants in the
United States. In 1997, coal was used to generate 57% of the electricity in the
United States.
CONSOL's proximity to generating plants, access to low-cost transportation,
favorable geologic conditions for mining and the high-Btu content of its coal
enable it to provide fuel to electricity generators at low delivered cost.
CONSOL's large, highly mechanized eastern mines are located near major
electricity generators in the northeastern, Mid-Atlantic, southeastern and
midwestern United States. In 1997, almost 40% of CONSOL's coal moved on inland
waterways, the mode of transport considered the most cost-effective for bulk
commodities. Approximately 65% of CONSOL's reserves consist of high-Btu coal.
CONSOL had 4.8 billion tons of proved and probable reserves at December 31,
1997, the second largest among U.S. coal producers. Reserves are located in
northern Appalachia (52%), central Appalachia (13%), the midwest (21%) and in
the western United States and Canada (14%). The size, quality and strategic
location of CONSOL's reserves provide a basis for the expansion of many existing
mines and for new mine development.
CONSOL operated 24 mining complexes at December 31, 1997. The Company added
three complexes in September 1998 by acquiring R&P. Two complexes, Holden and
Twin Branch, were exchanged in November 1998, for the Vesta coal reserves
located in southwestern Pennsylvania. CONSOL uses high-extraction longwall
technology at 14 of its mines and leads the industry in the deployment of
longwall systems. The mines operating these advanced mining systems accounted
for approximately 84% of the coal mined by CONSOL in 1997. CONSOL's ability to
source coal from its multiple longwall mines provides it with great flexibility
in meeting customer fuel requirements. CONSOL can expand production at longwall
mines at very low incremental cost.
DEMAND FOR CONSOL'S COALS
The United States and other economies rely on electricity as a fundamental
energy source. Economic growth will involve growth in electricity consumption.
Fuel costs typically represent as much as 78% of the variable cost of generating
electricity at fossil fuel powered plants. Electricity generation soon will be
deregulated in the United States. Competition resulting from deregulation should
benefit low-cost fuel providers, including coal producers which can continue to
reduce mining costs, and for which delivered cost is not dominated by
46
<PAGE>
transportation costs. Of total U.S. coal-fired generating capacity, 68% is
located east of the Mississippi River where CONSOL's mines predominantly are
located.
CONSOL expects that owners of existing coal-fired generating capacity will seek
to meet growth in demand for electricity by increasing the capacity utilization
of their plants. In the aggregate, domestic coal-fired generating stations
currently run at 65% capacity utilization. The optimal sustainable capacity
utilization is 85% for a typical plant, although many can run at higher rates
for short periods of time. Increasing utilization of existing generating- plant
capacity places a premium on the use of high-Btu fuels produced by CONSOL.
The Clean Air Act controls the emission of sulfur dioxide and oxides of nitrogen
from coal combustion. This has led utilities to retrofit plants with scrubbers,
purchase emission allowances or burn low-sulfur coal. CONSOL already ships 67%
of its high-sulfur coal production to scrubbed generating plants, where the cost
of operating scrubbers is typically less than 10% of variable costs. To the
extent that the cost of technology continues to fall and environmental
regulations tighten, CONSOL expects more generators with coal-based systems to
install scrubbers. The advantage of retrofitting scrubbers to generating
stations should be particularly apparent as the current bank of sulfur dioxide
allowances declines and the more restrictive phase of the Clean Air Act becomes
effective in 2000.
Electricity generators are beginning to respond to these forces. For example, in
August 1998, Mission Energy announced its intention to acquire a large
generating station in central Pennsylvania, Homer City, and to install a
scrubber and other environmental control technologies. As scrubbing of existing
plants to remove sulfur increases, CONSOL believes that high- and medium-sulfur
coals with low delivered costs and high-Btu content will become increasingly
attractive to cost-sensitive electricity generators. RDI, an industry
consultant, recently forecast that by 2015 the owners of plants with up to
80,000 megawatts of existing coal-fired capacity may invest in scrubbers to
comply with new environmental regulations. The majority of these plants are
located east of the Mississippi River. As a result, CONSOL believes that it is
well-positioned to benefit from this anticipated trend.
A significant portion of the nuclear-based generating plants, that now account
for 21% of total U.S. generating capacity, is likely to be retired during the
next 15 years. Although natural gas will replace some of this capacity, CONSOL
believes that coal, the most cost-effective base-load generating fuel, will also
be used to replace lost nuclear capacity.
STRATEGY
CONSOL's objective is to maintain and enhance its position as one of the premier
coal companies in the United States based on its financial strength, operating
capability and reserve position. CONSOL believes that it is well-positioned to
grow faster than the industry by reason of its low cost structure and its strong
financial position. As such, CONSOL believes that its low-cost, high-Btu mines
will benefit from this future shift in demand growth. These mines can be
expanded at low cost. The proximity of CONSOL's mines to major population and
electricity consumption centers as well as the quality and size of its reserve
base gives CONSOL significant advantages. CONSOL's strategy for long-term growth
does not depend on either the construction of new coal combustion facilities or
on high overall growth in coal demand. Instead, CONSOL's strategy assumes that
most growth in demand for coal will come from the expansion and increased
utilization of existing facilities. CONSOL further believes that there will be a
growing demand from electricity generators for high-Btu fuels available at low
delivered cost and that the sulfur content of coal will not be the principal
quality determining coal demand. CONSOL's strategy reflects its belief that
delivered cost and Btu content will be the chief determinants of coal demand.
Accordingly, CONSOL believes that coal produced in the eastern United States
will continue to be an attractive fuel for electricity producers.
47
<PAGE>
Specifically, CONSOL will implement this strategy by:
. strengthening its core operating position in northern Appalachia by
continuing to make productivity improvements and by expanding the low-
cost production capacity of existing mines at low incremental costs;
. developing new mining complexes in locations with reserves controlled
by CONSOL where price levels or volume demand would generate
attractive returns and where low mining costs can be achieved;
. making large-scale acquisitions, both in the United States and abroad,
that will enable CONSOL to bring its mining expertise to coal markets
where it does not have an existing presence; and
. making opportunistic acquisitions in CONSOL's existing markets that
will enable CONSOL to leverage its existing infrastructure and
operations. For example, CONSOL recently acquired R&P and the Vesta
coal reserves in southwestern Pennsylvania. These acquisitions have
strengthened CONSOL's position in northern Appalachia.
COMPETITIVE STRENGTHS
STRONG FINANCIAL PERFORMANCE
CONSOL is one of the most profitable coal companies in the United States. Net
income has grown since 1994 at a compound annual growth rate of 11% and reached
$184 million in 1997. Growth has been based in large measure on the ability to
expand production and improve productivity at existing mining complexes. Since
1994, CONSOL has re-invested about half of cash generated by operating
activities. During this period, net cash provided by operating activities has
averaged $361 million per year, more than double capital expenditures, which
averaged $173 million for the same period. During the period from January 1,
1994 to December 31, 1997, CONSOL was able to pay $700 million in dividends,
including an extraordinary dividend of $380 million in 1997, while reducing
borrowings by $33 million. CONSOL has investment-grade debt ratings.
CONSOL believes that its financial strength will enable it to apply its mining
expertise and emerge as a major consolidating force in the coal industry. The
top ten coal producers have increased their share of production from 40% in 1990
to 54% in 1997. CONSOL has gained substantial experience in acquiring and
integrating the operations of coal companies. Since 1990, in addition to R&P,
CONSOL has acquired Island Creek Coal Company from Occidental Petroleum,
Kentucky Criterion (now called Mill Creek) from Westmoreland Coal Company,
Greene Hill Coal Company properties from Pennsylvania Power and Light and the
Vesta coal reserves from A.T.
Massey Coal Company.
PRODUCTIVITY LEADERSHIP
CONSOL has maintained its strong financial performance despite generally lower
coal prices by increasing productivity and reducing unit costs. Consistent
improvement in mine productivity reflects investment in capital improvements,
including deployment of longwall mining systems, expertise in operations,
favorable geological conditions and overall excellence in mine management. The
number of employees was reduced by approximately 20% and mining complexes
decreased from 30 in 1994 to 24 in 1997. At the same time, CONSOL maintained
annual production at approximately 72 million tons. Between 1990 and 1996,
CONSOL's compound annual growth rate in productivity at its underground mines
(measured in tons per manday) was 8.4% compared with an industry average for
underground mines of 6.5%. Consequently, CONSOL has reduced costs per ton of
coal mined by $2.41, or 9.9%, during the period. In 1997, CONSOL's productivity
increased by 11.3%.
48
<PAGE>
The following graph shows the growth of underground mine productivity at CONSOL.
[Graph shows tons per man day for each year from 1982 to 1998]
CONSOL operates approximately 25% of the U.S. longwall mining systems. Because
of the high production levels of these mining systems, which CONSOL uses at 14
of its mines, it operates seven of the 20 largest underground mines east of the
Mississippi River. Productivity at these mines is high and they have low
variable cost structures. CONSOL's reserve base supports their expansion and
life extension. This is in contrast to many other producers with higher cost
structures and less extensive reserves, particularly certain companies dependent
on operations in central Appalachia.
The following table ranks the 20 largest underground mines in the United States
by tons of coal produced in 1997.
MAJOR U.S. UNDERGROUND COAL MINES, 1997
<TABLE>
<CAPTION>
in millions of tons ------------------------------------------------
Mine Name Operating Company Tonnage
- --------- ----------------- -------
<S> <C> <C>
Enlow Fork CONSOL 8.4
Bailey CONSOL 7.5
Twenty Mile Twenty Mile Coal Company 7.3
Baker Lodestar Energy Inc. 6.5
Cumberland Cyprus Cumberland Resources Corp. 6.4
Eastern Kentucky MAPCO Coal Company 5.9
Mountaineer Mingo Logan Coal Co. 5.7
West Elk Mountain Coal Co. 5.6
McElroy CONSOL 5.4
Pinnacle U.S. Steel Mining 5.2
Powhatan No. 6 The Ohio Valley Coal Company 5.1
Galatia Kerr-McGee Coal Co. 5.0
SUFCO Canyon Fuel Company 4.9
Loveridge CONSOL 4.8
Shoemaker CONSOL 4.8
Robinson Run CONSOL 4.8
Mine 84 CONSOL 4.8
Upper Big Branch A.T. Massey Coal Company 4.7
Emerald Cyprus Emerald Resources Corp. 4.7
Federal Mine No. 2 Eastern Associated Coal Corp. 4.5
</TABLE>
- -----------------
Source: National Mining Association
49
<PAGE>
The following table shows the growth in production from CONSOL's longwall
operations since 1994.
<TABLE>
<CAPTION>
PRODUCTION BY YEAR
--------------------------------------------------------------------------
Compound
in millions of tons Annual
MINE 1994 1995 1996 11997 Rate/(1)/
- ----------------------- ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Bailey 6.6 7.3 7.5 7.5 4.4%
Enlow Fork 8.1 8.0 8.7 8.4 1.2%
Dilworth 2.7 3.0 3.6 4.4 17.7%
Buchanan 3.0 3.2 3.6 4.3 12.7%
Shoemaker 1.8 3.8 4.4 4.8 12.4%(1)
McElroy 4.1 4.1 4.2 5.2(2) 8.2%
Loveridge 3.1 2.7 3.1 4.8 15.7%
Blacksville 3.7 3.8 3.5 3.4 (2.8%)
Robinson Run 3.3 3.7 4.2 4.8 13.3%
Rend Lake 2.7 3.3 3.2 4.1 14.9%
VP 8 0.9 2.3 2.8 1.3 21.7%(1)
VP 3 1.7 1.8 1.6 2.2 9.0%
Powhatan No. 4 3.1 2.7 3.4 3.2 1.1%
------------- ------------ ------------ ------------- ------------
Total 44.8 49.7 53.8 58.4 9.2%
------------- ------------ ------------ ------------- ------------
</TABLE>
- ---------------------------
(1)CAGR calculated from 1994 to 1997 with the exception of Shoemaker mine
(1995-97) and VP 8 (1995-96) due to shutdown periods in the excluded years.
(2)Excludes 200,000 tons of coal mined in connection with construction
activities. With the exception of Dilworth, VP 3 and Powhatan No. 4, these mines
have the potential to further expand production through investment in various
projects to debottleneck the coal mine or by instituting continuous work
schedules to maximize utilization of existing equipment. With the exception of
Dilworth, VP 3 and Powhatan No. 4, these mines all have access to extensive,
CONSOL-controlled reserves to support expansion in capacity at low incremental
cost.
According to an RDI database, CONSOL operated ten of the top 20 most productive
underground mines in 1997, in terms of tons per man day produced, based on an
analysis of production of large eastern U.S. underground mines (with production
greater than 3.0 million tons).
50
<PAGE>
HIGH-QUALITY, STRATEGICALLY LOCATED RESERVE BASE
CONSOL has a large proved and probable reserve base of 4.8 billion tons at
December 31, 1997. CONSOL's northern Appalachian reserves accounted for 52% of
total reserves at year-end 1997. These reserves are near many coal users in the
United States, particularly generators of electricity, and are served by major
coal-transporting railroads and low-cost river transportation. Mining from these
reserves accounted for 68% of CONSOL's production in 1997.
Fifty-two percent of CONSOL's reserve base is ranked as high-Btu and
high-sulfur. During the past two decades, air quality laws have created some
market advantage for lower-sulfur coals by imposing restrictions on sulfur-
dioxide emissions. These usually require high-sulfur coal users to switch to
lower-sulfur coals, install scrubbers or, in more recent years, to buy pollution
allowances. High sulfur coal produced by CONSOL remains competitive because of
CONSOL's transportation advantage and generally higher Btu content. In addition,
CONSOL has maintained its margins by progressively reducing unit costs and
increasing mine productivity.
The reader should refer to the map located on the inside front cover page of
this Prospectus which shows the location of CONSOL's mines in relation to
transportation links and major coal-fired power plants east of the Mississippi
River.
EXPERIENCED MANAGEMENT TEAM
CONSOL's management team is one of the most experienced in the coal industry
with an average of over 24 years of coal industry experience. The management
team has demonstrated its ability to streamline operations and reduce costs.
Management has successfully expanded existing mines, built new mines and
acquired additional operations while increasing production, productivity and
earnings.
RESEARCH AND DEVELOPMENT CAPABILITIES
CONSOL operates the largest private research and development facility in the
United States devoted to the mining and use of coal. CONSOL's Research and
Development Department has pioneered several major technical developments in
mining technology. CONSOL also is in the forefront of U.S. coal companies in the
extent to which it is able to solve coal-combustion and other challenges for its
customers and, in the process, create new business opportunities.
The Research and Development Department also works to improve the effectiveness
and the cost of pollution- control technologies. CONSOL's facilities and staff,
including 100 scientists and engineers, provide both testing and
field-diagnostic service to customers and potential customers.
BROAD, DIVERSE CUSTOMER BASE
CONSOL currently sells coal to more than 160 different customers, including
financially strong domestic utilities. The three largest customers are Allegheny
Energy, Pennsylvania Power Company and Detroit Edison. During 1998, CONSOL will
sell about 61% of its production under contracts with terms exceeding one year.
These contract customers represent a base of nearly 60 companies, both domestic
and foreign, including generators of electricity, steel mills, heavy
manufacturers, chemical plants, cement plants and paper manufacturers. See
"Management's Discussion and Analysis of Results Of Operations and Financial
Condition."
51
<PAGE>
MINING METHODS
CONSOL mines coal using both underground and surface mining methods. In 1997,
94% of CONSOL's production came from underground mines and 6% from surface
mines. The percentage of coal produced by surface mines has declined in recent
years because several CONSOL surface mines have depleted their mineable
reserves, and because production from existing underground mines has increased.
Nevertheless, CONSOL maintains engineering expertise in both mining methods.
Where the geology is favorable and where recoverable reserves are sufficient,
CONSOL employs longwall mining systems in its underground mines. In 1997, 84% of
CONSOL's production came from mines equipped with longwall mining systems.
Underground mines equipped with longwall systems are highly mechanized, capital
intensive operations. These mines have a low variable cost structure compared
with other types of mines and can achieve high productivity levels compared with
other underground mining methods. Because CONSOL has substantial reserves
readily suitable to these operations, and because of their existing cost
structure, these longwall mines can increase capacity at low incremental cost.
CONSOL's Research and Development Department has worked on a number of advances
that have enhanced longwall mining methods. CONSOL has developed proprietary
automation software that allows the shearer to guide itself in the coal seam,
reducing incursions into the rock above and below the seam, thus improving
initial coal quality and improving cutting bit life. The Research and
Development Department has also developed methods for automating shield advances
as mining progresses, thereby improving overall system efficiency. The Research
and Development Department has done geotechnical studies on pillar design that
have allowed continuous miners to advance more quickly and at lower cost when
developing the panels in advance of longwall mining. Because of the higher
capital cost of longwall mining systems, this type of mining requires an
extensive reserve and favorable geological mining conditions in order to justify
the investment. CONSOL's extensive reserves and favorable geologic conditions in
those reserves as well as its strong financial base allow CONSOL to benefit from
the advantages that these mining systems offer. CONSOL's Research and
Development Department has developed several technological advances that allow
coal to be moved in more continuous fashion from the coal face, thus improving
utilization for the mining machinery, resulting in lower costs and higher
productivity. See "Business--Research and Development."
MINING OPERATIONS
At September 30, 1998, CONSOL operated a total of 27 mining complexes, including
a 50% interest in a surface mine in Alberta, Canada, all located in North
America. In November 1998, CONSOL exchanged the Holden Complex and the Twin
Branch Complex for the Vesta coal reserves located in southwestern Pennsylvania,
reducing the number of mining complexes to 25.
All of CONSOL's mining complexes are underground operations except the Mahoning
Valley and Cardinal River mines which employ only surface mining techniques. The
Mill Creek complex employs a combination of underground and surface mining
systems. Mining machinery used in all of CONSOL's underground mines is powered
by electricity.
Coal is transported from CONSOL's mining complexes to customers by means of
railroad cars, river barges, trucks, conveyor belts or a combination of these
means of transportation. The McElroy and Robinson Run mines transport coal to
customers by conveyor belt. The McElroy, Shoemaker, Dilworth, Powhatan No. 4,
Humphrey, Mahoning Valley and Ohio No. 11 complexes ship coal to customers by
means of river barges. Trucks are used to transport coal from Loveridge,
Blacksville, Powhatan No. 4, Rend Lake, Keystone, Helvetia and Emery complexes.
The Enlow Fork, Bailey, Mine No. 84, Robinson Run, Loveridge, Blacksville,
Buchanan, Mill Creek, VP-3, Jones Fork, VP-8, Amonate, Elk Creek, Rend Lake and
Cardinal River complexes transport coal to customers by rail.
52
<PAGE>
The following table provides the location and a summary of the main
characteristics of CONSOL's mining complexes and the coal reserves associated
with these operations.
53
<PAGE>
<TABLE>
<CAPTION>
CONSOL MINING COMPLEXES
--------------------------------------------------------------------------------------------------
AVERAGE QUALITY
1997 ON DRY BASIS ASSIGNED RESERVED(1)
--------------------- ----------------------------------
PRODUCTION HEAT SULFUR TOTAL
(MILLIONS CONTENT CONTENT (MILLIONS OWNED LEASED(2)
OPERATIONS LOCATION OF TONS/(1)/ (BTU1B.) (%) OF TONS) (%) (%)
- ------------------------- ------------------------ ------------ ---------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHERN APPALACHIA
Enlow Fork Mine Enon, Pennsylvania 8.4 14,173 1.62 52.4 34 66
Bailey Mine Enon, Pennsylvania 7.5 14,101 1.85 81.6 1 99
McElroy Mine Glen Easton, West Virginia 5.2 13,999 3.18 234.0 100 0
Loveridge Mine Fairview, West Virginia 4.8 13,969 2.40 21.0 100 0
Robinson Run Mine Shinnston, West Virginia 4.8 14,126 3.36 60.6 76 24
Shoemaker Mine Moundsville, West Virginia 4.8 13,860 3.13 79.5 100 0
Mine No. 84 Eighty-Four, Pennsylvania 4.8 14,040 1.84 42.2 75 25
Dilworth Mine Rices Landing, Pennsylvania 4.4 14,126 3.36 24.1 0 1 00
Blacksville Mine Wana, West Virginia 3.4 14,165 2.87 41.2 100 0
Powhatan No. 4 Mine Clarington, Ohio 3.2 13,545 4.72 5.8 8 92
Keystone Complex Indiana, Pennsylvania 2.1 13,042 1.62 7.0 86 14
Helvetia Complex Blairsville, Pennsylvania 1.7 11,839 2.08 5.4 97 3
Humphrey Mine Maidsville, West Virginia 1.5 13,600 2.75 6.5 100 0
Mahoning Valley Mine Cadiz, Ohio 0.4 12,214 2.31 2.0 93 7
CENTRAL APPALACHIA
Buchanan Mine Mavisdale, Virginia 4.3 14,950 0.78 31.5 1 99
Mill Creek Complex Deane, Kentucky 3.1 13,643 1.18 15.1 100 0
VP-3 Mine Vansant, Virginia 2.2 15,185 0.77 8.1 0 1 00
Jones Fork Complex Mousie, Kentucky 2.0 13,245 1.00 10.3 85 15
VP-8 Mine Rowe, Virginia 1.3 14,903 0.31 17.3 1 99
Amonate Complex Amonate, Virginia 1.1 14,422 0.77 9.3 64 36
Elk Creek Complex Emmett, Virginia 0.3 13,750 0.78 7.0 27 73
ILLINOIS BASIN
Rend Lake Mine Sesser, Illinois 4.1 13,738 1.02 13.6 100 0
Ohio No. 11 Mine Morganfield, Kentucky 1.4 13,500 3.13 3.9 0 1 00
WESTERN U.S.
Emery Mine Emery County, Utah 0.0 12,933 0.74 14.8 84 16
WESTERN CANADA
Cardinal River Mine Hinton, Alberta, Canada 1.5 14,000 0.37 4.2 0 1 00
<CAPTION>
TOTAL
ACCESSIBLE
AND
ASSIGNED YEAR
RESERVES(3) ESTABLISHED
MILLIONS OR ACQUIRED
OPERATIONS OF TONS) BY CONSOL
- -------------------------- ----------- -----------
<S> <C> <C>
NORTHERN APPALACHIA
Enlow Fork Mine 215.8 1990
Bailey Mine 209.3 1984
McElroy Mine 234.0 1968
Loveridge Mine 161.8 1956
Robinson Run Mine 154.0 1966
Shoemaker Mine 146.4 1966
Mine No. 84 159.6 1998
Dilworth Mine 24.1 1984
Blacksville Mine 126.0 1970
Powhatan No. 4 Mine 5.8 1987
Keystone Complex 7.0 1998
Helvetia Complex 11.7 1998
Humphrey Mine 6.5 1956
Mahoning Valley Mine 3.2 1974
CENTRAL APPALACHIA
Buchanan Mine 124.4 1983
Mill Creek Complex 21.5 1994
VP-3 Mine 8.1 1993
Jones Fork Complex 28.7 1992
VP-8 Mine 17.3 1993
Amonate Complex 20.7 1925
Elk Creek Complex 14.9 1993
ILLINOIS BASIN
Rend Lake Mine 49.3 1986
Ohio No. 11 Mine 17.1 1993
WESTERN U.S.
Emery Mine 14.8 1945
WESTERN CANADA
Cardinal River Mine 5.1 1969
</TABLE>
_________________________
(1)The Burning Star No. 4 mine and the Potomac mine, which in the aggregate,
produced 2.0 million tons of coal during 1997 have been closed. Two mining
complexes, Twin Branch Complex and the Holden Complex, which, in the aggregate,
produced 500,000 tons in 1997, were exchanged in November 1998 for the Vesta
coal reserves. The mines and complexes sold or exchanged are not shown in the
table.
(2)There are, in the aggregate, approximately 680 leases with respect to
assigned coal reserves. The leases have terms extending up to 30 years and
generally provide for renewal through the anticipated life of the associated
mine. These renewals are exercisable by the payment of minimum royalties.
(3)Represents proved and probable coal reserves at December 31, 1997. CONSOL
assigns coal reserves to each of its mining operations, but each mine also may
have access to reserves that have not yet been assigned to any particular mine.
Unassigned reserves may be accessed by more than one mining operation.
Information with respect to proved and probable coal reserves has been
determined by CONSOL geologists and mining engineers. See Note 22 of Notes to
the Consolidated Financial Statements.
54
<PAGE>
[Map showing the location of CONSOL's mines in relation to major coal basins.]
The following provides a description of the operating characteristics of
CONSOL's principal mines by geographic region.
NORTHERN APPALACHIA MINES
Enlow Fork. The Enlow Fork mine produces coal from the Pittsburgh #8 Seam using
two longwall systems and six continuous mining machines. Coal is transported to
the surface by conveyor belts. The coal is processed in the Bailey Central
Preparation Plant which can fully wash coal at a rate of 3,600 tons of raw coal
per hour. From January 1, 1996 to September 30, 1998, capital expenditures at
the mine totaled $56 million. The Enlow Fork mine will complete in 1999
installation of a 5,000-ton underground storage bunker that will level the flow
of coal between the producing face and the plant. In addition, a new longwall
system was placed in service in 1997.
Bailey. The Bailey mine produces coal from the Pittsburgh #8 Seam using two
longwall systems and seven continuous mining machines. Coal is transported to
the surface by conveyor belts. The coal is processed in the Bailey Central
Preparation Plant which can fully wash coal at the rate of 3,600 tons of raw
coal per hour. From January 1, 1996 to September 30, 1998, capital expenditures
at the mine totaled $33 million. From January 1, 1996 to September 30, 1998,
capital expenditures at the preparation plant totaled $44 million. The Bailey
Central Preparation Plant, which serves both the Bailey and Enlow Fork mines,
currently is being expanded. When completed, the expansion will increase total
processed coal capacity from 16 million tons per year to 20 million tons per
year.
McElroy. The McElroy mine produces coal from the Pittsburgh #8 Seam using one
longwall system and four continuous mining machines. Coal is transported to the
surface by conveyor belts. The coal is partially washed in a preparation plant
capable of processing 1,400 tons of raw coal per hour. From January 1, 1996 to
September 30, 1998, capital expenditures at the mine totaled $48 million. In
1997, the mine completed the installation of an underground conveying system
that replaced a less efficient underground track haulage system.
Mine No. 84. Mine No. 84 produces coal from the Pittsburgh #8 Seam using one
longwall and three continuous mining machines. Coal is transported to the
surface by conveyor belts. The coal is processed in a preparation plant capable
of processing 2,500 tons of raw coal per hour. Mine No. 84 was acquired as part
of the acquisition of R&P on September 22, 1998.
Robinson Run. The Robinson Run mine produces coal from the Pittsburgh #8 Seam
using one longwall system and four continuous mining machines. Coal is
transported to the surface by conveyor belts. The coal is partially washed in a
preparation plant capable of processing 1,500 tons of raw coal per hour. From
January 1, 1996 to September 30, 1998, capital expenditures at the mine totaled
$21 million. In 1995, the Robinson Run mine installed an underground belt
conveying system to move coal to the surface, replacing a less efficient rail
haulage system as well as increasing the mine's production capacity.
Shoemaker. The Shoemaker mine produces coal from the Pittsburgh #8 Seam using
one longwall system and three continuous mining machines. Coal is transported to
the surface by a conveyor belt and underground track locomotives. The coal is
fully washed in a preparation plant capable of processing 1,275 tons of raw coal
per hour. From January 1, 1996 to September 30, 1998, capital expenditures at
the mine totaled $47 million. In 1997, the mine installed new longwall mining
equipment and added a new yard track-loop system, both of which contributed to
increases in production.
55
<PAGE>
Loveridge. The Loveridge mine produces coal from the Pittsburgh #8 Seam using
one longwall system and four continuous mining machines. Coal is transported to
the surface by a conveyor belt. The coal is fully washed in a preparation plant
capable of processing 1,400 tons of raw coal per hour. From January 1, 1996 to
September 30, 1998, capital expenditures at the mine totaled $44 million. In
1996, the mine installed a new longwall system that included many new automated
functions which improved production rates, enhanced coal quality and reduced
unscheduled maintenance.
Dilworth. The Dilworth mine produces coal from the Pittsburgh #8 Seam using one
longwall system and three continuous mining machines. Coal is conveyed to the
surface with conveyor belts. The coal is transported by barge to the Robena
preparation plant where it is fully washed. The Robena preparation plant can
process 1,200 tons of raw coal per hour. From January 1, 1996 to September 30,
1998, capital expenditures at the mine totaled $13 million. Capital expenditures
at the Robena preparation plant for the same period totaled $9 million. In 1997,
a raw coal storage silo was installed at the Robena preparation plant permitting
direct discharge of raw coal to and from river barges. The silo eliminated the
need for more costly handling and increased flexibility in blending raw coal and
processed coal.
Blacksville. The Blacksville mine produces coal from the Pittsburgh #8 Seam
using one longwall system and three continuous mining machines. Coal is
transported underground by conveyor belts to a skip hoist which lifts the coal
to the surface. The coal is partially or fully washed in a preparation plant
capable of processing 1,000 tons of raw coal per hour. From January 1, 1996 to
September 30, 1998, capital expenditures at the mine totaled $48 million. In
1998, CONSOL completed the construction of a large, underground coal storage
bunker at the mine which allows storage of up to 2,400 tons of coal, leveling
the flow of coal both from the producing coal face and to the preparation plant.
Powhatan No. 4. The Powhatan No. 4 mine produces coal from the Pittsburgh #8
Seam utilizing one longwall system and one continuous mining machine. Coal is
transported to the surface using a combination of conveyor belts and rail
haulage. The coal is washed in a preparation plant capable of processing 1,100
tons of raw coal per hour. From January 1, 1996 to September 30, 1998, capital
expenditures at the mine totaled $8 million. The mine will deplete its
economically minable reserves in 1999.
Helvetia Complex. The Helvetia Complex produces coal from the Upper Freeport and
Upper Kittanning seams. Coal is produced at two CONSOL-operated underground
mines and a CONSOL-operated surface mine. Coal is mined with a total of eight
continuous mining machines at the underground mines and with an end-loader at
the surface mine. Coal is transported from the underground mines to the surface
on conveyor belts and is transported to a small wash plant by truck. Coal from
the surface mine is transported to the wash plant by truck. The small wash plant
has a capacity of 250 tons of raw coal per hour. The Helvetia Complex was
acquired on September 22, 1998.
Keystone Complex. The Keystone Complex produces coal from the Upper Freeport and
Upper Kittanning seams. Coal is produced at three CONSOL-operated underground
mines. Additional coal is purchased from outside sources to be blended and
processed with CONSOL-produced coal. Coal is mined with a total of 11 continuous
mining machines at the underground mines. Coal is transported to the surface by
conveyor belt and is transported to the preparation plant by overland conveyor
or truck. The coal is processed at a preparation plant capable of processing 900
tons of raw coal per hour. The Keystone Complex was acquired on September 22,
1998.
Humphrey. The Humphrey mine produces coal from the Pittsburgh #8 Seam using two
continuous mining machines. Coal is sold raw. From January 1, 1996 to September
30, 1998, capital expenditures at the mine totaled $2 million. In 1997, the
Humphrey mine reduced production and started using continuous mining equipment
after longwall-minable reserves were depleted.
56
<PAGE>
Mahoning Valley. The Mahoning Valley mine produces coal from the #9 Seam. Coal
is uncovered at this surface mine using a large, electrically powered stripping
shovel. A smaller shovel loads the uncovered coal into trucks for transport from
the pit. CONSOL made no capital expenditures on the mine between January 1, 1996
to September 30, 1998. The mine will deplete its economically mineable reserves
in 1999.
CENTRAL APPALACHIA MINES
Buchanan. The Buchanan mine produces coal from the Pocahontas #3 Seam using one
longwall system and four continuous mining machines. The coal is transported to
a skip hoist by conveyor belts where the coal is then lifted to the surface. The
coal is washed in a preparation plant that is capable of processing 1,000 tons
of raw coal per hour. From January 1, 1996 to September 30, 1998, capital
expenditures at the mine totaled $23 million. In 1997, CONSOL constructed a
large, underground coal-storage bunker at the mine. The bunker allows storage of
up to 4,700 tons of coal, leveling the flow of coal both from the face and to
the preparation plant. Also in 1997, the mine instituted a continuous work
schedule that allowed higher coal-hoisting and preparation plant utilization.
Mill Creek Complex. The Mill Creek complex produces coal from the Hazard #4 Seam
and the Elkhorn #3 Seam. Coal is produced at two CONSOL-operated underground
mines, a CONSOL-operated surface mine and by several small underground and
surface mines operated by independent contractors. Mining at CONSOL-operated
underground mines is done with a continuous mining machine. Coal is conveyed to
the surface using conveyor belts. Mining at CONSOL-operated surface mines is
done with front-end loaders and trucks. Coal from all of the mines is
transported by truck or conveyor belt to a central preparation plant for
processing. The plant has the capacity to process 950 tons of raw coal per hour.
From January 1, 1996 to September 30, 1998, capital expenditures at the mine
totaled $13 million.
VP-3. The VP-3 mine produced coal from the Pocahontas #3 Seam utilizing one
longwall system and three continuous mining machines. Coal was carried
underground by conveyor belts to a skip hoist which lifted the coal to the
surface. The coal was processed in a preparation plant which has a capacity to
process 750 tons of raw coal per hour. From January 1, 1996 to September 30,
1998, capital expenditures at the mine totaled $5 million. VP-3 mine was placed
on long-term shutdown status because of excess production capacity for the type
of coal produced at this mine.
Jones Fork Complex. The Jones Fork mining complex produces coal from the Hazard
#4 Seam and the Elkhorn #3 Seam. Coal is produced from three CONSOL-operated
underground mines and two contractor-operated underground mines. Mining at
CONSOL-operated underground mines is accomplished with continuous mining
machines. Coal is conveyed to the surface with conveyor belts. Coal from all
operations is transported by conveyor belt or by truck to a central preparation
facility which has the capacity to process 825 tons of raw coal per hour. From
January 1, 1996 to September 30, 1998, capital expenditures at the mine totaled
$12 million.
VP-8. The VP-8 mine produces coal from the Pocahontas #3 Seam utilizing one
longwall system and two continuous mining machines. Coal is carried underground
by conveyor belts to a skip hoist which lifts the coal to the surface. The coal
is processed at two preparation plants which together have the capacity to
process 1,350 tons of raw coal per hour. From January 1, 1996 to September 30,
1998, capital expenditures at the mine totaled $9 million.
Amonate Complex. The Amonate mining complex processes coal from the Pocahontas
#3, #5, #8, #10, and #11 and Squire Jim Seams. The coal typically is produced
from approximately ten underground mines operated by independent contractors on
CONSOL-owned reserves. The preparation plant has the capacity to process 700
tons of raw coal per hour. From January 1, 1996 to September 30, 1998, capital
expenditures at the complex totaled $2 million.
57
<PAGE>
Elk Creek Complex. The Elk Creek complex produces coal from the Lower Cedar
Grove "C" and the Alma Seams. The coal is produced from two underground mines
operated by independent contractors on CONSOL-controlled reserves. The coal is
taken by truck for processing to the Elk Creek preparation plant, which has the
capacity to process 550 tons of raw coal per hour. The preparation plant also
processes coal that CONSOL purchases from other mine operators. From January 1,
1996 to September 30, 1998, capital expenditures at the complex totaled less
than $1 million.
ILLINOIS BASIN MINES
Rend Lake. The Rend Lake mine produces coal from the Herrin #6 Seam utilizing
two longwall systems and five continuous mining machines. Coal is conveyed
underground by conveyor belts to a skip hoist which lifts the coal to the
surface. The coal is processed at a preparation plant which has the capacity to
process 1,000 tons of raw coal per hour. From January 1, 1996 to September 30,
1998, capital expenditures at the mine totaled $14 million.
Ohio No. 11. The Ohio No. 11 mine produces coal from the West Kentucky #11 Seam
utilizing four continuous mining machines. Coal is conveyed to the surface by
conveyor belts. Coal is processed at a preparation plant which has the capacity
to process 700 tons of raw coal per hour. From January 1, 1996 to September 30,
1998, capital expenditures at the mine totaled $5 million.
WESTERN U.S. MINES
Emery. The Emery mine is capable of producing coal from the I Seam. The mine is
configured for underground mining operations. The mine has been idle for several
years. CONSOL made no capital expenditures at the mine between January 1, 1996
and September 30, 1998.
WESTERN CANADA MINES
Cardinal River. The Cardinal River mine produces coal from the Jewel Seam.
Mining is done with stripping shovels and front-end loaders, which are either
powered with electricity or diesel. Coal is hauled from the pit in large, diesel
or electric powered haul trucks. The coal is processed at a preparation plant
which has the capacity to process 800 tons of raw coal per hour. From January 1,
1996 to September 30, 1998, capital expenditures at the mine totaled $6 million.
The mine is a joint-venture operation with Luscar Ltd. in which CONSOL maintains
a 50% interest.
COAL RESERVES
CONSOL had an estimated 4.8 billion tons of proved and probable reserves at
December 31, 1997. Reserves are the portion of the "demonstrated" tonnage
(equivalent to "proved" and "probable") that meet CONSOL's general economic
criteria regarding mining height, preparation plant recovery, depth of
overburden and stripping ratio. Generally, these reserves would be commercially
minable at year-end price and cost levels.
CONSOL's reserves are located in northern Appalachia (52%), central Appalachia
(13%), the midwestern United States (21%) and in the western United States and
in Canada (14%).
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The following table summarizes CONSOL's reserves at December 31, 1997.
CONSOL RESERVES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
less than 1.20 lbs. of SO\2\ greater than 1.20 lbs. of SO\2\
in thousands of tons Per Per
Million Btus Million Btus Percentage
---------------------------------- -------------------------------------
By
Region and Product Low Btu Medium Btu High Btu Low Btu Medium Btu High Btu Total Region
- ------------------ --------- ----------- -------- --------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Northern Appalachia
Steam 0 49,359 0 56,010 135,471 2,031,239 2,272,079
High-vol met 0 0 0 0 0 211,754 211,754
Subtotal 0 49,359 0 56,010 135,471 2,242,993 2,483,833 52.0%
Central Appalachia
Steam 31,350 51,826 2,261 40,577 48,915 61,597 236,526
High-vol met 0 8,642 41,828 0 2,134 12,704 65,308
Medium-vol met 0 4,191 90,947 0 4,537 18,423 118,098
Low-vol met 0 0 205,013 0 0 6,867 211,880
Subtotal 31,350 64,659 340,049 40,577 55,586 99,591 631,812 13.2%
Midwestern U.S.
Steam 0 0 0 130,524 746,391 129,833 1,006,748 21.1%
Western U.S.
PRB steam 0 193,017 248,609 0 0 4,126 445,752
W. Colo. and S. 12,456 0 14,772 0 5,584 9,574 42,386
Ut. steam
Subtotal 12,456 193,017 263,381 0 5,584 13,700 488,138 10.2%
Canada
Medium-vol met 16,286 119,649 29,172 0 0 0 165,107 3.5%
--------- ---------- -------- --------- ----------- ---------- --------- ----------
Total 60,092 426,684 632,602 227,111 943,032 2,486,117 4,775,638 100.0%
========= ========== ======== ========= =========== ========== ========= ==========
Percentage of total
by Btu content 5.4 38.1 56.5% 6.2% 25.8% 68.0%
--------- ----------- -------- --------- ----------- ----------
100% 100%
----------------------------------- -------------------------------------
</TABLE>
The following table characterizes the relative Btus value (low, medium and high)
for each coal producing region.
<TABLE>
<CAPTION>
------------------------------------------------------------
Region Low Medium High
- ------------------------------------------ ---------------- ----------------- -------------
<S> <C> <C> <C>
in Btus per lb.
Northern and Central Appalachia and Canada less than 12,500 12,500 - 13,000 >13,000
Midwest less than 11,600 11,600 - 12,000 >12,000
Powder River Basin less than 8,400 8,400 - 8,800 >8,800
Western Colorado and Southern Utah less than 11,000 11,000 - 12,000 >12,000
</TABLE>
Reserve estimates are based on geological data assembled and analyzed by
CONSOL's staff, which includes 14 geologists and more than 40 mining engineers,
located at individual mines, operations offices and at CONSOL's headquarters.
The reserve estimates and general economic criteria upon which they are based
are reviewed and adjusted annually to reflect production of coal from the
reserves, analysis of new engineering and geological
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data, changes in property control, modification of mining methods and other
factors. Reserve information, including the quantity and quality of reserves,
coal and surface ownership, lease payments and other information relating to
CONSOL's coal reserve and land holdings, is maintained through a system of
interrelated computerized databases developed by CONSOL.
CONSOL's reserve estimates are predicated on information obtained from its
extensive, ongoing exploration drilling and in-mine channel sampling programs.
Data including elevation thickness and, where samples are available, the quality
of the coal from individual drill holes and channel samples are input into a
computerized geologic database. The information derived from the geologic
database is then combined with data on ownership or control of the mineral and
surface interests to determine the extent of the reserves in a given area.
COAL CONTRACTS
CONSOL sells coal to customers under arrangements that are the result of both
bidding procedures and extensive negotiations. Coal typically is sold by
contracts for terms that range from a single shipment to multi-year agreements
for millions of tons. Many contracts now allow the coal to be sourced from more
than one mine, an advantage to CONSOL because of the number of its mining
complexes, particularly in northern Appalachia. CONSOL currently sells 61% of
its coal under contracts with terms of one year or more. The pricing mechanisms
under these agreements typically consist of (1) base-price-plus-escalation
methods which allow for periodic price adjustments based on inflation indices,
or in some cases, pass-through of actual cost changes or (2) annually negotiated
prices adjusted to market. Certain contracts have features of both types of
contracts, such as limited price reopener provisions within a
base-price-plus-escalation agreement. Such reopener provisions allow both the
customer and CONSOL an opportunity to adjust price to a level close to then
current market conditions. Reopener provisions could result in early termination
of a contract or of requirements that certain volumes be purchased if the
parties were to fail to agree on price and other terms that may be subject to
renegotiation.
Contracts also typically contain force majeure provisions allowing suspension of
performance by CONSOL or the customer for the duration of certain events beyond
the control of the affected party, including labor disputes. Certain contracts
may terminate upon continuance of an event of force majeure for an extended
period (generally six to 12 months). Contracts also typically specify certain
minimum and maximum quality specifications regarding the coal to be delivered.
Failure to meet these conditions could result in substantial price reductions or
termination of the contract.
Although the volume to be delivered pursuant to a long-term contract is
stipulated, buyers or CONSOL have the option to vary the volume within specified
limits. In addition, a contract may provide for early termination of all or part
of the specified sales volume due to failure to agree on price or other terms
for which renegotiation is provided or for suspension of performance or
termination by the customer for force majeure events or failure of performance.
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The following table shows the tons of coal delivered in 1997 and the total
stated tons of coal deliverable in the year indicated for all contracts held by
CONSOL at September 30, 1998.
CONTRACT TONS OF DELIVERED COAL
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1997 1998 1999 2000 2005 2010
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
In millions of nominal tons per year
Volume under
long-term
contracts................. 46.9 45.7 41.7 24.2 5.3 1.1
</TABLE>
CONSOL routinely engages in efforts to renew or extend contracts scheduled to
expire. Although there are no guarantees that contracts will be renewed, CONSOL
frequently has been successful in the past in renewing or extending contracts.
The length of term, volumes specified and price typically are adjusted during
the renegotiation.
MARKETING AND SALES
CONSOL sells coal produced by its mining complexes and additional coal which is
purchased for resale from other producers through a sales force of 20 people.
CONSOL maintains U.S. sales offices in Atlanta, Chicago, Cleveland, Norfolk,
Philadelphia, Pittsburgh and overseas in Brussels, Belgium. In addition, CONSOL
sells coal through agents, brokers and trading companies. In 1997, CONSOL sold
75.2 million tons of coal, 84% of which was sold in domestic markets to
electricity generators, steel companies and other consumers of coal. Direct
sales by CONSOL to domestic electricity generators represented 68% of total
sales and 81% of U.S. sales in 1997. The three largest customers are Allegheny
Energy, Pennsylvania Power Company and Detroit Edison.
More than 100 technical specialists work with the direct sales force to meet the
needs of current and potential customers. Specialists review customer bid
solicitations with the sales force and then identify the coal or coal- blends
that CONSOL could provide. Specialists also may accompany the sales force on
customer calls to suggest, from a technical standpoint, how CONSOL coals could
be used to improve combustion efficiency or lower customers' costs.
If additional technical resources are required, the sales force utilizes
expertise provided by CONSOL's Research and Development Department. CONSOL's
research and development expertise in areas, including combustion, emission
control, coal coking and power plant performance, allows CONSOL to address
customer concerns on detailed technical basis. See "-- Research and
Development."
DISTRIBUTION
CONSOL employs transportation specialists who negotiate freight and equipment
agreements with various transportation suppliers, including railroads, barge
lines, terminal operators, ocean vessel brokers and trucking companies.
In addition, CONSOL's transportation managers coordinate with customers and with
CONSOL's mining complexes to establish shipping schedules and to order
transportation equipment necessary to meet the customer's needs. CONSOL owns or
leases more than 1,100 railroad cars for moving coal either directly to domestic
customers or to the river and sea ports for transloading to barges or vessels.
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CONSOL has five towboats and a fleet of nearly 300 barges to serve customers
along the Ohio and Monongahela rivers. The barge operation allows CONSOL to
exercise control of delivery schedules and serves as temporary floating storage
of coal where land storage is unavailable. The towboat and barge fleet is sized
to accommodate the narrower channels and smaller locking facilities along the
Monongahela River on which much of CONSOL's coal is moved.
In 1997, CONSOL transported 14.8 million tons of coal by river. Third-party
shippers transported an additional 13.5 million tons of CONSOL's coal. Nearly
40% of CONSOL-produced coal moved on the inland waterways in 1997. CONSOL
estimates that shipping coal by water is as much as 80% less expensive than rail
transportation. Coal shipped on the Monongahela, Ohio and Mississippi rivers is
transported to electricity generators, steel makers and industrial customers in
the United States and overseas. Water-borne shipments of coal originate from
mines in every state in which CONSOL operates.
International customers and domestic coastal customers receive coal through
CONSOL's terminal at Baltimore, Maryland. The Baltimore Terminal is a 100 acre
site with a throughput capacity of 18 million tons annually and ground storage
capacity for steam and metallurgical coal. The ground storage capacity is
significant to CONSOL for several reasons. First, it provides additional
inventory storage to allow mines to continue to operate at optimal levels.
Second, the large storage capacity allows CONSOL to ensure overseas buyers that
coal will be available for rapid loading when the transporting vessel arrives at
the port, thereby minimizing demurrage charges. Finally, the storage capacity of
the terminal allows CONSOL to inventory coals of various qualities and to then
produce custom blends for overseas customers. The terminal is served by both the
Norfolk Southern Corporation ("Norfolk") and CSX Transportation, Inc. ("CSX")
railroads. The terminal berths have been dredged to a depth of 50 feet to allow
CONSOL to load larger oceangoing vessels.
RESEARCH AND DEVELOPMENT
CONSOL's Research and Development Department is the largest private research
organization in the United States devoted to coal. The function of the
department is to identify, develop and apply technology to support the
production and marketing objectives of CONSOL's coal and gas operations and to
serve as a technical resource to other staff departments. The Research and
Development Department works closely with CONSOL's mines, preparation plants,
sales offices, engineering, environmental affairs and government relations
departments to address current opportunities and problems while pursuing a
longer term strategic mission to maintain CONSOL's competitive advantage in
mining and sales. The Research & Development Department employs approximately
100 engineers, scientists and staff at two locations and has an annual budget of
$11 million.
The strategic objectives of the Research and Development Department are to
understand and control the geologic factors that can limit productivity or
impair safety, to develop systems and procedures to optimize resource extraction
and utilization, to assess the value of CONSOL's products in the market place
and to address operational and environmental issues that can affect CONSOL's
customers and, as a consequence, limit the market for CONSOL's coal. CONSOL's
research and development effort is directed at both production ("upstream") and
marketing ("downstream") issues. This approach recognizes that profitability is
a function of the ability to control costs of production and the ability to
develop and access the highest value markets for CONSOL's products.
The goal of the upstream research is to reduce costs, to improve productivity
and to enhance the safety of CONSOL's mines and preparation plants. Among the
significant areas of research are the geophysical evaluation of reserves and
mines, the automation of mining systems, including robotic control of longwall
shearers, the improvement of underground haulage technology, the hydrological
modeling of mines and the associated geology, the control of dust and methane in
mines, and the development of computer technology for preparation plants. CONSOL
has developed sophisticated measurement and computer modeling techniques for
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ground control and hydrologic modeling. These tools are used to design and
operate safe and productive mines, and to understand better the effect of mining
on the environment. CONSOL also maintains extensive testing and sampling
capabilities at its research and development facilities to address coal quality
issues, and to solve in a cost-effective manner such environmental problems as
acid mine drainage and plant emission controls. In recent years, CONSOL has
obtained (or applied for) various patents, including froth floatation control
systems to improve preparation plant efficiencies and costs, the TramVeyor(TM)
coal haulage systems to increase productivity in continuous miner sections,
devices to extend conveyor belts as mining advances without interrupting belt
operations, and a device that allows continued mine ventilation during periodic
testing.
The downstream program supports CONSOL's coal sales through the development of
improved coal use technologies, and by assigning research and development staff
to participate in the government regulatory process where it affects the use of
coal. The Research and Development Department operates a pilot combustor and a
moveable-wall coke oven to test and qualify coal for virtually any customer
application and to diagnose and solve operating problems at customer facilities
that might otherwise limit the use of CONSOL's coal. The Research and
Development Department has developed the proprietary CONSOL, Coal Quality Cost
Model ("CQCM") as a tool for determining the value of specific coals based on
the busbar power cost when they are used in electricity generating stations.
Alone, or in combination with the pilot combustor, the CQCM allows CONSOL's
sales force and its customers to identify the best coals for a given
application.
CONSOL not only has extensive coal-testing capabilities, but it can provide
customers with field diagnostic services to evaluate and solve coal combustion
problems. These capabilities not only help preserve existing business, but allow
CONSOL to generate new business opportunities. For example, CONSOL recently
resolved concerns about the use of CONSOL coal for blending in an electricity
generating station of an upper midwest electric utility. The station primarily
burned low-Btu, Western coal for blending with a lesser amount of high-sulfur
Eastern coal from another producer. The utility wanted to consider CONSOL's high
Btu, fully-washed, Pittsburgh # 8 seam coal, but was concerned that this coal
would create slagging and fouling problems, if substituted in the blend. By
testing blends in the Research & Development Department's pilot-scale coal
combustion facility and working with the utility's station operators, CONSOL
demonstrated that fully washed, high Btu coal could be part of the blend. As a
result, CONSOL's coal was qualified and ultimately chosen by the customer.
The Research and Development Department's work on the development of coal
utilization technology is directed principally at reducing the cost of
compliance with environmental regulations for existing coal-fired boilers.
CONSOL believes that existing electricity generating stations will be the site
of increased coal use as operators of these stations seek to increase the
utilization of the capacity of the generating units. The Research and
Development Department is engaged in the development and demonstration of
low-cost retrofit technology for the control of sulfur dioxide, oxides of
nitrogen and other post-combustion air emissions and for the control of solid
waste. For example, CONSOL was recently awarded a grant from the U.S. Department
of Energy to construct a pilot plant to turn scrubber sludge into pellets that
can be used as aggregate in road construction. A test of asphalt using sludge
pellets currently is being conducted at a road repair and construction project.
If successful, this technology will transform scrubber sludge, which would
otherwise have to be land-filled into a commercial product, reducing the costs
of using high-sulfur coal.
EMPLOYEES AND LABOR RELATIONS
At September 30, 1998, CONSOL had a total of 8,716 employees, of whom
approximately 4,364 were represented by the UMWA and covered by the terms of the
1998 NBCWA. The NBCWA became effective on January 1, 1998 and will expire on
December 31, 2002. This agreement is negotiated with the UMWA by the Bituminous
Coal Operators' Association on behalf of its members, which includes several
subsidiaries of CONSOL. The NBCWA also serves as a pattern agreement for other
coal producers with UMWA-represented employees. About 41% of the U.S. miners are
represented by the UMWA.
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<PAGE>
The NBCWA provided moderate wage and benefit increases and pension improvements.
The NBCWA also provided CONSOL with additional scheduling flexibility and will
reduce required contributions to multi-employer benefits funds over the life of
the contract. Since 1984, the UMWA has had only one nationwide strike, which
occurred in 1993. CONSOL believes that the current labor environment is stable.
COMPETITION
The U.S. coal industry is highly competitive, with numerous producers in all
coal producing regions. CONSOL competes against other large producers and
hundreds of small producers in the United States and overseas. The largest
producer is estimated to have less than 15% (based on tonnage sold) of the total
U.S. market. The U.S. Department of Energy reports 1,810 active coal mines in
the United States in 1997, the latest year for which government statistics are
available. The U.S. coal industry is going through a period of rapid
consolidation. Oil, steel and utility companies have been selling their coal
assets, which have been acquired for the most part by mining companies. The most
important factors on which CONSOL competes are coal price at the mine, coal
quality, transportation costs from the mine to the customer and the reliability
of supply. Continued demand for CONSOL's coal and the prices that CONSOL obtains
are affected by demand for electricity, environmental and government regulation,
technological developments and the availability and price of competing coal and
alternative fuel supplies, including nuclear, natural gas, oil or renewable
energy, including hydroelectric power.
NON-MINING OPERATIONS
CONSOL's non-mining operations started as service, support or ancillary
functions for its mining operations. Several have grown to be stand-alone
businesses that obtain a large part of their revenues from outside customers.
FAIRMONT SUPPLY COMPANY
Fairmont Supply Company ("Fairmont Supply"), headquartered in Washington,
Pennsylvania, is one of the largest general-line distributors of mining and
industrial supplies in the United States. Fairmont Supply has more than 30
customer service centers nationwide. All Fairmont Supply sites are linked by
computer to manage large inventories of name-brand parts, supplies and
equipment, which helps reduce Fairmont Supply's distribution and product
acquisition costs.
Fairmont Supply also provides integrated supply procurement and management
services. Integrated supply procurement is a materials management strategy that
utilizes a single, full-line distributor to minimize total cost in the MRO
(maintenance, repair and operating) supply chain. Fairmont Supply offers
value-added services including on-site stores management and procurement
strategies.
In 1997, Fairmont Supply received ISO 9002 re-certification at its Wilmington,
Delaware, Charleston, West Virginia and Parkersburg, West Virginia customer
service centers as well as at its purchasing department in Washington,
Pennsylvania.
Fairmont Supply provides mine supplies to CONSOL's mining operations.
Approximately 26% of Fairmont Supply's sales in 1997 were made to CONSOL mines.
Fairmont Supply also serves DuPont sites in the United States providing
maintenance and repair services and operating supplies and equipment in a
central location near each plant. About 32% of Fairmont Supply's revenues in
1997 were derived from sales made and services provided to DuPont, based on
contract terms and conditions. See Note 21 of Notes to Consolidated Financial
Statements.
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BALTIMORE TERMINAL
More than 90 million tons of coal have been shipped through CONSOL's exporting
terminal in the Port of Baltimore during the terminal's 14 years of operation.
Constructed in the early 1980s at a cost of about $100 million, the terminal can
either store coal or transload coal directly into vessels from rail cars. It is
also one of the few terminals in the United States served by two railroads,
Norfolk and CSX. In 1997, 8 million tons of coal were shipped through the
terminal. One half of the tonnage shipped was produced by CONSOL coal mines, the
remainder by other coal producers. The terminal has capacity to ship 18 million
tons annually.
The terminal's berth has a depth of 50 feet, enabling the facility to handle
larger ocean-going vessels. More than 1 million tons of coal can be stored on
site, which gives the terminal the advantage of having coal available at the
site for immediate loading onto ocean-going vessels or to provide blending
capability.
NEPTUNE BULK TERMINAL
CONSOL also has a 19% interest in the Neptune Bulk Terminal located in
Vancouver, Canada. The terms of the contract governing this joint venture permit
CONSOL to transship its coal through the terminal at cost. CONSOL believes that
this arrangement gives it a competitive advantage in selling coal mined from its
Cardinal River operations.
RIVER OPERATIONS
CONSOL's river operations transport coal from CONSOL mines with river loadout
facilities along the Monongahela River in northern West Virginia and
southwestern Pennsylvania to customers along the Monongahela and Ohio rivers.
The river operations employ five towboats and nearly 300 barges. Coal is towed
directly to customers. In 1997, CONSOL transported 15 million tons of coal by
river.
KELLOGG DOCK
Kellogg Dock is located in Moduc, Randolph County on the Mississippi River in
southern Illinois. This facility transfers coal from CONSOL's Rend Lake Mine
from railcars to barges. In 1997, 1 million tons were supplied by rail to the
Kellogg dock and then transported to commercial river shippers.
ALICIA DOCK
Alicia Dock, located on the Monongahela River north of the Dilworth mine, is a
new transshipment facility with design capacity of 6 million tons of coal per
year and potential storage capacity for 0.2 million tons of coal. Coal is
transferred from rail cars to barges for customers that receive coal on the
river system. The facilities include a single-car rotary dump with a positioner,
capable of handling an average of 25 cars per hour. The rail siding provides
space for 105 cars on each side of the dumper. The Alicia Dock facility became
operational in April 1997 and throughput was 1 million tons through the end of
1997.
ASH DISPOSAL
CONSOL operates an ash disposal facility on a 61-acre site in northern West
Virginia to handle ash residues for coal customers that are unable to dispose of
ash on-site at their generating facilities. This facility became operational in
early 1994. The ash disposal facility can process 200 tons of material per hour.
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CONSOL has a long-term contract with a cogeneration facility to supply coal and
take the residual fly ash and bottom ash. The fly ash is transported to the
disposal site by CONSOL-leased pressure differential rail cars.
Bottom ash is sold locally for road construction and other purposes.
GAS OPERATIONS
CONSOL has a 50% interest in the Pocahontas Gas Partnership which engages in the
production and transportation of commercial coalbed methane gases. The
Pocahontas Gas Partnership recovers pipeline-quality coalbed methane from mining
activities in southwestern Virginia and transports the gas to the interstate
pipeline system. The production from the Pocahontas Gas Partnership was
approximately 36 million cubic feet per day in 1997. CONSOL serves as operator
of the Pocahontas Gas Partnership and as operator of an adjacent coalbed methane
property. The total gas production supervised by CONSOL from these two ventures
was 53 million cubic feet per day in 1997.
LEGAL PROCEEDINGS
CONSOL is subject to numerous legal proceedings in the ordinary course of its
business. Except as described below, CONSOL does not believe that the outcome of
any such legal proceedings, if adversely determined, would have a material
adverse effect on its business, financial condition or results of operations.
On September 18, 1996, Union Electric, a Missouri corporation, commenced an
action in the U.S. District Court for the Eastern District of Missouri against
Consolidation Coal Co. ("Consolidation"), CONSOL, Inc., and CONSOL Energy Inc.
alleging, among other things, breach of contract and asserting unjust enrichment
claims against each defendant. The claims relate to a long-term coal supply
contract originally entered into between Union Electric and Consolidation on
December 30, 1966. Union Electric claims that Consolidation breached the
contract by refusing to agree to price reductions in the per-ton price for coal
when requested to do so by Union Electric under the contract's gross inequities
clause. The defendants dispute all of Union Electric's allegations and do not
believe that Union Electric has suffered any gross inequity or is entitled to
any relief under the contract. Union Electric has estimated its damages to be
$124 million plus $66 million in interest. On August 31, 1998, CONSOL was
awarded a summary judgment dismissing Union Electric's claims against it. Union
Electric has appealed the court's order dismissing the suit.
CONSOL is engaged in a contract dispute with Cleveland Electric Illuminating
Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company
and The Toledo Edison Company (together, "CAPCO"). CAPCO claims that CONSOL
under the terms of the Mansfield Plant Coal Sales Agreement dated April 10, 1987
(the "Mansfield Agreement") made improper adjustments to the coal price for
certain labor, retirement and benefit costs. CAPCO claims that they were
improperly assessed $40 million as a result of the price adjustments made by
CONSOL. CONSOL has responded to CAPCO and has denied the claims. The Mansfield
Agreement provides for arbitration.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement in order to register the shares of common stock being offered under
the Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations promulgated thereunder. This prospectus omits certain information
contained in the registration statement and the exhibits and schedules thereto,
and we sometimes refer you to the registration statement for further information
with respect to us and the common stock. We have summarized the contents of
contracts, agreements or other documents in this prospectus. Although we have
disclosed all material elements of such contracts or documents required to be
disclosed in this prospectus, we qualify each such disclosure in its entirety by
reference to the copy of such contract or document filed as an exhibit to the
registration statement.
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You may inspect and copy the registration statement and all exhibits filed with
the registration statement at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
regional offices of the Securities Exchange Commission at 7 World Trade Center,
13th Floor, New York, New York 10048, and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You also may obtain copies of such material from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The SEC also maintains a web site that contains
reports, proxy and information statements and other materials that are filed
through the SEC's Electronic Data Gathering, Analysis and Retrieval System. You
may access this web site at http://www.sec.gov. We will apply to list our common
stock on The New York Stock Exchange. Accordingly, our reports and other
information also can be inspected at the offices of The New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
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REGULATION
The coal mining industry is subject to regulation by federal, state and local
authorities on matters such as employee health and safety, permitting and
licensing requirements, air quality standards, water pollution, plant and
wildlife protection, the reclamation and restoration of mining properties after
mining is completed, the discharge of materials into the environment, surface
subsidence from the underground mining and the effects of mining on groundwater
quality and availability. In addition, the utility industry is subject to
extensive regulations regarding the environmental impact of its power generation
activities which could affect demand for CONSOL's coal. The possibility exists
that new legislation and/or regulations may be adopted which may have a
significant impact on CONSOL's mining operations and/or its customers' ability
to use coal and may require CONSOL or its customers to change their operations
significantly or incur substantial costs.
Numerous governmental permits or approvals are required for mining operations.
CONSOL believes all permits currently required to conduct its present mining
operations have been obtained. CONSOL may be required to prepare and present to
federal, state or local authorities data pertaining to the effect or impact that
any proposed exploration for or production of coal may have upon the
environment. All requirements imposed by any such authority may be costly and
time-consuming and may delay commencement or continuation of exploration or
production operations. Future legislation and administrative regulations may
emphasize the protection of the environment and, as a consequence, the
activities of CONSOL may be more closely regulated. Such legislation and
regulations, as well as future interpretations of existing laws, may require
substantial increases in equipment and operating costs to CONSOL and delays,
interruptions or a termination of operations, the extent of which cannot be
predicted.
CONSOL's independent operating subsidiaries endeavor to conduct mining
operations in compliance with all applicable federal, state and local laws and
regulations. However, because of extensive and comprehensive regulatory
requirements, violations during mining operations are not unusual in the
industry and, notwithstanding compliance efforts, CONSOL does not believe such
violations can be eliminated completely. None of the violations to date or the
monetary penalties assessed upon CONSOL's subsidiaries have been material.
While it is not possible to quantify the costs of compliance with all applicable
federal and state laws, those costs have been and are expected to continue to be
significant. It is estimated that CONSOL will make capital expenditures for
environmental control facilities in the amount of approximately $4 million in
1998, as compared to $4 million and $5 million in 1996 and 1997, respectively.
These costs are in addition to reclamation costs. Compliance with these laws has
substantially increased the cost of coal mining, but is, in general, a cost
common to all domestic coal producers.
MINE HEALTH AND SAFETY LAWS
Stringent safety and health standards have been imposed by federal legislation
since 1969 when the Federal Coal Mine Health and Safety Act of 1969, as amended
(the "1969 Mine Act") was adopted. The 1969 Mine Act resulted in increased
operating costs and reduced productivity. The Federal Mine Safety and Health Act
of 1977, as amended (the "1977 Mine Act"), which significantly expanded the
enforcement of health and safety standards of the 1969 Mine Act, imposes
comprehensive safety and health standards on all mining operations. Regulations
are comprehensive and affect numerous aspects of mining operations, including
training of mine personnel, mining procedures, blasting, the equipment used in
mining operations and other matters. The Mine Safety and Health Administration
("MSHA") monitors compliance with these federal laws and regulations. In
addition, as part of the 1969 Mine Act and the 1977 Mine Act, the 1969 Black
Lung Act and the 1977 Black Lung Acts require payments of benefits by all
businesses conducting current mining operations to coal miners with
pneumoconiosis (black lung) and to certain survivors of a miner who dies from
pneumoconiosis.
Most of the states in which CONSOL operates have state programs for mine safety
and health regulation and enforcement. In combination, federal and state safety
and health regulation in the coal mining industry is perhaps the most
comprehensive and pervasive system for protection of employee safety and health
affecting any
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segment of the industry. Even the most minute aspects of mine operations,
particularly underground mine operations, are subject to extensive regulation.
This regulation has a significant effect on CONSOL's operating costs. However,
CONSOL's competitors in all of the areas in which it operates are subject to the
same degree of regulation.
One of CONSOL's goals is to achieve excellent health and safety performance as
measured by accident frequency rates and other measures. CONSOL believes that
attainment of this goal is inherently tied to the attainment of productivity and
financial goals. CONSOL seeks to implement this goal by training employees in
safe work practices; openly communicating with employees; establishing,
following, and improving safety standards; involving employees in establishing
safety standards; and recording, reporting and investigating all accidents,
incidents and losses to avoid reoccurrences.
BLACK LUNG LEGISLATION
In order to compensate miners who are totally disabled due to pneumoconiosis and
certain survivors of a miner who dies from the disease and who were last
employed as miners prior to 1970 or where no responsible coal mine operator has
been identified for claims where the miners last coal employment was after
December 31, 1969, the 1977 Black Lung Acts as amended by the Black Lung
Benefits Revenue Act of 1981 and the Black Lung Amendments of 1981 (the "1981
Black Lung Acts"), levied a tax on production of $1.10 per ton for deep-mined
coal and $.55 per ton for surface-mined coal, but not to exceed 4.4% of the
sales price. In addition, the 1981 Black Lung Acts provide that certain claims
for which coal operators had previously been responsible will be obligations of
the government trust funded by the tax. The Revenue Act of 1987 extended the
termination date of the tax from January 1, 1996 to the earlier of January 1,
2014, or the date on which the government trust becomes solvent. For miners last
employed as miners after 1969 who are determined to have contracted black lung,
CONSOL self insures against potential cost using actuarial determined estimates
of the cost of present and future claims. CONSOL's subsidiaries are also liable
under state statutes for pneumoconiosis (black lung) claims.
Legislation on black lung reform was introduced, but not enacted, in the last
Congress. It is possible that such legislation will be reintroduced for
consideration by the current Congress. Such legislation could restrict the
evidence that can be offered by a mining company, establish a standard for
evaluation of evidence that greatly favors black lung claimants, allow claimants
who have been denied benefits at any time since 1981 to refile their claims for
consideration under the new law, make surviving spouse benefits significantly
easier to obtain and retroactively waive repayment of preliminarily awarded
benefits that are later determined to have been improperly paid. If this or
similar legislation is passed, the number of claimants who are awarded benefits
could significantly increase. There can be no assurance that such proposed
legislation or other proposed changes in black lung legislation will not have an
adverse effect on CONSOL.
The U.S. Department of Labor has issued proposed amendments to the regulations
implementing the federal black lung laws which, among other things, establish a
presumption in favor of a claimant's treating physician and limit a coal
operator's ability to introduce medical evidence regarding the claimant's
medical condition. If adopted, the amendments could have an adverse impact on
CONSOL, the extent of which cannot be accurately predicted.
WORKERS' COMPENSATION
CONSOL is required to compensate employees for work-related injuries. Several
states in which CONSOL operates consider changes in workers compensation laws
from time to time. Such changes, if enacted, could adversely affect CONSOL's
financial condition and results of operation.
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RETIREE HEALTH BENEFITS LEGISLATION
The Coal Industry Retiree Health Benefits Act of 1992 requires CONSOL to make
payments to fund the cost of health benefits for CONSOL's and other coal
industry retirees. As a result of a recent U.S. Supreme Court decision, CONSOL
may be required to increase its share of such payments.
ENVIRONMENTAL LAWS
CONSOL is subject to various Federal environmental laws, including the federal
Surface Mining Control and Reclamation Act of 1977 ("SMCRA"), the Clean Air Act,
the Clean Water Act, the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), and the federal Resource Conservation
Recovery Act ("RCRA") as well as state laws of similar scope in each state in
which CONSOL operates (the "Environmental Laws"). These Environmental Laws
require permitting and/or approval of many aspects of coal mining operations,
and to that end both federal and state inspectors regularly visit CONSOL's mines
and other facilities to assure compliance. CONSOL has ongoing compliance and
permitting programs to assure compliance with such Environmental Laws.
Given the retroactive nature of certain environmental laws, CONSOL has incurred
and may in the future incur liabilities in connection with properties and
facilities currently or previously owned or operated as well as sites to which
it sent waste materials.
SURFACE MINING CONTROL AND RECLAMATION ACT
SMCRA establishes operational, reclamation and closure standards for all aspects
of surface mining as well as many aspects of deep mining. SMCRA requires that
comprehensive environmental protection and reclamation standards be met during
the course of and upon completion of mining activities. Permits for surface
mining operations must be obtained from the federal Office of Surface Mining
Reclamation and Enforcement or, where state regulatory agencies have adopted
federally approved state programs under SMCRA, the appropriate state regulatory
authority. All states in which CONSOL's active mining operations are located
have achieved primary jurisdiction for SMCRA enforcement through approved state
programs.
SMCRA and similar state statutes, among other things, require that mined
property be restored in accordance with specified standards and approved
reclamation plans. SMCRA requires CONSOL to restore the surface to approximate
the original contours as contemporaneously as practicable with the completion of
surface mining operations. The mine operator must submit a bond or otherwise
secure the performance of these reclamation obligations. The earliest a
reclamation bond can be released is five years after reclamation has been
achieved. Some states, including Pennsylvania, impose on mine operators the
responsibility for repairing or compensating for damage occurring on the surface
as a result of mine subsidence, a consequence of longwall mining. In addition,
the Abandoned Mine Lands Act ("AML"), which is part of SMCRA, imposes a tax on
all current mining operations, the proceeds of which are used to restore mines
closed before 1977. The maximum tax is $.35 per ton on surface- mined coal and
$.15 per ton on underground-mined coal.
CONSOL accrues for the costs of final mine closure, including the cost of
treating mine water discharge where necessary, over the estimated useful mining
life of the property and for current mine disturbance which will be reclaimed
prior to final mine closure. The establishment of liability for the current
disturbance and final mine closure reclamation is based upon permit requirements
and requires various estimates and assumptions, principally associated with
costs and production levels. The reclamation costs, mine-closing costs and other
environmental liability accruals were $321 million at September 30, 1998. The
amount that was included as an operating expense for the nine-month period ended
September 30, 1998 was $7 million, while the related cash expense for such
liability in such period was $22 million. Although CONSOL's management believes
it is making adequate provisions for all expected reclamation and other costs
associated with mine closures, future operating results would be adversely
affected if such accruals were later determined to be insufficient.
Under SMCRA, responsibility for unabated violations, unpaid civil penalties and
unpaid reclamation fees of independent contract mine operators can be imputed to
other companies which are deemed, according to the regulations, to have "owned"
or "controlled" the contract mine operator. Sanctions against the "owner" or
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"controller" are quite severe and can include being blocked from receiving new
permits and revocation of any permits that have been issued since the time of
the violations or, in the case of civil penalties and reclamation fees, since
the time such amounts became due. CONSOL is not aware of any currently pending
or asserted claims relating to the "ownership" or "control" theories discussed
above. However, there can be no assurance that such claims may or may not
develop in the future.
CLEAN AIR ACT
The federal Clean Air Act and similar state laws, which regulate emissions into
the air, affect coal mining and processing operations primarily through
permitting and/or emissions control requirements. In addition, the U.S.
Environmental Protection Agency (the "EPA") has issued certain and is
considering further regulations relating to fugitive dust and coal combustion
emissions which could restrict CONSOL's ability to develop new mines or require
CONSOL to modify its operations. In July 1997, the EPA adopted new, more
stringent National Ambient Air Quality Standards ("NAAQs") for particulate
matter which may require some states to change existing implementation plans.
These NAAQs are expected to be implemented by 2003. Because coal mining
operations emit particulate matter, CONSOL's mining operations and utility
customers are likely to be directly affected when the revisions to the NAAQs are
implemented by the states. Regulations may restrict CONSOL's ability to develop
new mines or could require CONSOL to modify its existing operations, and may
have a material adverse effect on CONSOL's financial condition and results of
operations.
The Clean Air Act also indirectly affects coal mining operations by extensively
regulating the air emissions of coal- fueled electric power generating plants.
The Clean Air Act requires reduction of sulfur dioxide emissions from electric
power generation plants in two phases. Only certain facilities are subject to
the Phase I requirements. By the year 2000, Phase II requires nearly all
facilities to reduce such emissions. The affected utilities will be able to meet
these requirements by switching to lower sulfur fuels, by installing pollution
control devices such as scrubbers, by reducing electricity generating levels or
by purchasing or trading so-called pollution "credits." Specific emissions
sources receive these "credits" which utilities and industrial concerns can
trade or sell to allow other units to emit higher levels of sulfur dioxide. In
addition, the Clean Air Act requires a study of utility power plant emission of
certain toxic substances and their eventual regulation, if warranted. The effect
of the Clean Air Act cannot be completely ascertained at this time, although the
sulfur dioxide emissions reduction requirement is projected generally to
increase the demand for low-sulfur coal and potentially decrease demand for high
sulfur coal.
The Clean Air Act also indirectly affects coal mining operations by requiring
utilities that currently are major sources of nitrogen oxides in moderate or
higher ozone nonattainment areas to install reasonably available control
technology ("RACT") for nitrogen oxides, which are precursors of ozone. The EPA
recently announced a proposal that would require 22 eastern states to make
substantial reductions in nitrogen oxide emissions by the year 2003. The EPA
expects such states will achieve these reductions by requiring power plants to
make substantial reductions in their nitrogen oxide emissions. This in turn will
require power plants to install RACT and additional control measures.
Installation of RACT and additional measures required under the EPA proposal
will make it more costly to operate coal-fired plants and, depending on the
requirements of individual state implementation plans and the development of
revised new source performance standards, could make coal a less attractive fuel
alternative in the planning and building of utility power plants in the future.
Any reduction in coal's share of the capacity for power generation could have a
material adverse effect on CONSOL's business, financial condition and results of
operations. The effect such regulations, or other requirements that may be
imposed in the future, could have on the coal industry in general and on CONSOL
in particular cannot be predicted with certainty. No assurance can be given that
the implementation of the Clean Air Act, the new NAAQs or any other future
regulatory provisions will not materially adversely affect CONSOL's business,
financial condition or results of operations.
Impact of the Framework Convention and Global Climate Change. The United States
and more than 160 other nations are signatories to the 1992 Convention which is
intended to limit or capture emissions of greenhouse gases, such as carbon
dioxide. In the Kyoto Protocol, the signatories to the Convention established a
binding set of emissions targets for developed nations. The specific limits vary
from country to country. Under the terms of Kyoto Protocol, the United States
would be required to reduce emissions to 93% of 1990 levels over a
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five-year budget period from 2008 through 2012. The Clinton Administration
signed the protocol in November 1998. Although the U.S. Senate has not yet
ratified the Kyoto Protocol and no comprehensive regulations focusing on
greenhouse gas emissions have been enacted, efforts to control greenhouse gas
emissions could result in reduced use of coal if electric power generators
switch to lower carbon sources of fuel. Such restrictions, if established
through regulation or legislation, could have a material adverse effect on
CONSOL's business, financial condition and results of operations.
CLEAN WATER ACT
The federal Clean Water Act affects coal mining operations by imposing
restrictions on effluent discharge into waters. Regular monitoring, as well as
compliance with reporting requirements and performance standards, are
preconditions for the issuance and renewal of permits governing the discharge of
pollutants into water. CONSOL believes it has obtained all permits required
under the Clean Water Act and that compliance with the Clean Water Act will not
materially adversely affect its business, financial condition and results of
operations. CONSOL has received several notices of violations from the Ohio EPA
at its Powhatan Mine No. 4, located near Clarington, Monroe County, Ohio. In
September 1998, CONSOL entered into a settlement agreement with the Ohio EPA and
finalized a consent decree with the Ohio EPA reflecting the resolution of
outstanding issues. This settlement included a payment of $102,620 and a
schedule to achieve compliance with its permit. CONSOL is meeting all Ohio EPA
requirements on the schedule set forth in the consent decree.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT
CERCLA and similar state laws affect coal mining operations by, among other
things, imposing cleanup requirements for threatened or actual releases of
hazardous substances that may endanger public health or welfare or the
environment. Under CERCLA, joint and several liability may be imposed on waste
generators, site owners and operators and others regardless of fault or the
legality of the original disposal activity. Although waste substances generated
by coal mining and processing are generally not regarded as hazardous substances
for the purposes of CERCLA, some products used by coal companies in operations,
such as chemicals, and the disposal of such products, are governed by the
statute. Thus, coal mines currently or previously owned or operated by CONSOL,
and sites to which CONSOL sent waste materials, may be subject to liability
under CERCLA and similar state laws. CONSOL has been, from time to time, the
subject of administrative proceedings, litigation and investigations relating to
environmental matters and has also been named as a potentially responsible party
("PRP") at several Superfund sites. CONSOL believes, based on various factors,
that the liabilities associated with the Superfund sites should not have a
material adverse effect on its financial condition or results of operations.
However, there can be no assurances that CONSOL will not become involved in
future proceedings, litigation or investigations or that such liabilities will
not be material.
RESOURCE CONSERVATION RECOVERY ACT
The federal Resource Conservation Recovery Act affects coal mining operations by
imposing requirements for the treatment, storage and disposal of hazardous
wastes. Although many mining wastes are excluded from the regulatory definition
of hazardous waste, and coal mining operations covered by SMCRA permits are
exempted from regulation under RCRA by statute, the EPA may consider the
possibility of expanding regulation of mining wastes under RCRA. Such expansion
could have a material adverse affect on CONSOL's results of operations and
financial condition.
FEDERAL COAL LEASING AMENDMENTS ACT
Although CONSOL currently does not have mining operations on federal coal
leases, mining operations on federal lands in the West are affected by
regulations of the U.S. Department of the Interior. The Federal Coal Leasing
Amendments Act of 1976 (the "1976 Act") amended the Mineral Lands Leasing Act of
1920 which authorized the leasing of federal lands for coal mining. The 1976 Act
increased the royalties payable to the U.S. Government for federal coal leases
and required diligent development and continuous operations of leased reserves
within a specified period of time. Regulations adopted by the U.S. Department of
the Interior to implement such legislation could affect coal mining by CONSOL
from federal leases if operations were developed on such leases.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names and ages at December 1, 1998, of the executive
officers and directors of CONSOL Energy Inc. and certain executive officers of
CONSOL Inc. and Consolidation Coal Company. Consolidation Coal Company is the
principal operating subsidiary of CONSOL Energy Inc. and CONSOL Inc. is the
direct holding company subsidiary of CONSOL Energy Inc. that provides executive,
management and administrative services to CONSOL. No family relationship exists
among these people. Executive officers are appointed by, and hold office at, the
discretion of the Board of Directors of CONSOL Energy Inc., CONSOL Inc. and
Consolidation Coal Company, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name Age Position
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
B. R. Brown.................................. 66 Chairman of the Board of Directors and Chairman of the
Board of CONSOL and CONSOL Inc.
J. Brett Harvey.............................. 48 Director and President and Chief Executive Officer,
CONSOL and CONSOL Inc.
Ronald J. FlorJancic......................... 48 Executive Vice President-- Marketing, CONSOL Inc.
C. Wesley McDonald........................... 59 Executive Vice President-- Operations, CONSOL Inc.
Ronald E. Smith.............................. 50 Executive Vice President-- Engineering Services,
Environmental Affairs and Exploration, CONSOL Inc.
Michael F. Nemser............................ 48 Vice President and Treasurer, CONSOL and Senior Vice
President-- Administration, CONSOL Inc.
Grayson G. Heard............................. 51 Senior Vice President-- Mining, Consolidation Coal
Company
Benjamin M. Statler.......................... 47 Senior Vice President-- Mining, Consolidation Coal
Company
Daniel L. Fassio............................. 51 Vice President and Secretary, CONSOL and Vice
President, General Counsel and Secretary of CONSOL Inc.
Dr. Dieter Henning........................... 62 Director, CONSOL
Berthold Bonekamp............................ 48 Director, CONSOL
Bernd J. Breloer............................. 56 Director, CONSOL
Dr. Rolf Zimmermann.......................... 54 Director, CONSOL
</TABLE>
B.R. BROWN has been the Chairman of the Board of Directors of CONSOL since
January 1992. From January 1992 to January 1996, he served as CONSOL's President
and Chief Executive Officer and has served in the Executive Office of Chairman
of the Board from January 1, 1996. Mr. Brown joined Consolidation Coal Company
in March 1977 as Executive Vice President. He served as President and Chief
Operating Officer from November 1977 to September 1982, as Chairman and Chief
Executive Officer from September 1982 to March 1987 and as President and Chief
Executive Officer from March 1987 to January 1992 of Consolidation Coal Company.
Prior to March 1977 Mr. Brown was employed by Conoco, including most recently as
Senior Vice President -- Personnel. Mr. Brown serves as a Director of Remington
Arms Co., Inc. He also serves as a Director and is Chairman of the Bituminous
Coal Operators Association Negotiating Committee, is a past Chairman of the
National Mining Association, a Director and former Chairman of the Coal Industry
Advisory Board of the International Energy Agency and a Trustee of the Nature
Conservancy. Mr. Brown holds honorary doctorates from several colleges,
including Bluefield State College, Robert Morris College, Waynesburg College,
and Wheeling College. He is a graduate of the University of Arkansas.
J. BRETT HARVEY has been President, Chief Executive Officer and a Director of
CONSOL since January 1998. Prior to joining CONSOL, Mr. Harvey served as the
president and chief executive officer of PacifiCorp Energy
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Inc., a subsidiary of PacifiCorp, one of the country's largest electric utility
companies, beginning in 1995. Between 1993 and 1995, Mr. Harvey was president
and chief executive officer of both Interwest Mining Company and PacifiCorp
Fuels. Mr. Harvey is a member of the Board of Directors of the National Mining
Association, the National Coal Council, and the Utah Mining Association. He
received a bachelor's degree in mining engineering from the University of Utah.
He is a former director of the Wasatch Crest Mutual Insurance Company and has
served on the Construction Board of the College of Eastern Utah.
RONALD J. FLORJANCIC has been Executive Vice President-Marketing of CONSOL Inc.
since May 1995. He was Vice President-Supply and Distribution and Vice
President-Sales from January 1992 to December 1993 and December 1993 to May
1995, respectively. From September 1982 to January 1992, he served as Vice
President- Supply and Distribution for Consolidation Coal Company. Prior
thereto, he served in a variety of operations and management positions. Mr.
FlorJancic joined Consolidation Coal Company in 1974. He received a bachelor's
degree in business and a master's degree in business administration, in each
case magna cum laude, from Indiana University (Bloomington). Mr. FlorJancic
completed the Emory University Executive Management Program in 1987.
C. WESLEY MCDONALD has been Executive Vice President--Operations of CONSOL Inc.
since January 1992. He was employed by Consolidation Coal Company in June 1967,
and held numerous operating and management positions from 1975 to 1981,
including Vice President and Assistant to the President for Consolidation Coal
Company from 1980 to 1981. He also served as Senior Vice President--Engineering,
Exploration and Environmental Affairs from 1981 to 1982, Senior Vice
President--Mining from 1982 to 1985 and Executive Vice President--Operations for
Consolidation Coal Company from 1985 to 1992. Mr. McDonald received a bachelor's
degree in mining engineering from the University of Alabama. He attended Harvard
Business School's Program for Management Development. He was named a
Distinguished Engineering Fellow in 1987 at the University of Alabama, and is a
member of the Board of Directors, Capstone Engineering Society, College of
Engineering, at the University. In addition, Mr. McDonald is former Chairman of
the Mineral Engineering Advisory Committee, University of Alabama College of
Engineering. He is also a member of the West Virginia University Visiting
Committee, which advises the University on engineering program matters.
RONALD E. SMITH has been Executive Vice President--Engineering Services,
Environmental Affairs & Exploration of CONSOL Inc. since April 1992. He joined
Consolidation Coal Company in June 1969 and has held numerous operating and
management positions, including Administrative Assistant to the Vice
President--Tazewell Operations in 1981, Vice President and Assistant to the
Executive Vice President in 1987 and Senior Vice President--Engineering
Services, Environmental Affairs & Exploration for Consolidation Coal Company
from April 1990 to January 1992. Mr. Smith received a bachelor's degree in
mining engineering from Virginia Polytechnic Institute and was named a
Distinguished Alumnus in 1998.
MICHAEL F. NEMSER has been Vice President and Treasurer for CONSOL since January
1992 and has been Senior Vice President--Administration for CONSOL Inc. since
January 1, 1996. From January 1992 to January 1, 1996, he was Vice President and
Treasurer for CONSOL Inc. Before joining CONSOL, Mr. Nemser was employed by
DuPont from 1974 to 1987, and held a variety of positions in DuPont's
Accounting, Finance, Textile Fibers, International and Polymer Products
Departments. He received a bachelor's degree in economics from Hobart College
and a master's degree of business administration degree from the Wharton School.
Mr. Nemser is a past President of the Financial Executives Institute, Pittsburgh
Chapter, a current member of the National Leadership Board of the Financial
Executives Institute and Chairman of the Finance Advisory Board of the Duquesne
University A.J. Palumbo School of Business.
GRAYSON G. HEARD has been Senior Vice President--Mining and a Director of
Consolidation Coal Company since May 1985. He has been employed by Consolidation
Coal Company since February 1970 and has held numerous operational and
management positions. From 1980 until 1984, he was Vice President of Fairmont
Operations. From 1984 until 1985 he was Vice President and Assistant to the
Executive Vice President--Operations. Mr. Heard received a bachelor's degree in
mining engineering from Penn State University. In 1996, he was honored as a
Centennial Fellow of Penn State University.
BENJAMIN M. STATLER has been Senior Vice President--Mining and a Director of
Consolidation Coal Company since September 1994. He has been employed by
Consolidation Coal Company since February 1970 and has
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held numerous operational and management positions. He served as Vice President
of Moundsville Operations from September 1983 to June 1994. From June 1994 until
September 1994, he was Vice President and Assistant to the Executive Vice
President of Consolidation Coal Company. Mr. Statler received a bachelor's
degree in mining engineering from West Virginia University. He is a past
director of the Executive Committee of the Society for Mining, Metallurgy &
Exploration, Inc. (SME), Pittsburgh Chapter. In addition, he is past General
Campaign Chairman of the United Way of the Upper Ohio Valley and has served on
the Board of Directors of the Ohio Valley Medical Center, United Way, Wheeling
Chamber of Commerce, and Wheeling Symphony. He is also a member of the West
Virginia University Visiting Committee, which advises the University on
engineering program matters.
DANIEL L. FASSIO has been Secretary for CONSOL and Vice President, General
Counsel and Secretary of CONSOL Inc. since March 1994. He has been Vice
President of CONSOL since November 1998. He joined Consolidation Coal Company in
March 1981 as the Attorney for Consolidation Coal Company's former Eastern
Region and subsequently served as Counsel and Senior Counsel to Consolidation
Coal Company and CONSOL Inc. Prior to March 1981, he was a partner with Rose
Schmidt & Dixon, a law firm in Pittsburgh, Pennsylvania. Mr. Fassio received
bachelor's and master's degrees from the University of Virginia and a doctor of
law degree from Samford University. Besides membership in the American Bar
Association and the Pennsylvania Bar Association, Mr. Fassio has served as
Chairman of the Lawyers Committee for the Bituminous Coal Operators Association
and as a Trustee of the Eastern Mineral Law Foundation.
DR. ING. DIETER HENNING has been a member of the Board of CONSOL as a
representative of Rheinbraun AG and on the Executive Committee of the Board of
CONSOL since November 1994. He started as Superintendent Mine Operations at the
former Frechen open cast mine of Rheinbraun AG in 1969. After various positions
in the headquarters and mines of Rheinbraun AG, he was promoted to General
Manager of the Hambach open cast mine in 1977. From 1990 to 1993 he served as
Chairman of the Executive Board and Chief Executive Officer of the Lausitzer
Braunkohle AG (LAUBAG), Senftenberg, the major company that was formed as a
result of the privatization of the East-German lignite production. In 1993, he
became Chairman of the Executive Board and Chief Executive Officer of Rheinbraun
AG and is a member of the Executive Board of RWE AG. Mr. Henning holds a degree
(Diplom Ingenieur) in mine engineering from Clausthal Technical University in
Germany. He holds a doctor's degree (Dr.-Ing.) in mining from Clausthal
University and a honorary doctor's degree (Dr.-Ing.E.h.) from Aachen University.
BERTHOLD BONEKAMP has served on the Board of CONSOL as a representative of
Rheinbraun AG since July 1998. He started at the Accounting Department of
Rheinbraun AG in 1981. He held a variety of positions in the Rheinbraun
Accounting Department and was promoted to Vice President and Division Head -
Corporate Development, Organization and Information Processing in 1994. From
1995 to 1998 he served as Chairman of the Executive Board and Chief Executive
Officer of RV Rheinbraun Handel und Dienstleistungen GmbH, Cologne, the trading
and logistic services branch of the Rheinbraun group. In 1998 he became member
of the Executive Board of Rheinbraun AG, where he serves as Executive Vice
President - International Operations. Mr. Bonekamp holds a mechanical
engineering degree from the Muenster College of Applied Science and holds a
master's degree in business administration (Diplom-Kaufmann) from Muenster
University in Germany.
BERND JOBST BRELOER was appointed to the Board of CONSOL in September 1998,
where he serves as a representative of Rheinbraun AG. Mr. Breloer has held
various executive positions in the RWE AG group's nuclear division. From 1988 to
1992 he served as Chairman of the Executive Board and as Chief Executive Officer
of Nukem GmbH, the group's nuclear fuel cycle services entity. In 1993, he
joined Rheinbraun AG, where he became member of the Executive Board with
responsibility for the Finance and Accounting Division. Mr. Breloer holds a
master's degree in business administration (Diplom-Kaufmann) from Muenster
University in Germany.
DR. ROLF ZIMMERMANN has been on the Board of CONSOL since November 1993, where
he serves as a representative of Rheinbraun AG. In 1973, he served in the
Corporate Planning Department of the oil refinery subsidiary of Rheinbraun A.G.
He became Vice President and head of supply in 1985. He joined Rheinbraun AG in
1989 and was the head of Corporate Structure and Internal Audit Department until
1990. From 1990 to 1991, he was a member of the management board of a consulting
firm established to prepare for the privatization of the East German lignite
industry. In 1992, he became Senior Vice President of Rheinbraun and
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head of the Business Development, Corporate Structure and Information Processing
Division. Mr. Zimmermann has received a master's degree (Diplom-Volkswirt) in
Economics from Bonn University and holds a doctor's degree (Dr.rer.pol.) in
Economics from Cologne University in Germany.
Following the Offering, CONSOL will have a Board of Directors consisting of the
then current members of the Board of Directors and at least two other persons
who will not be officers or directors of CONSOL or Rheinbraun.
The Board of Directors will appoint members to a compensation committee of the
Board of Directors (the "Compensation Committee") and an audit committee of the
Board of Directors (the "Audit Committee"). Both such committees will be
comprised solely of independent directors. The Compensation Committee will
establish remuneration levels for certain officers of CONSOL and perform such
functions as may be delegated to it under certain benefit and executive
compensation programs. The Audit Committee will select and engage the
independent public accountants to audit CONSOL's annual financial statements.
The Audit Committee will also review and approve the planned scope of the annual
audit. The Board of Directors may from time to time establish certain other
committees to facilitate the management of CONSOL.
DIRECTOR COMPENSATION
Each of Mr. Brown, Dr. Henning and Dr. Zimmermann received a retainer fee of
$18,000 for serving as members of the Board of Directors for 1997. It is
anticipated that directors who are not employees or officers of CONSOL or
Rheinbraun or of any subsidiary of either of them will be paid an annual Board
membership fee, an attendance fee for each meeting of the Board of Directors,
and an annual fee for service on any committee of the Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table discloses the compensation awarded to or earned by Mr.
Brown, William G. Karis, the former President and Chief Executive Officer of
CONSOL, and the other four most highly compensated executive officers of CONSOL
at December 31, 1997 whose annual salary plus other forms of compensation
exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
ALL OTHER
NAME AND OTHER ANNUAL LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ($) PAYMENTS SATION ($)
------------------ ---- ------ ----- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
B.R. Brown(1) 1997 0 425,000 0 0 558,000(2)
Chairman of the Board
William G. Karis(3) 1997 200,000 220,000 0 255,000 3,530,387(4)
President and
Chief Executive
C. Wesley McDonald 1997 277,650 160,000 0 300,000 9,600(5)
Executive Vice
President
Ronald J. FlorJancic 1997 193,650 185,000 75,000(6) 0 9,600(5)
Executive Vice
President
Ronald E. Smith 1997 205,650 120,000 0 202,500 9,600(5)
Executive Vice
President
Benjamin M. Statler 1997 181,860 120,000 0 150,000 9,600(5)
Senior Vice President
</TABLE>
_____________________
(1) Mr. Brown performed the functions of CONSOL's Chief Executive Officer during
the interim period between the resignation of Mr. Karis and the election of Mr.
Harvey as CONSOL's President and Chief Executive Officer.
(2) Includes $540,000 paid to Mr. Brown under a consulting agreement among Mr.
Brown and CONSOL and CONSOL Inc. and a $18,000 retainer fee for serving as a
Director of CONSOL. See "--Employment Agreements-- Consulting Arrangement With
Mr. Brown."
(3) Mr. Karis resigned as the President, Chief Executive Officer and a Director
of CONSOL on August 31, 1997.
(4) Includes $3,510,587 distributed to Mr. Karis in connection with his
resignation from CONSOL, a $12,000 retainer fee for serving as a director and
$7,800 in matching contributions to CONSOL's employee investment plan.
(5) Represents matching contributions to CONSOL's employee investment plan.
(6) Represents award payable in 1997 under CONSOL's Long-Term Incentive Plan but
deferred at the election of Mr. FlorJancic. See "--Long-Term Incentive Plan."
Long-Term Incentive Plan
Certain officers of CONSOL participate in a long-term incentive plan (the "Long-
Term Incentive Plan") which is administered by CONSOL's Vice President--Human
Resources at the direction of the Chairman of the Board
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<PAGE>
of Directors. The Board of Directors may adjust award targets to reflect certain
extraordinary events, including strategic restructuring and new investments for
capital expansion. The Board of Directors has the discretion to terminate,
suspend, withdraw or modify the Long-Term Incentive Plan in whole or in part.
Awards under the Long-Term Incentive Plan are based on CONSOL's results of
operations. Performance targets are tied to after tax operating income and
operating cash flow. Awards under the Long-Term Incentive Plan are granted in
units, each of which has a nominal value of $100. The awards have a three-year
term and are payable in the third year. The target for the first year is the
profit objective of CONSOL for that year. Years two and three are based upon
targets stated in CONSOL's long-term business plan in place prior to the
beginning of the award cycle. Awards may vary from 0% to 150% depending upon the
targeted results of operations for CONSOL. For example, if the results of
operations average 100% of the target for the relevant period, each unit would
have a value of $100.00. If the results of operations average less than 100% of
the target for the relevant period, each unit would have a value of $0.00. If
the results of operations average 150% or more of the target for the relevant
period, each unit would have a value of $150.00. A recipient may elect to
receive payment when an award is earned or he may defer the payment of such
award. Deferred awards accrue compounded interest at an annual rate equal to
Moody's AAA 10-year municipal bond rate.
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<PAGE>
The following table provides certain information with respect to awards granted
to the Named Executive Officers during the year ended December 31, 1997.
LONG-TERM INCENTIVE PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
PRICE-BASED PLANS
-------------------------------------------
PERFORMANCE
NUMBER OF PERIOD UNTIL THRESHOLD TARGET MAXIMUM
NAME UNITS PAYOUT (YEARS) ($) ($) ($)
- ---- --------- -------------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
B.R. Brown 7,100 3 0 710,000 1,065,000
William G. Karis 0 -- -- -- --
C. Wesley McDonald 1,700 3 0 170,000 255,000
Ronald J. FlorJancic 2,000 3 0 200,000 300,000
Ronald E. Smith 1,400 3 0 140,000 210,000
Benjamin M. Statler 1,200 3 0 120,000 180,000
</TABLE>
1998 Equity Incentive Plan
General
CONSOL has adopted the 1998 Equity Incentive Plan (the "Plan"). A maximum of
shares of Common Stock has been reserved for issuance under the Plan, generally
subject to equitable adjustment upon the occurrence of any stock dividend, stock
split, subdivision or consolidation.
Pursuant to the Plan, CONSOL may grant Stock Options (including "incentive stock
options" and "nonqualified stock options"), stock appreciation rights ("SARs")
(either in connection with stock options granted under the Plan or independently
of options), performance awards and other stock- or cash-based awards
("Awards"). It is the intent of CONSOL that certain Awards under the Plan will
satisfy applicable requirements of section 162(m) ("Section 162(m)") of the
Code.
The Plan will be administered by the Compensation Committee. The Compensation
Committee has full authority, subject to the provisions of the Plan and except
with respect to nonemployee directors, to, among other things, determine the
persons to whom Awards will be granted, determine the terms and conditions
(including any applicable performance criteria) of such Awards, and prescribe,
amend and rescind rules and regulations relating to the Plan.
Grants of Awards may be made under the Plan to selected employees of CONSOL and
its present or future subsidiaries, in the discretion of the Compensation
Committee.
Stock Options and Appreciation Rights
Stock options may be either "incentive stock options," as such term is defined
in Section 422 of the Code, or nonqualified stock options. The exercise price
per share of Class A Common Stock subject to an option may not be less than the
fair market value of a share of Common Stock on the date of grant.
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<PAGE>
Stock Options and SARs will be exercisable at such times and upon such
conditions as the Compensation Committee may determine, as reflected in the
applicable Award agreement. The exercise period shall be determined by the
Compensation Committee except that, in the case of an incentive stock option,
such exercise period may not exceed ten years from the date of grant of such
incentive stock option.
The Compensation Committee will set forth in the applicable Award agreement the
treatment of stock options and SARs in the event that the employment of a
participant is terminated.
Stock Awards
A Stock Award is an Award of the right to receive cash or Common Stock at a
future date that may be subject to such restrictions on transferability and
other restrictions as the Compensation Committee may impose at the date of grant
or thereafter, which restrictions may lapse separately or in combination at such
times, under such circumstances (including without limitation a specified period
of employment or the satisfaction of preestablished performance goals), in such
installments, or otherwise, as the Compensation Committee may determine. All
other terms and conditions of Stock Awards will be set forth in the applicable
Award agreement.
Performance Awards
The Performance Award component of the Plan provides for the payment of Awards
to participants if, and only to the extent that, performance goals established
by the Compensation Committee are met with respect to the appropriate applicable
performance period. The Compensation Committee will establish performance goals
expressed in terms of the achievement of one or more performance measures.
Certain Limitations
No participant in the Plan may be granted, in respect of any calendar year,
Stock Options or SARs representing an aggregate of more than shares of Common
Stock, Stock Awards covering or relating to more than shares of Common Stock or
Performance Awards having an aggregate value determined on the date of grant in
excess of $ .
Change in Control
Unless otherwise provided in an Award agreement, in the event of a "Change in
Control" of CONSOL (as defined in the Plan), each unvested equity Award
outstanding under the Plan will be vested.
Amendment and Termination
The Plan may, at any time and from time to time, be altered, amended, suspended,
or terminated by the Board of Directors, in whole or in part, except that (i) no
amendment or alteration that would adversely affect the rights of any
participant under any Award previously granted to such participant shall be made
without the consent of such participant and (ii) no amendment or alteration
shall be effective prior to its approval by the stockholders of CONSOL to the
extent such approval is required by applicable law.
Transferability
Except as otherwise determined by the Compensation Committee, awards granted
under the Plan may not be transferred other than by will or by the laws of
descent and distribution.
EMPLOYMENT AGREEMENTS
Employment Agreement With Mr. Harvey. J. Brett Harvey entered into an employment
agreement with CONSOL and CONSOL Inc. on December 11, 1997 pursuant to which Mr.
Harvey assumed his current positions as the President and Chief Executive
Officer of both companies on January 1, 1998. The employment agreement
terminates on December 31, 2002 unless terminated earlier pursuant to the terms
and conditions of
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<PAGE>
such agreement. Mr. Harvey's employment will terminate (i) upon his death, or
sustaining a disability for which he would be eligible to receive disability
benefits under the CONSOL Inc.'s employee retirement plan, (ii) effective at any
time, upon 90 days advance written notice given by either any party, or (iii)
for cause as defined therein and as determined by
the Board of Directors of CONSOL Inc. at any time by written notification
specifying the reason for such termination. Upon termination (other than
termination by CONSOL Inc. for cause) or if Mr. Harvey resigns, Mr. Harvey is
entitled to receive severance payments in an amount equal to any incentive
compensation received in the preceding 12 months and he is entitled to receive
his then current base salary until the end of the term of the employment
agreement. In the event of termination for cause, Mr. Harvey's compensation and
benefits terminate at the end of the month in which the notice of termination
was given.
As compensation for his services during the term of the employment agreement,
Mr. Harvey (i) will receive a yearly base salary of $390,000, (ii) is entitled
to participate in all incentive compensation programs for senior management of
CONSOL Inc., including short-term and long-term incentive pay programs and (iii)
is eligible for all employee benefit plans and policies applicable to CONSOL
Inc. employees. For employee retirement plans purposes, Mr. Harvey will receive
11 years of additional service credit representing his years of employment at
PacifiCorp, deducting from any such benefits amounts payable to him pursuant to
any retirement or similar plans of PacifiCorp.
The employment agreement binds Mr. Harvey to certain confidentiality and non-
competition obligations. Mr. Harvey must keep the non-public information of
CONSOL confidential during the term of the employment agreement and for a period
of 12 months after his termination. Mr. Harvey has agreed not to compete with
the business of CONSOL for so long as he receives severance benefits under the
terms of the employment agreement.
Consulting Arrangement With Mr. Brown. Mr. Brown entered into a consulting
agreement with CONSOL Inc. on December 9, 1996 which terminated on June 30,
1998. CONSOL Inc. and Mr. Brown have agreed to continue this consulting
arrangement on a month-to-month basis. Mr. Brown will receive a base consulting
fee of $540,000 per year which will be paid in equal monthly installments. The
base fee may be increased by the Board of Directors of CONSOL Inc.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
See Note 3 of Notes to the Consolidated Financial Statements for information
with respect to certain transactions between CONSOL and affiliates of CONSOL.
In November 1998, CONSOL purchased shares of Common Stock from DEC for a
purchase price of $500 million (the "DEC Purchase"). The DEC Purchase was
completed pursuant to an agreement entered into in September 1998 (the "Share
Purchase Agreement") among DuPont, DEC, Rheinbraun and CONSOL. After the DEC
Purchase (and before the Offering), Rheinbraun owned 94% and DEC owned 6% of the
outstanding Common Stock. DuPont agreed to indemnify Rheinbraun and CONSOL in
respect of (1) any loss incurred by Rheinbraun to which Rheinbraun succeeds or
incurs as a result of the DEC Purchase, and (2) 47% of any and all losses
incurred by CONSOL and its subsidiaries, subject to certain limitations, arising
or related to the period prior to the closing date of the DEC Purchase with
respect to (A) environmental matters (including the failure to obtain any
permits or to comply with laws governing the generation, handling, storage,
transportation, disposal or remediation of hazardous material), (B) litigation,
(C) taxes and (D) properties of Conoco Inc. or its mineral divisions ("Conoco
Minerals"). DuPont is obligated to indemnify Rheinbraun and CONSOL only if
losses exceed $50 million with respect to environmental matters and $40 million
with respect to litigation. In addition, except for indemnification as to Conoco
Minerals, DuPont is only obligated to indemnify CONSOL and Rheinbraun at such
time that all losses exceed $20 million (calculated on a pre-tax basis) and, at
which time, DuPont's indemnification will include the first $20 million of such
losses. In no event will DuPont's indemnification obligations in the aggregate
exceed $500 million.
Prior to the closing of the DEC Purchase, the Company paid a dividend of $60
million, an amount which approximates CONSOL's regular annual dividend based on
1998 results for the period elapsed prior to the payment of the purchase price
of the shares.
In connection with the DEC Purchase, the Shareholders Agreement, dated as of
December 6, 1991, among DuPont, DEC, CONSOL, Rheinbraun and Rheinbraun US Gmbh
("RG") (the "Shareholders Agreement") was amended as of September 14, 1998
("Amendatory Agreement No. 4"). Pursuant to Amendatory Agreement No. 4, DuPont
and DEC agreed not to dispose of any of the remaining shares of Common Stock
held by DEC (including securities issued in exchange for, in lieu of or as a
dividend on such shares of Common Stock) (the "Registrable Shares") during the
180 days after the closing date of the DEC Purchase (the "Waiting Period").
After the Waiting Period, Dupont may cause DEC, and DEC will have the right, to
dispose of the Registrable Shares (1) pursuant to registration rights previously
granted to DEC pursuant to the Amendatory Agreement No. 3 to the Shareholders
Agreement (the "Registration Rights Agreement"), (2) if CONSOL has not completed
a registered underwritten initial public offering of common stock (an "IPO")
during the Waiting Period, in which case DEC will be entitled to, and DuPont may
cause DEC to, piggyback the Registrable Securities with CONSOL's later IPO upon
reasonable notice to CONSOL and upon customary terms for such offerings or (3)
in an private sale or sales conforming to the Securities Act. DEC may not, and
DuPont will cause DEC not to, effect any public sale of Registrable Securities
during the seven days prior to and the 90 days after any underwritten registered
financing by CONSOL has become effective or such longer period (not to exceed
180 days) as the underwriter may require consistent with customary practice.
Pursuant to the Registration Rights Agreement, DuPont will have two demand
registration rights at DuPont's expense prior to December 31, 2001.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth at December 1, 1998 certain information with
respect to beneficial ownership of the Common Stock before and after the
completion of the Offering and the beneficial ownership of shares of Common
Shares of RWE, A.G. (the "RWE Common Shares"). Except as indicated in the
footnotes below, the persons in this table have sole voting and investment power
with respect to all shares beneficially owned by them.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
------------------------------------------------------------------------------
BEFORE THE AFTER THE
OFFERING OFFERING
---------------------------------------- ------------------------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER PERCENT
- ---------------------------------- ------------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
RWE, A.G............................ (2) 94%
Opernplatz 1
45128 Essen, Germany
E.I. du Pont de Nemours and Company. (3) 6%
1007 Market Street
Wilmington, Delaware 19898
B.R. Brown.......................... -- -- -- --
J. Brett Harvey..................... -- -- -- --
C. Wesley McDonald.................. -- -- -- --
Ronald E. Smith..................... -- -- -- --
Benjamin M. Statler................. -- -- -- --
Ronald J. FlorJancic................ -- -- -- --
Dr. Dieter Henning.................. -- -- -- --
Berthold Bonekamp................... -- -- -- --
Bernd Breloer....................... -- -- -- --
Dr. Rolf Zimmerman.................. -- -- -- --
All directors and executive
officers as a group ( persons)...... -- -- -- --
</TABLE>
_____________________
(1)The address of the directors and executive officers of CONSOL is c/o CONSOL
Inc., 1800 Washington Road, Pittsburgh, Pennsylvania 15241.
(2)Represents shares held of record by Rheinbraun A.G. and Rheinbraun U.S. GmbH,
direct and indirect subsidiaries of RWE, A.G.
(3)Represents shares held of record by DEC, a wholly owned subsidiary of DuPont.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, CONSOL will have shares of Common Stock
issued and outstanding ( shares, assuming full exercise of the Underwriters'
over-allotment option). Except as described below, all of the shares of Common
Stock to be sold in the Offering will be freely transferable without restriction
or further registration under the Securities Act. Rheinbraun and DuPont, which
will own % and %, respectively, of the Common Stock upon completion of the
Offering (assuming no exercise of the Underwriters' over-allotment option),
CONSOL and certain of CONSOL's directors and senior executives have agreed not
to sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of J.P.
Morgan Securities Inc. There can be no assurance concerning the period of time
during which such parties will maintain their ownership of Common Stock
following completion of the Offering. See "Risk Factors--Shares Eligible for
Future Sale" and "Underwriting."
Any shares of Common Stock held by a CONSOL "affiliate" (as that term is defined
in Rule 144 under the Securities Act ("Rule 144")), will be subject to the
resale limitations of Rule 144. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
such issuer. Upon completion of the Offering, Rheinbraun will be an affiliate of
CONSOL. The Common Stock owned by Rheinbraun may be sold only pursuant to an
effective registration statement under the Securities Act or in accordance with
Rule 144 or another exemption from registration. Except as noted above,
Rheinbraun is not subject to any contractual obligation to retain its
controlling interest in CONSOL. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are required to be aggregated) who has
been deemed to have beneficially owned shares of an issuer for at least one
year, including an affiliate, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the total
outstanding number of shares of such class (approximately shares after the
Offering, assuming no exercise of the Underwriters' over-allotment option) or
the average weekly trading volume in composite trading in all national
securities exchanges during the four calendar weeks preceding the filing of the
required notice of such sale. A person (or persons whose shares are required to
be aggregated) who is not deemed an affiliate of an issuer any time during three
months prior to the sale and who has beneficially owned shares for at least two
years is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. Affiliates continue to be subject to such
limitations.
Prior to the Offering, there has been no market for the Common Stock, and no
prediction can be made about the effect, if any, that future sales of shares of
Common Stock or the availability of such shares for sale would have on the
market price prevailing from time to time. Nevertheless, sales by CONSOL,
Rheinbraun or DuPont of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock offered in the Offering. DuPont is
entitled to require CONSOL to register its shares of Common Stock for sale under
the Securities Act after expiration of the 180-day period noted above. See "Risk
Factors--Shares Eligible for Future Sale."
CONSOL is unable to estimate the number of shares of Common Stock that may be
sold pursuant to the foregoing methods of sale because such sales will depend on
the market price for the Common Stock, the circumstances of sellers and other
factors. The sale or availability for sale of a substantial number of shares of
Common Stock in the public market subsequent to the Offering could adversely
affect the prevailing market price of the Common Stock and could impair CONSOL's
ability to raise additional capital by the sale of equity securities.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
CONSOL's authorized capital stock consists of shares of Common Stock, $1.00 par
value per share. After giving effect to the Offering, the issued and outstanding
capital stock of CONSOL will consist of shares of Common Stock (or if the
Underwriters' over-allotment option is exercised in full).
COMMON STOCK
As of December 15, 1998, there were shares of Common Stock outstanding, which
were held of record by three stockholders. The holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders. Cumulative voting of shares of Common Stock is prohibited, which
means that the holders of a majority of shares voting for the election of
directors can elect all members of the Board of Directors. Except as otherwise
required by applicable law, a majority vote is sufficient for any act of
stockholders. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution, or winding up of CONSOL, the holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities. The
holders of Common Stock have no preemptive or conversion rights or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are fully paid and nonassessable, and all of the shares of Common Stock offered
hereby, when issued, will be fully paid and nonassessable. DuPont has the right
to require CONSOL to effect the registration of its shares under the Securities
Act in certain circumstances.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
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<PAGE>
CERTAIN TAX CONSIDERATIONS
The following is a general discussion of certain United States federal tax
considerations applicable to the ownership and disposition of Common Stock by
"Non-U.S. Holders." In general, a "Non-U.S. Holder" is a beneficial owner of
Common Stock other than: (1) a citizen or resident of the United States, (2) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state, (3) an estate or partnership, the
income of which is includible in gross income for United States federal income
tax purposes regardless of its source, or (4) a trust the administration of
which is subject to the primary supervision of a court within the United States
and for which one or more U.S. fiduciaries have the authority to control all
substantial decisions. An individual may, subject to certain exceptions, be
deemed a resident of the United States by virtue of being present in the United
States for at least 31 days in the current calendar year and for an aggregate of
at least 183 days during the prior three year period ending in the current
calendar year (counting for such purposes all days present in the current
calendar year, one-third of the days present in the immediately preceding
calendar year, and one-sixth of the days present in the second preceding
calendar year). The term "Non-U.S. Holder" does not include individuals who were
United States citizens within the ten-year period immediately preceding the date
of this Prospectus and whose loss of United States citizenship had as one of its
principal purposes the avoidance of United States taxes.
The following summary deals only with Common Stock held as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), and does not deal with special situations, such as those
of dealers in securities or currencies, financial institutions, life insurance
companies, tax exempt organizations, or persons holding Common Stock as a part
of a hedging or conversion transaction or a straddle. Furthermore, the
discussion below is based upon the provisions of the Code and Treasury
regulations, administrative and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified with possible
retroactive effect so as to result in federal income and estate tax consequences
different from those discussed below. PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NONUNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING OF
SHARES OF COMMON STOCK.
DIVIDENDS
If dividends are paid on the Common Stock, these payments will be treated as
dividends for United States federal income tax purposes to the extent of
CONSOL's current or accumulated earnings and profits as determined under U.S.
income tax principles. The portion of a payment that exceeds such earnings and
profits will be treated as a return of capital to the extent of each Non-U.S.
Holder's tax basis in the Common Stock. The portion of a payment that exceeds
such earnings and profits and tax basis will be treated as a gain from the sale
or other disposition of the Common Stock to the extent of such excess, with the
tax consequences described below under "--Sale of Common Stock."
In general, any dividends (i.e., distributions to the extent of current or
accumulated earnings and profits for United States federal income tax purposes)
paid to a Non-U.S. Holder of Common Stock will be subject to United States
withholding tax at a 30% rate (or a lower rate prescribed by an applicable tax
treaty) unless the dividends are either (1) effectively connected with a trade
or business carried on by the Non-U.S. Holder within the United States or (2) if
certain income tax treaties apply, attributable to a permanent establishment in
the United States maintained by the Non-U.S. Holder. For purposes of determining
whether tax is to be withheld at a 30% rate or at a lower rate as prescribed by
an applicable tax treaty, CONSOL will presume, consistent with currently
effective Treasury Regulations, that dividends paid to an address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted. However, under United States Treasury regulations
applicable to dividends paid after December 31, 1999 (the "Final Regulations"),
a Non-U.S. Holder of Common Stock would be required to satisfy applicable
certification and other requirements in order to claim the benefits of an
applicable tax treaty. Dividends effectively connected with a United States
trade or business or attributable to a United States permanent establishment
generally will not be subject to
86
<PAGE>
withholding tax (if the Non-U.S. Holder files certain forms, including IRS Form
4224, or any successor form, with the payor of the dividend) and generally will
be subject to United States federal tax on a net income basis, in the same
manner as if the Non-U.S. Holder were a resident of the United States. In the
case of a Non-U.S. Holder that is a corporation, such dividend income so
connected or attributable may also be subject to the branch profits tax (which
is generally imposed on a foreign corporation on the repatriation from the
United States of its effectively connected earnings and profits subject to
certain adjustments) at a 30% rate (or a lower rate prescribed by an applicable
income tax treaty).
A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain recognized upon the disposition of Common Stock unless:
(1) the gain is effectively connected with a trade or business carried on by the
Non-U.S. Holder within the United States or, alternatively, if certain tax
treaties apply, attributable to a permanent establishment in the United States
maintained by the Non-U.S. Holder (and in either such case, the branch profits
tax may also apply if the Non-U.S. Holder is a corporation), (2) in the case of
a Non-U.S. Holder who is a nonresident alien individual and holds Common Stock
as a capital asset, such individual is present in the United States for 183 days
or more in the taxable year of disposition, and either (a) such individual has a
"tax home" (as defined for United States federal income tax purposes) in the
United States or (b) the gain is attributable to an office or other fixed place
of business maintained by such individual in the United States, (3) the Non-U.S.
Holder is subject to tax pursuant to the provisions of the United States tax law
applicable to certain United States expatriates or (4) subject to the exception
discussed below, CONSOL is or has been a United States real property holding
corporation (a "USRPHC") for United States federal income tax purposes (which
CONSOL believes that it is) at any time within the shorter of the five-year
period preceding such disposition or such Non-U.S. Holder's holding period. If
CONSOL is or becomes a USRPHC, gains realized upon a disposition of Common Stock
by a Non-U.S. Holder that did not directly or indirectly own more than 5% of the
Common Stock during the shorter of the periods described above generally would
not be subject to United States federal income tax so long as the Common Stock
was "regularly traded" on an established securities market (within the meaning
of Section 897(c)(3) of the Code and the Treasury Regulations promulgated
thereunder) at the time of the disposition.
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a citizen or
resident (as defined for United States federal estate tax purposes) of the
United States at the time of death will be includible in the individual's gross
estate for United States federal estate tax purposes unless an applicable estate
tax treaty provides otherwise, and therefore may be subject to United States
federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
CONSOL must report annually to the IRS the amount of dividends paid to, and the
tax withheld with respect to, each Non-U.S. Holder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of this information also may be made
available under the provisions of a specific treaty or agreement with the tax
authorities in the country in which the Non-U.S. Holder resides or is
established.
United States backup withholding (which generally is imposed at the rate of 31%
on certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) and information
reporting (other than reporting requirements described in the preceding
paragraph) generally will not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the United States.
87
<PAGE>
The payment of proceeds from the disposition of Common Stock to or through a
United States office of a U.S. broker will be subject to information reporting
and United States backup withholding unless the owner, under penalties of
perjury, certifies among other things, its status as a Non-U.S. Holder, or
otherwise establishes an exemption. The payment of proceeds from the disposition
of Common Stock to or through a non-U.S. office of a U.S. or non-U.S. broker
generally will not be subject to backup withholding and information reporting,
except as noted below. In the case of proceeds from the disposition of Common
Stock paid to or through a non-United States office of a U.S. broker, or a non-
U.S. broker that is: (1) a United States person, (2) a "controlled foreign
corporation" for United States federal income tax purposes or (3) a foreign
person 50% or more of whose gross income for a specified three-year period is
effectively connected with a United States trade or business, information
reporting (but not backup withholding) will apply unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder (and the
broker has no actual knowledge to the contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder can be refunded or
credited against the Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
88
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the
Underwriters named below, for whom J.P. Morgan Securities Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase, and CONSOL has agreed to
sell to them, the respective number of shares of Common Stock set forth opposite
their names below. Under the terms and conditions of the Underwriting Agreement,
the Underwriters are obligated to take and pay for all such shares of Common
Stock, if any are taken. Under certain circumstances, the commitments of
nondefaulting Underwriters may be increased as set forth in the Underwriting
Agreement.
<TABLE>
<CAPTION>
------------------
UNDERWRITERS NUMBER OF SHARES
------------------
<S> <C>
J.P. Morgan Securities Inc.............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. -------------
Total............................................................... =============
</TABLE>
The shares of the Common Stock are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters. The
Underwriters propose initially to offer the Common Stock directly to the public
at the price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial public offering of
the Common Stock, the public offering price and such concession may be changed.
Pursuant to the Underwriting Agreement, CONSOL has granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to an additional shares of Common Stock on the same terms and conditions as set
forth on the cover page hereof. The Underwriters may exercise such option to
purchase solely for the purpose of covering over-allotments, if any, made in
connection with the sale of the Common Stock offered hereby. To the extent such
option is exercised, such Underwriter will have a commitment, subject to certain
conditions, to purchase approximately the same percentage of such additional
Common Stock as the number set forth next to each Underwriter's name in the
preceding tables bears to the total number of shares of Common Stock offered
hereby.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by CONSOL. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase up to an additional shares.
<TABLE>
<CAPTION>
PAID BY CONSOL
--------------
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
In connection with this Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may over-allot in connection with this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase,
89
<PAGE>
shares of Common Stock in the open market to cover syndicate short positions or
to stabilize the price of the Common Stock. Finally, the underwriting syndicate
may reclaim selling concessions allowed for distributing the Common Stock in
this Offering if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
These transactions may be effected on the NYSE, in the over-the-counter market
or otherwise.
The Company estimates that the total expenses of this Offering, excluding
underwriting discounts and commissions, will be $ .
CONSOL has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act.
CONSOL, Rheinbraun, DuPont and certain officers and directors of CONSOL have
agreed that during the period beginning from the date of this Prospectus and
continuing to and including the date of 180 days after the date of this
Prospectus they will not (1) offer, sell, contract to sell or otherwise dispose
the Common Stock or any securities of CONSOL which are substantially similar to
the Common Stock, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to receive,
Common Stock or any such substantially similar securities or (2) enter into any
swap, option, future, forward or other agreement that transfers, in whole or in
part, the economic consequence of ownership of Common Stock or any securities
substantially similar to the Common Stock (other than (x) pursuant to employee
stock option and restricted stock plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the date
of this Prospectus and (y) the issuance of Common Stock in connection with the
transactions described in this Prospectus), without the prior written consent of
J.P. Morgan Securities Inc.
The Underwriters have reserved for sale, at the initial public offering price,
shares of the Common Stock for certain directors, officers, retirees and
employees of CONSOL (in the United States) and, subject to local laws,
internationally, who have expressed an interest in purchasing such shares of
Common Stock in the Offering. Such persons are expected to purchase, in the
aggregate, not more than % of the Common Stock offered in the Offering. The
number of shares available for sale to the general public in the Offering will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered to the general public on the
same basis as other shares offered hereby.
Application will be made to list the Common Stock on the New York Stock Exchange
under the trading symbol "CNX."
Prior to the Offering, there has been no public market for the Common Stock. The
initial public offering price for the shares of Common Stock offered hereby is
expected to be determined by agreement between CONSOL and the Underwriters.
Among the factors considered in making such determination are expected to be the
history of and the prospects for the coal industry, an assessment of CONSOL's
management, the present operations of CONSOL, the historical results of
operations of CONSOL and the trend of its revenues and earnings, the prospects
for future earnings of CONSOL, the general condition of the securities markets
at the time of the Offering and the prices of similar securities of generally
comparable companies. There can be no assurance that an active trading market
will develop for the Common Stock or that the Common Stock will trade in the
public market at or above the initial public offering price.
From time to time in the ordinary course of their respective businesses, certain
of the Underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with CONSOL and its
affiliates.
90
<PAGE>
LEGAL MATTERS
The validity of the Common Stock will be passed upon for CONSOL by Thelen Reid &
Priest LLP, New York, New York. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Davis Polk & Wardwell, New
York, New York.
EXPERTS
The Consolidated Financial Statements of CONSOL as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997 included
in this Prospectus have been audited by Ernst & Young LLP, independent auditors,
as stated in their report appearing herein, and are included herein in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
91
<PAGE>
GLOSSARY
Anthracite. The highest rank of economically usable coal with moisture content
less than 15% by weight and heating value as high as 15,000 Btus per pound. It
is jet black with a high luster. It is mined primarily in Pennsylvania.
Ash. Impurities consisting of iron, alumina and other incombustible matter that
are contained in coal. Since ash increases the weight of coal, it adds to the
cost of handling and can affect the burning characteristics of coal.
Bituminous Coal. The most common type of coal with moisture content less than
20% by weight and heating value of 10,500 to 14,000 Btus per pound. It is dense
and black and often has well-defined bands of bright and dull material.
British Thermal Unit ("Btu"). A measure of the energy required to raise the
temperature of one pound of water one degree Fahrenheit.
Coal Seam. Coal deposits occur in layers. Each such layer is called a "seam."
Continuous Mining. A form of underground room-and pillar mining, which involves
the excavation of a series of "rooms" into the coal seam leaving "pillars" or
columns of coal to help support the mine roof. A specialized cutting machine,
the continuous miner, mechanizes the extraction procedure. Continuous miners
tear the coal from the seam and load it onto conveyors or into shuttle cars in a
continuous operation.
Longwall Mining. A form of underground mining in which two sets of parallel
entries, which can be up to 1,000 feet apart, are joined together at their far
ends by a crosscut, called the longwall. The longwall machine consists of a
rotating drum that moves back and forth across the longwall. The loosened coal
falls onto a conveyor for removal from the mine.
Metallurgical Coal. The various grades of coal suitable for carbonization to
make coke for steel manufacture. Also known as "met" coal, it possesses four
important qualities: volatility, which affects coke yield; the level of
impurities, which affects coke quality; composition, which affects coke
strength; and basic characteristics, which affect coke oven safety. Met coal has
a particularly high Btu, but low ash content.
Nitrogen Oxide (NO2). A gas formed in high temperature environments such as coal
combustion. It is reported to contribute to ground level ozone and visibility
degradation.
Preparation Plant. Usually located on a mine site, although one plant may serve
several mines. A preparation plant is a facility for crushing, sizing and
washing coal to prepare it for use by a particular customer. The washing process
has the added benefit of removing some of the coal's sulfur content.
Probable Reserves. Reserves for which quantity and/or quality are computed from
information similar to that used for proved reserves, but the sites for
inspection, sampling, and measurement are farther apart or are otherwise less
adequately spaced. The degree of assurance, although lower than that for proved
reserves, is high enough to assume continuity between points of observation.
Proved Reserves. Reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established.
Recoverable Reserves. The amount of coal that can be recovered from the reserve
base. The average recovery factor for underground mines and surface mines is
about 57% and 80%, respectively. Using these percentages, there are about 300
billion tons of recoverable reserves in the United States, enough to last more
than 300 years at current consumption levels.
92
<PAGE>
Scrubber (flue gas desulfurization unit). Any of several forms of
chemical/physical devices which operate to neutralize sulfur compounds formed
during coal combustion. These devices combine the sulfur in gaseous emissions
with other chemicals to form inert compounds, such as gypsum, which must then be
removed for disposal.
Steam Coal. Coal used by power plants and industrial steam boilers to produce
electricity or process steam. It generally is lower in Btu heat content and
higher in volatile matter than metallurgical coal.
Subbituminous Coal. Dull, black coal that ranks between lignite and bituminous
coal. Its moisture content is between 20% and 30% by weight, and its heat
content ranges from 7,800 to 9,500 Btus per pound of coal.
Sulfur. One of the elements present in varying quantities in coal. Sulfur
dioxide (S02) is produced as a gaseous by-product of coal combustion.
Tons. A "short" or net ton is equal to 2,000 pounds. A "long" or British ton is
2,240 pounds; a "metric" ton is approximately 2,205 pounds. The short ton is the
unit of measure referred to in this document.
93
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1997.... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997............................ F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1995, 1996 and 1997........ F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997...................... F-7
Notes to Consolidated Financial Statements................... F-8
Unaudited Consolidated Balance Sheets at December 31, 1997
and September 30, 1998...................................... F-29
Unaudited Consolidated Statements of Income for Nine Months
Ended September 30, 1997 and 1998........................... F-31
Unaudited Consolidated Statement of Stockholders'
Equity for the Nine Months Ended September 30, 1998......... F-32
Unaudited Consolidated Statements of Cash Flows for the
Nine Months September 30, 1997 and 1998..................... F-33
Notes to Unaudited Consolidated Financial Statements......... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CONSOL Energy Inc.
We have audited the consolidated balance sheets of CONSOL Energy Inc. and
subsidiaries (CONSOL) as of December 31, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of CONSOL's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CONSOL
at December 31, 1996 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
February 15, 1998
F-2
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------
AT DECEMBER 31,
-----------------------------------------
1996 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents......................................... $ 39,986 $ 18,788
Marketable Securities............................................. 354,273 114,829
Accounts and Notes Receivable
Trade.......................................................... 269,659 252,901
Related Parties (Note 3)....................................... 5,403 6,305
Other Receivables.............................................. 26,721 23,392
Inventories (Note 8).............................................. 132,677 140,724
Deferred Income Taxes (Note 7).................................... 80,939 94,027
Prepaid Expenses.................................................. 16,574 19,273
----------------- ----------------
Total Current Assets........................................... 926,232 670,239
Property, Plant and Equipment (Note 9)
Property, Plant and Equipment..................................... 4,351,574 4,506,797
Less -- Accumulated Depreciation, Depletion and Amortization...... 1,872,996 2,067,707
----------------- ----------------
Total Property, Plant and Equipment - Net...................... 2,478,578 2,439,090
Other Assets
Deferred Income Taxes (Note 7).................................... 198,334 201,270
Advance Mining Royalties.......................................... 143,139 131,079
Other............................................................. 111,225 106,333
----------------- ----------------
Total Other Assets............................................. 452,698 438,682
Total Assets................................................... $3,857,508 $3,548,011
================= ================
</TABLE>
F-3
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------
AT DECEMBER 31,
---------------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable................................... $ 189,644 $ 211,059
Short-Term Notes Payable (Note 10)................. 46,378 55,051
Current Portion of Long-Term Debt.................. 54,237 7,639
Accrued Income Taxes............................... 2,770 13,581
Other Accrued Liabilities (Note 13)................ 275,173 305,596
---------------- ---------------
Total Current Liabilities....................... 568,202 592,926
Long-Term Debt (Note 11).............................. 394,933 389,618
Deferred Credits and Other Liabilities
Postretirement Benefits Other Than
Pensions (Note 15).................................... 1,084,617 1,082,061
Pneumoconiosis Benefits (Note 14)..................... 506,421 500,429
Mine Closing.......................................... 227,011 232,767
Workers' Compensation................................. 183,389 177,453
Reclamation........................................... 39,868 24,331
Other................................................. 274,091 245,661
---------------- ---------------
Total Deferred Credits and Other Liabilities.... 2,315,397 2,262,702
Stockholders' Equity
Common Stock, $1 Par Value; 50,000 Class A
Shares and 50,000 Class B Shares Authorized,
Issued and Outstanding............................. 100 100
Capital in Excess of Par Value..................... 802,904 802,904
Retained Earnings Deficit.......................... (224,028) (500,239)
---------------- ---------------
Total Stockholders' Equity...................... 578,976 302,765
---------------- ---------------
Total Liabilities and Stockholders' Equity...... $3,857,508 $3,548,011
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Sales (Note 3)................................................ $2,269,211 $2,336,014 $2,285,197
Other Income (Note 4)......................................... 45,024 60,940 64,441
---------- ---------- ----------
Total Revenue.............................................. 2,314,235 2,396,954 2,349,638
Costs of Goods Sold and
Other Operating Charges..................................... 1,600,271 1,687,836 1,592,489
Selling, General and Administrative Expense................... 53,537 53,354 55,353
Depreciation, Depletion and Amortization...................... 253,113 235,159 233,304
Interest Expense (Note 5)..................................... 53,915 44,510 45,876
Taxes Other Than Income (Note 6).............................. 200,605 187,396 188,940
---------- ---------- ----------
Total Costs................................................ 2,161,441 2,208,255 2,115,962
---------- ---------- ----------
Earnings Before Income Taxes.................................. 152,794 188,699 233,676
Income Taxes (Note 7)......................................... 22,744 35,970 49,887
---------- ---------- ----------
Net Income................................................. $ 130,050 $ 152,729 $ 183,789
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------
CAPITAL IN RETAINED TOTAL
COMMON EXCESS OF PAR EARNINGS STOCKHOLDERS'
STOCK VALUE DEFICIT EQUITY
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1994.............. $ 100 $802,904 $(346,807) $ 456,197
Net Income............................. -- -- 130,050 130,050
Dividends.............................. -- -- (80,000) (80,000)
----- -------- --------- ---------
Balance December 31, 1995.............. 100 802,904 (296,757) 506,247
Net Income............................. -- -- 152,729 152,729
Dividends.............................. -- -- (80,000) (80,000)
----- -------- --------- ---------
Balance December 31, 1996.............. 100 802,904 (224,028) 578,976
Net Income............................. -- -- 183,789 183,789
Dividends.............................. -- -- (460,000) (460,000)
----- -------- --------- ---------
Balance December 31, 1997.............. $ 100 $802,904 $(500,239) $ 302,765
===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------
Year Ended December 31,
--------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flow from Operations
Net Income..................................................... $ 130,050 $ 152,729 $ 183,789
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation, Depletion and Amortization................. 253,113 235,159 233,304
(Gain) Loss on Sale of Assets............................ 4,770 (13,959) (13,134)
Amortization of Advance Mining Royalties................. 12,994 22,809 14,617
Deferred Income Taxes.................................... (30,069) (23,149) (16,024)
Changes in Operating Assets
Accounts and Notes Receivable............................ 39,322 (7,787) 19,185)
Inventories.............................................. (36,015) 60,884 (8,997)
Prepaid Expenses......................................... (15,928) 7,396 (2,699)
Changes in Other Assets.................................. 14,166 2,931 4,892
Changes in Operating Liabilities
Accounts Payable......................................... 2,115 (24,848) 22,562
Other Operating Liabilities.............................. 16,631 (25,603) 39,222)
Changes in Other Liabilities............................. (94,421) (13,088) (47,415)
Other.......................................................... 1,562 (892) (1,389)
--------- --------- ---------
168,240 219,853 244,124
--------- --------- ---------
Net Cash Provided by Operating Activities...................... 298,290 372,582 427,913
Cash Flow From Investing Activities
Capital Expenditures........................................... (179,022) (169,367) (200,617)
Additions to Advance Mining Royalties.......................... (4,469) (5,444) (6,119)
Proceeds from Sales of Assets (Note 2)......................... 98,432 19,669 19,535
Acquisitions (Note 2).......................................... (52,520) -- --
Changes in Marketable Securities -- Net........................ (23,277) (96,094) 239,444
--------- --------- ---------
Net Cash Provided by (Used in)
Investing Activities........................................... (160,856) (251,236) 52,243
Cash Flow from Financing Activities
Payments on Borrowings......................................... (60,805) (39,254) (41,354)
Dividends Paid................................................. (80,000) (80,000) (460,000)
--------- --------- ---------
Net Cash Used in Financing Activities.......................... (140,805) (119,254) (501,354)
--------- --------- ---------
Net (Decrease) Increase in Cash and
Cash Equivalents............................................... (3,371) 2,092 (21,198)
Cash and Cash Equivalents at Beginning of Period.................. 41,265 37,894 39,986
--------- --------- ---------
Cash and Cash Equivalents at End of Period........................ $ 37,894 $ 39,986 $ 18,788
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies of CONSOL Energy Inc. and
subsidiaries (CONSOL) is presented below. These, together with the other notes
that follow, are an integral part of the consolidated financial statements.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of majority-owned
subsidiaries. Investments in affiliates owned 20 percent to 50 percent are
accounted for under the equity method. Investments in non-corporate joint
ventures, for which CONSOL owns undivided interests in the assets and
liabilities, are consolidated on a pro rata basis. Other securities and
investments are carried at cost. All significant intercompany transactions and
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks as well as all
highly liquid short-term securities with a maturity of three months or less at
the time of purchase. Overdrafts representing outstanding checks in excess of
funds on deposit are classified as accounts payable.
MARKETABLE SECURITIES
Marketable securities consist primarily of financial instruments for which the
yield (dividend or interest) is established periodically through a market
auction mechanism. These investments are readily convertible to cash and are
stated at cost plus accrued interest, which approximates fair value, due to the
liquidity provided by the auction process.
INVENTORIES
Inventories are stated at the lower of cost or market.
Cost is determined by the last-in first-out (LIFO) method for 54% and 46% of
coal inventories at December 31, 1996 and December 31, 1997, respectively. The
cost of coal inventories not on LIFO is determined by the first-in, first-out
(FIFO) method. Coal inventory costs include labor, supplies, equipment costs,
overhead, and other related costs. The cost of merchandise for resale is
determined by the LIFO method. The cost of supplies inventory is determined by
the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost. Expenditures, which extend
the useful lives of existing plant and equipment, are capitalized. Interest
costs applicable to major asset additions are capitalized during the
construction period. Coal exploration costs are expensed as incurred.
Development costs applicable to the opening of new coal mines and certain mine
expansion projects are capitalized. Costs of additional mine facilities
required to maintain production after a mine reaches the production stage,
generally referred to as "receding face costs," are expensed as incurred;
however, the costs of additional airshafts and new portals are capitalized.
F-8
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
Maintenance, repairs and minor renewals are expensed as incurred. When
properties are retired or otherwise disposed, the related cost and accumulated
depreciation are removed from the respective accounts and any profit or loss on
disposition is credited or charged to income.
Depreciation of plant and equipment, including assets leased under capital
leases, is provided on the straight-line method over their estimated useful
lives or lease terms. Depletion of coal lands and amortization of mine
development costs are computed using the units-of-production method over the
estimated recoverable tons.
ADVANCE MINING ROYALTIES
Advance mining royalties are advance payments made to lessors under terms of
mineral lease agreements that are recoupable against future production. These
advance payments are deferred and charged against income as the coal reserves
are mined.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used or disposed of by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. CONSOL adopted this standard during 1996 and has determined
that no impairment losses for 1996 or 1997 need to be recognized.
INCOME TAXES
The provision for income taxes has been determined under Statement of Financial
Accounting Standards No. 109, which requires use of the asset and liability
approach to accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year and
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
where it is more likely than not that a deferred tax benefit will not be
realized.
PNEUMOCONIOSIS BENEFITS
CONSOL is required by federal and state statutes to provide benefits to
employees for awards related to coal workers' pneumoconiosis. CONSOL is self-
insured for these benefits. Provisions are made for estimated benefits based on
annual evaluations prepared by outside actuaries.
MINE CLOSING COSTS
Estimated final mine closing and perpetual care costs are accrued over the
productive life of mines on a units of production basis.
WORKERS' COMPENSATION
CONSOL is primarily self-insured for workers' compensation. Annual provisions
are made for the estimated liability for awarded and pending claims.
F-9
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
RECLAMATION
Generally, CONSOL records a liability for the estimated costs to reclaim land as
the acreage is disturbed during the ongoing surface mining process.
REVENUE RECOGNITION
Coal sales are recorded at contract prices when title passes to the customer.
Generally, for domestic sales, this occurs when coal is loaded onto
transportation vehicles at mine or offsite storage locations. For most export
sales, this occurs when coal is loaded onto marine vessels at terminal
locations. Industrial supplies and equipment sales are recorded when the
products are shipped.
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform to 1997
classifications.
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
On December 1, 1995, CONSOL sold Reid Holding, Inc. and Oakwood Gathering, Inc.
for $77,483. These operations consist mainly of coal bed methane reserve
properties and gas collection facilities. Assets sold in connection with this
sale amounted to $89,196. CONSOL continues to serve as operator for these
companies, and retains certain rights for participation in future gas
operations. The results of these operations were not material to the 1995
consolidated financial statement.
On November 20, 1995, CONSOL acquired the Greene Hill Coal Company from Realty
Company of Pennsylvania, a coal reserve holding subsidiary of Pennsylvania Power
& Light Company for $52,520. The acquisition included approximately 183 million
clean recoverable tons of Pittsburgh seam coal in Greene County, Pennsylvania.
This acquisition has been accounted for under the purchase method and
accordingly, the purchase price has been allocated to the assets acquired, based
on the fair values at the date of the acquisition. CONSOL's financial
statements include the results of the acquisition on a consolidated basis
effective November 20, 1995.
F-10
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES
CONSOL is structured as a corporate joint venture owned 50% by E. I. du Pont de
Nemours and Company (DuPont) and 50% by subsidiaries of RWE A.G. of Germany
(collectively Rheinbraun). CONSOL sells coal to DuPont and Rheinbraun and
industrial supplies to DuPont on a basis reflecting the market value of the
products. Related party sales, which are included in Sales, were as follows:
<TABLE>
<CAPTION>
=============================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
--------------- ---------- ---------
<S> <C> <C> <C>
Coal sales....................................... $037,921 $039,212 $039,406
Industrial supplies and equipment sales.......... 102,645 89,232 98,855
--------------- ---------- ---------
Total Sales - Related Parties.................... $140,566 $128,444 $138,261
=============== ========== =========
</TABLE>
DuPont and CONSOL have entered into an annually renewable service agreement to
provide each other with certain services and functions. Charges are based on
each party's fully allocated cost as distributed to its own organizational units
and are paid currently. Net amounts charged and credited under this agreement
were not significant in 1995, 1996 or 1997.
NOTE 4 -- OTHER INCOME
<TABLE>
<CAPTION>
=============================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
--------------- ---------- ---------
<S> <C> <C> <C>
Interest income.................................. $17,994) $20,501 $22,618
Gain (loss) on disposition of assets............. (4,770) 13,959 13,134
Service income................................... 9,954) 6,277 5,702
Royalty income................................... 8,095) 9,758 13,338
Rental income.................................... 4,778) 6,020 5,165
Other............................................ 8,973) 4,425 4,484
--------------- ---------- ---------
Total Other Income............................... $45,024) $60,940 $64,441
=============== ========== =========
</TABLE>
F-11
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 5 -- INTEREST EXPENSE
<TABLE>
<CAPTION>
=============================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
--------------- ---------- ---------
<S> <C> <C> <C>
Interest on debt................................. $41,895 $34,505 $32,021
Interest on other payables....................... 9,630 7,742 9,246
Non-cash interest accretion...................... 4,788 4,975 6,425
Interest capitalized............................. (2,398) (2,712) (1,816)
--------------- ---------- ---------
Total Interest Expense........................... $53,915 $44,510 $45,876
=============== ========== =========
</TABLE>
Non-cash interest accretion includes interest accrued on perpetual care
obligations which are stated at present values.
NOTE 6 -- TAXES OTHER THAN INCOME
<TABLE>
<CAPTION>
=============================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
--------------- ---------- ---------
<S> <C> <C> <C>
Production taxes................................. $118,160 $113,452 $121,969
Payroll taxes.................................... 41,926 39,632 37,346
Property taxes................................... 31,292 32,099 27,786
Other............................................ 9,227 2,213 1,839
--------------- ---------- ---------
Total Taxes Other Than Income.................... $200,605 $187,396 $188,940
=============== ========== =========
</TABLE>
F-12
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 7 -- INCOME TAXES
Income taxes provided on earnings consisted of:
<TABLE>
<CAPTION>
=============================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
-------------- ---------- ----------
<S> <C> <C> <C>
Current
U.S. federal..................................... $ 41,783 $ 50,533 $ 52,015
U.S. state....................................... 6,446 5,928 6,677
Non-U.S.......................................... 4,584 2,658 7,219
-------------- ---------- --------
52,813 59,119 65,911
Deferred
U.S. federal..................................... (30,750) (19,288) (14,001)
U.S. state....................................... (532) (3,518) (2,413)
Non-U.S.......................................... 1,213) (343) 390)
-------------- ---------- ----------
(30,069) (23,149) (16,024)
-------------- ---------- ----------
Total Income Taxes............................... $(22,744) $(35,970) $(49,887)
============== ========== ==========
</TABLE>
F-13
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
================================================
DECEMBER 31,
------------------------------------------------
1996 1997
------------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS
Postretirement benefits other than pensions............. $ 445,139 $ 445,527
Pneumoconiosis benefits................................. 201,456 198,939
Mine closing............................................ 94,938 96,965
Workers' compensation................................... 79,443 78,273
Alternative minimum tax................................. 48,479 48,307
Reclamation............................................. 17,030 14,560
Other................................................... 104,179 111,677
--------- ---------
Total Deferred Tax Assets.................................. 990,664 994,248
DEFERRED TAX LIABILITIES
Property, plant and equipment........................... (655,117) (636,756)
Advance mining royalties................................ (41,232) (38,950)
Other................................................... (15,042) (23,245)
--------- ---------
Total Deferred Tax Liabilities............................. (711,391) (698,951)
--------- ---------
Net Deferred Tax Asset..................................... $ 279,273 $ 295,297
========= =========
</TABLE>
The following is a reconciliation, stated as a percentage of pretax income of
the U.S. statutory federal income tax rate to CONSOL's effective tax rate:
<TABLE>
<CAPTION>
=============================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
-------------- ---------- ----------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate............ 35.0% 35.0% 35.0%
Excess tax depletion.............................. (17.4) (17.3) (13.8)
Alternative fuel tax credit....................... (6.3) (.8) (1.2)
Net effect of state tax........................... 2.5 .8 1.2
Net effect of foreign tax......................... .1 (.5) 1.3
Other............................................. 1.0 1.9 (1.2)
-------------- ---------- ----------
Effective Income Tax Rate......................... 14.9% 19.1% 21.3%
============== ========== ==========
</TABLE>
F-14
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
Foreign income before taxes totaled $14,507 in 1995, $10,273 in 1996 and $13,832
in 1997.
NOTE 8 -- INVENTORIES
<TABLE>
<CAPTION>
====================================
DECEMBER 31,
------------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Coal................................................................... $043,399 $057,947
Merchandise for resale................................................. 39,794 38,994
Supplies............................................................... 49,484 43,783
---------- ----------
Total Inventories...................................................... $132,677 $140,724
========== ==========
</TABLE>
Replacement cost of coal inventories exceeded LIFO cost by $8,639 and $10,476 at
December 31, 1996 and 1997, respectively.
Merchandise for resale is valued using the LIFO cost method. The excess of
replacement cost of merchandise for resale inventories over carrying LIFO value
was $6,216 and $6,261 at December 31, 1996 and 1997, respectively.
NOTE 9 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
====================================
DECEMBER 31,
------------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Coal and surface lands $1,421,795 $1,417,847
Plant and equipment 2,559,522 2,681,224
Mine development and airshafts 370,257 407,726
---------- ----------
4,351,574 4,506,797
Less -- Accumulated depreciation, depletion and amortization 1,872,996 2,067,707
---------- ----------
Net Property, Plant and Equipment $2,478,578 $2,439,090
========== ==========
</TABLE>
NOTE 10 -- SHORT-TERM NOTES PAYABLE
CONSOL has commercial paper notes outstanding of $46,378 and $55,051 (net of
discount of $122 and $114) at December 31, 1996 and 1997, respectively. The
weighted average interest rate of the commercial paper
F-15
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS)
notes outstanding was 5.60 and 6.26 percent with an average maturity of 18 and
14 days at December 31, 1996 and 1997, respectively.
CONSOL has a $199,500 senior revolving credit facility with several banks. This
facility is used to support the commercial paper program. The term of this
facility is 360 days renewable on a 360-day basis. In the aggregate, the total
amount of funds borrowed under this facility and outstanding commercial paper
cannot exceed $199,500. Borrowings under this revolving credit facility bear
interest based on the London Interbank Offer Rate (LIBOR), the CD Rate, or the
Prime Rate at CONSOL's option. Funds may be borrowed for periods of 1 to 360
days depending on the interest rate method. There were no borrowings under this
facility at December 31, 1996 and 1997.
NOTE 11 - LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
====================================
DECEMBER 31,
------------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Baltimore Port Facility revenue bonds in series due 2010 and
2011 at 6.50%..................................................... 102,865 102,865
Unsecured Debt
Notes due 1997 at average of 7.32%................................ $ 43,995 $ --
Notes due 1999 at 7.88%........................................... 99,942 99,970
Notes due 2002 at average of 8.28%................................ 66,000 66,000
Notes due 2004 at 8.21%........................................... 45,000 45,000
Notes due 2007 at 8.25%........................................... 44,755 44,771
Variable rate note payable due at various dates through 2001......... 4,340 3,709
Advance royalty commitments.......................................... 30,503 28,328
Other long-term notes maturing at various dates through 2007......... 11,571 6,614
---------- ----------
448,971 397,257
Less amounts due in one year......................................... 54,038 7,639
---------- ----------
Total Long-Term Debt................................................. $394,933 $389,618
========== ==========
</TABLE>
The Baltimore Port Facility revenue bonds are guaranteed by DuPont.
F-16
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The variable rate note, advance royalty commitments, and the other long-term
notes had an average interest rate of approximately 7.4% at December 31, 1996
and 7.5% at December 31, 1997. The bonds and notes are carried net of debt
discount, which is being amortized by the interest method over the life of the
issue.
Annual undiscounted maturities on long-term debt during the next five years are
as follows:
YEAR AMOUNT
---- ------
1998 $ 7,639
1999 $104,756
2000 $ 2,705
2001 $ 2,718
2002 $ 68,212
NOTE 12 -- LEASES
CONSOL uses various leased facilities and equipment in its operations.
Currently, no capital leases are in effect. Future minimum lease payments under
operating leases at December 31, 1997, are as follows:
OPERATING
YEAR LEASES
---- ---------
1998 $12,150
1999 8,867
2000 8,494
2001 7,596
2002 3,154
Remainder 11,941
=========
Total minimum lease payments $52,202
=========
Rental expense under operating leases was $16,271 in 1995, $15,589 in 1996 and
$14,596 in 1997.
F-17
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 13 -- OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
===========================================
DECEMBER 31,
-------------------------------------------
1996 1997
------------------ ----------------
<S> <C> <C>
Accrued payroll and benefits..................................... $ 45,063 $ 41,559
Accrued other taxes.............................................. 33,364 35,133
Accrued royalties................................................ 12,851 14,230
Accrued interest................................................. 7,217 9,930
Other............................................................ 31,987 34,122
Current portion of long-term liabilities
Postretirement benefits other than pensions................... 59,700 63,254
Workers' compensation......................................... 31,302 33,213
Reclamation................................................... 18,636 20,221
Salary retirement............................................. 6,149 20,013
Mine closing.................................................. 17,389 16,824
Pneumoconiosis benefits....................................... 11,460 10,982
Other......................................................... 55 6,115
-------- --------
Total Other Accrued Liabilities.................................. $275,173 $305,596
======== ========
</TABLE>
NOTE 14 -- EMPLOYEE BENEFIT PLANS
PENSION PLANS
CONSOL has non-contributory defined benefit plans covering substantially all
employees not covered by multi-employer retirement plans. The benefits for
these plans are based primarily on years of service and employees' pay near
retirement. CONSOL's funding policy is consistent with the funding requirements
of federal law and regulations.
Net pension charges for defined benefit plans include the following components:
<TABLE>
<CAPTION>
===============================================
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period............ $ 10,400 $ 12,556 $ 12,657
Interest cost on projected benefit obligation................ 13,508 14,418 15,107
Return on assets:
Actual gain............................................... (31,857) (21,612) (26,273)
Deferred gain............................................. 19,536 8,649 13,034
-------- -------- --------
Net return on assets......................................... (12,321) (12,963) (13,239)
Amortization of net losses and prior service costs........... 771 568 4,029
-------- -------- --------
Net Pension Charges.......................................... $ 12,358 $ 14,579 $ 18,554
======== ======== ========
</TABLE>
F-18
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The status of these plans at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- -------
TOTAL TOTAL
-------- -------
<S> <C> <C>
Actuarial present value of
Vested benefit obligation.............................................. $(142,609) $(149,344)
--------- ---------
Accumulated benefit obligation............................................ $(163,305) $(176,175)
--------- ---------
Projected benefit obligation.............................................. $(220,643) $(227,671)
Plan assets at fair value................................................. 158,453 173,287
--------- ---------
Projected benefit obligation in excess of assets.......................... (62,190) (54,384)
Unrecognized net losses................................................... 46,500 30,324
Unrecognized prior service cost........................................... 2,787 2,434
--------- ---------
Accrued pension cost(1)................................................... $ (12,903) $ (21,626)
========= =========
</TABLE>
- ----------------------
(1) Accrued pension cost for plans where accumulated benefits exceed assets
excludes the additional pension liability of $1,201 in 1996 and $551 in 1997
(included in Other Deferred Credits and Other Liabilities) needed to meet the
minimum liability requirements.
The projected benefit obligation was determined using a discount rate of 7.25%
in 1996 and in 1997. The assumed long-term rate of compensation increase was 5%
in 1996 and in 1997. The assumed long-term rate of return on plan assets was 9%
in all years. Plan assets consist principally of common stocks and U.S.
government obligations.
UMWA PENSION AND BENEFIT TRUSTS
Certain subsidiaries of CONSOL are required under the National Bituminous Coal
Wage Agreement (NBCWA) of 1993 with the United Mine Workers of America (UMWA) to
pay amounts to the UMWA Pension Trusts based principally on hours worked by UMWA
represented employees. These multi-employer pension trusts provide benefits to
eligible retirees through a defined benefit plan. Amounts charged to expense
for these benefits were $7,166 in 1995, $6,441 in 1996 and $5,831 in 1997. The
Employee Retirement Income Security
F-19
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Act of 1974 (ERISA) as amended in 1980, imposes certain liabilities on
contributors to multi-employer pension plans in the event of a contributor's
withdrawal from the plan. The withdrawal liability would be calculated based on
the contributor's proportionate share of the plan's unfunded vested liabilities.
The Coal Industry Retiree Health Benefit Act of 1992 (The Act) created two
multi-employer benefit plans: (1) the United Mine Workers of America Combined
Benefit Fund (The Combined Fund) into which the former UMWA Benefit Trusts were
merged, and (2) the 1992 Benefit Fund. CONSOL subsidiaries account for required
contributions to these multi-employer trusts as expense when incurred.
The Combined Fund provides medical and death benefits for all beneficiaries of
the former UMWA Benefit Trusts who were actually receiving benefits as of July
20, 1992. The Act provides for the assignment of beneficiaries to former
employers and the allocation of unassigned beneficiaries (referred to as
orphans) to companies using a formula set forth in The Act. The Act requires
that responsibility for funding the benefits to be paid to beneficiaries be
assigned to their former signatory employers or related companies. Amounts
charged to expense for the Combined Fund were $22,730 in 1995, $25,828 in 1996
and $32,980 in 1997.
The 1992 Benefit Fund provides medical and death benefits to orphan UMWA-
represented members eligible for retirement on February 1, 1993, and who
actually retired between July 20, 1992 and September 30, 1994. Amounts charged
to expense for the 1992 Benefit Fund were $1,855 in 1995, $3,269 in 1996 and
$5,564 in 1997.
The UMWA 1993 Benefit Plan is a defined contribution plan that was created as
the result of negotiations for the NBCWA of 1993. This plan provides health
care benefits to orphan UMWA retirees who are not eligible to participate in the
Combined Fund, the 1992 Benefit Fund, or whose last employer signed the NBCWA of
1993 and subsequently goes out of business. Contributions to the trust are
fixed at ten cents per hour worked by UMWA represented employees. The NBCWA of
1993 specifies that benefits provided under this plan are only for the duration
of the contract. Amounts charged to expense for the UMWA 1993 Benefit Plan were
$956 in 1995, $857 in 1996 and $779 in 1997.
A new five-year labor agreement was reached in December 1997 and will be
effective from January 1, 1998 through December 31, 2002. This agreement
replaces the National Bituminous Coal Wage Agreement (NBCWA) of 1993.
INVESTMENT PLAN
CONSOL has an Investment Plan available to all domestic, non-represented
employees. CONSOL matches employee contributions for an amount up to 6 percent
of the employee's base pay. Amounts charged to expense were $12,170 in 1995,
$11,324 in 1996 and $11,372 in 1997.
LONG-TERM DISABILITY
CONSOL has a Long-Term Disability Plan available to all full-time salaried
employees. The benefits for this plan are based on a percentage of monthly
earnings, offset by all other income benefits available to the disabled.
F-20
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Liabilities (net of Plan Assets) included in Deferred Credits and Other
Liabilities - Other amounted to $18,960 and $22,342 at December 31, 1996, and
December 31, 1997, respectively. The liabilities were determined using a
discount rate of 7.25% in 1996 and 1997. Amounts charged to expense were $1,740
in 1995, $2,988 in 1996 and $8,449 in 1997.
COAL WORKERS' PNEUMOCONIOSIS (CWP)
CONSOL is liable under the Federal Coal Mine Health and Safety Act of 1969, as
amended, for medical and disability benefits to employees and their dependents
resulting from occurrences of coal workers' pneumoconiosis disease. CONSOL is
also liable under various state statutes for pneumoconiosis benefits. CONSOL
provides for these claims through a self-insurance program.
CONSOL employs the projected unit credit method to determine the CWP liability
and expense. Under this method, the costs determined by the actuarial study are
being amortized over the employees' requisite service period. Actuarial gains
and losses are being amortized over the remainder of the service life of the
employees which approximates 15.4 years.
Coal Workers' Pneumoconiosis cost included the following components:
<TABLE>
<CAPTION>
================================================
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................... $ 7,661 $ 8,971 $ 7,128
Interest cost.............................................. 21,030 20,436 16,075
Amortization of actuarial gain............................. (22,643) (17,326) (18,756)
-------- -------- --------
Net Coal Workers' Pneumoconiosis Cost...................... $ 6,048 $ 12,081 $ 4,447
======== ======== ========
</TABLE>
CWP payments were $12,084 in 1995, $12,543 in 1996 and $10,928 in 1997.
NOTE 15 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain subsidiaries of CONSOL provide medical and life insurance benefits to
retired employees not covered by the Coal Industry Retiree Health Benefit Act of
1992. Substantially all employees may become eligible for these benefits if
they have worked ten years and attained age 55. The associated plans are
unfunded. The medical plan contains certain cost sharing and containment
features, such as deductibles, coinsurance, health care networks and
coordination with Medicare.
F-21
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The following table sets forth the status of the plans, reconciled with amounts
recognized in the consolidated balance sheet:
<TABLE>
<CAPTION>
=====================================
DECEMBER 31,
-------------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees......................................................... $ 667,352 $ 697,540
Fully eligible active plan participants.......................... 60,432 66,845
Other active plan participants................................... 180,942 190,766
---------- ----------
Total accumulated postretirement obligation...................... 908,726 955,151
Unrecognized net reduction in prior service costs................ 48,359 39,528
Unrecognized net gain............................................ 187,232 150,636
---------- ----------
Total......................................................... 1,144,317 1,145,315
Less current portion (included in Other Accrued Liabilities)..... 59,700 63,254
---------- ----------
Long-Term Liability.............................................. $1,084,617 $1,082,061
========== ==========
</TABLE>
The accumulated postretirement benefit obligation was calculated using a
discount rate of 7.25% at December 31, 1996 and December 31, 1997.
Net Periodic Postretirement Benefit Cost included the following components:
<TABLE>
<CAPTION>
===============================================
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost.................................................. $ 7,298 $ 9,227 $ 9,884
Interest cost................................................. 67,223 62,736 65,968
Other -- net.................................................. (27,388) (18,278) (15,276)
-------- -------- --------
Net Periodic Postretirement Benefit Cost...................... $ 47,133 $ 53,685 $ 60,576
======== ======== ========
</TABLE>
A 7.5% annual rate of increase in per capita cost of covered health care
benefits was assumed for 1997, gradually decreasing to 4.5% in 2003, and
remaining level thereafter. The health care cost trend rate assumption has a
significant effect on the amount of the obligation and periodic cost reported.
An increase in the assumed health care cost trend rate by 1% in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997 by $84,920 and increase the aggregate of the service and interest cost
component of net periodic postretirement benefit cost for 1997 by $8,085.
The National Bituminous Coal Wage Agreement of 1993 included additional cost
containment features, including increased deductibles, pre-certification
requirements, and the implementation of a health care network, which
F-22
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
reduced the obligation for future represented retirees. This plan amendment
resulted in an unrecognized reduction in prior service cost of $49,459, which is
being amortized over the average remaining years of service to full eligibility
of those plan participants active at the date of the plan amendment. Effective
July 1, 1994, the benefit plans for non-represented employees were changed
similarly which reduced the obligation for current and future non-represented
retirees. This plan amendment resulted in an unrecognized reduction in prior
service cost of $24,153, which is being amortized over the average remaining
years of service to full eligibility of those plan participants active at the
date of the plan amendment.
NOTE 16 -- OTHER INCOME STATEMENT INFORMATION
Research and development costs charged to expense aggregated $11,533 in 1995,
$9,442 in 1996 and $9,484 in 1997.
Maintenance and repairs charged to expense aggregated $277,838 in 1995, $277,396
in 1996 and $281,820 in 1997.
NOTE 17 -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash used in operating activities includes:
<TABLE>
<CAPTION>
==================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest paid (net of amounts capitalized)................... $48,937 $36,544 $33,031
Income taxes paid............................................ $62,393 $64,547 $55,554
</TABLE>
Cash dividends paid to stockholders amounted to $80,000 in 1995, $80,000 in 1996
and $460,000 in 1997.
NOTE 18 -- CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
CONSOL markets steam coal, principally to electric utilities in the United
States, Canada and Western Europe, and metallurgical coal to steel and coke
producers worldwide. As of December 31, 1996 and 1997, accounts receivable from
utilities were $134,711 and $137,857, respectively, and from steel and coke
producers were $62,743 and $47,015, respectively. Credit is extended based on
an evaluation of the customer's financial condition, and generally collateral is
not required. Credit losses consistently have been minimal.
CONSOL is committed under several long-term contracts to supply coal that meets
certain quality requirements at specified prices. These prices are generally
adjusted based on indices. Quantities sold under some of these contracts may
vary from year to year within certain limits at the option of the customer.
F-23
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Sales (including spot sales) to a major customer were $302,968 in 1995, $318,899
in 1996 and $357,605 in 1997. As of December 31, 1996 and 1997, accounts
receivable from this customer were $35,146 and $31,818, respectively.
In 1995, 1996 and 1997, CONSOL U.S. operations had export sales, principally to
Canadian and Western European customers, of $359,370, $357,854 and $325,544,
respectively.
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value due to the short maturity
of these instruments.
Marketable securities The carrying value of marketable securities approximates
fair value based on impending auction dates and routine trading at par value for
those or similar investments.
Short-term notes payable The carrying amount reported in the balance sheet for
short-term notes payable approximates its fair value due to the short-term
maturity of these instruments.
Long-term debt The fair values of long-term debt are estimated using discounted
cash flow analyses, based on CONSOL's current incremental borrowing rates for
similar types of borrowing arrangements.
The carrying amounts and fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
==========================================================================
DECEMBER 31,
--------------------------------------------------------------------------
1996 1997
--------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------- -------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 39,986 $ 39,986 $ 18,788 $ 18,788
Marketable securities $ 354,273 $ 354,273 $ 114,829 $ 114,829
Short-term notes payable $ (46,378) $ (46,378) $ (55,051) $ (55,051)
Long-term debt $(448,971) $(470,023) $(397,257) $(420,215)
</TABLE>
NOTE 20 - COMMITMENTS AND CONTINGENT LIABILITIES
CONSOL has various purchase commitments for materials, supplies and items of
permanent investment incidental to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.
F-24
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
CONSOL is subject to various lawsuits and claims with respect to such matters as
personal injury, damage to property, governmental regulations including
environmental remediation, and other actions, arising out of the normal course
of business. In the opinion of management, the ultimate liabilities resulting
from such lawsuits and claims will not materially affect the consolidated
financial position of CONSOL.
A public utility filed suit against CONSOL alleging breach of a long-term coal
supply contract based upon CONSOL's refusal to agree to price reductions in the
price for coal under the contract's "gross inequities" clause. Damages claimed,
including interest, are approximately $190 million. Discovery is in progress,
and the case is set for trial October 5, 1998. CONSOL is vigorously defending
the suit. Management believes that the claims are without merit, and,
accordingly, CONSOL has not accrued any liability associated with the action.
CONSOL received from a group of public utilities, two notices of intent to
submit certain price disputes to arbitration pursuant to a 1987 coal sales
contract. The notices claim that the utilities have been overcharged by
approximately $40 million for coal under the price adjustment clause of the
contract. In accordance with contract procedure, CONSOL submitted its response
asserting that the price adjustments were made in conformity with the contract.
The parties have not yet submitted their positions to an arbitrator. Management
believes that the claims are without merit, and, accordingly, CONSOL has not
accrued any liability associated with this proceeding.
A subsidiary has a long-term sales contract to supply coal to a group of public
utilities. This contract was conditioned on the purchase of the subsidiary that
will supply a portion of the contracted coal. By agreement between the parties,
a portion of the amounts payable by the group of public utilities includes debt
service (long-term debt and capital lease obligations) that the company is
obligated to pay for the benefit of the group of public utilities, which has
severally guaranteed to the holders the discharge of the long-term debt and
capital lease obligations. Accordingly, that portion of the contract receivable
has been assigned to reduce the unpaid amounts of long-term debt and capital
lease obligations (which aggregated $81,189 at December 31, 1997), as such
amounts are funded and guaranteed by, and are under the responsibility and
control of, the group of public utilities.
NOTE 21 - INDUSTRY SEGMENT INFORMATION
CONSOL conducts its operations through a coal segment and an industrial supplies
and equipment segment. The principal business of the coal segment is the
mining, preparation and marketing of steam coal, sold primarily to electric
utilities, and metallurgical coal, sold to steel and coke producers. CONSOL's
other segment markets industrial supplies and equipment through Fairmont Supply
Company. Products are sold between segments on a basis reflecting the market
value of the products.
F-25
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Industry segment results for 1997 are:
<TABLE>
<CAPTION>
==============================================================================
INDUSTRIAL
SUPPLIES &
COAL EQUIPMENT ELIMINATION CONSOLIDATED
========== ========== =========== ============
<S> <C> <C> <C> <C>
Sales -- outside.................... $2,029,095 $117,841 $ -- $2,146,936
Sales -- related companies.......... 39,406 98,855 -- 138,261
Intersegment transfers.............. -- 77,714 (77,714) --
---------- ---------- ----------- ------------
Total Sales................... $2,068,501 $294,410 $ (77,714) $2,285,197
========== ========== =========== ============
Earnings before income taxes........ $ 232,395 $ 1,281 $ 233,676
Income taxes........................ 49,541 346 49,887
---------- ---------- ------------
Net Income.......................... $ 182,854 $ 935 $ 183,789
========== ========== ============
Identifiable assets................. $3,480,303 $ 67,708 $3,548,011
========== ========== ============
Depreciation, depletion and
amortization..................... $ 232,225 $ 1,079 $ 233,304
========== ========== ============
Additions to property, plant and
equipment........................ $ 201,907 $ 526 $ 202,433
========== ========== ============
</TABLE>
Industry segment results for 1996 are:
<TABLE>
<CAPTION>
==============================================================================
INDUSTRIAL
SUPPLIES &
COAL EQUIPMENT ELIMINATION CONSOLIDATED
========== ========== =========== ============
<S> <C> <C> <C> <C>
Sales -- outside.................... $2,094,137 $113,433 $ -- $2,207,570
Sales -- related companies.......... 39,212 89,232 -- 128,444
Intersegment transfers.............. -- 76,569 (76,569) --
---------- ---------- ----------- ------------
Total Sales................... $2,133,349 $279,234 $ (76,569) $2,336,014
========== ========== =========== ============
Earnings before income taxes........ $ 185,367 $ 3,332 $ 188,699
Income taxes........................ 34,813 1,157 35,970
---------- ---------- ------------
Net Income.......................... $ 150,554 $ 2,175 $ 152,729
========== ========== ============
Identifiable assets................. $3,791,145 $ 66,363 $3,857,508
========== ========== ============
Depreciation, depletion and
amortization..................... $ 233,934 $ 1,225 $ 235,159
========== ========== ============
Additions to property, plant and
equipment........................ $ 171,104 $ 975 $ 172,079
========== ========== ============
</TABLE>
F-26
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Industry segment results for 1995 are:__________________________________________
<TABLE>
<CAPTION>
INDUSTRIAL
SUPPLIES &
COAL EQUIPMENT ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales -- outside......................... $2,019,439 $109,206 $ -- $2,128,645
Sales -- related companies............... 37,921 102,645 -- 140,566
Intersegment transfers................... -- 77,604 (77,604) --
---------- ---------- ----------- -----------
Total Sales........................ $2,057,360 $289,455 $ (77,604) $2,269,211
========== ========== =========== ===========
Earnings before income taxes............. $ 151,901 $ 893 $ 152,794
Income taxes............................. 22,414 330 22,744
---------- ---------- ------------
Net Income............................... $ 129,487 $ 563 $ 130,050
========== ========== ============
Identifiable assets...................... $3,805,531 $ 66,447 $3,871,978
========== ========== ============
Depreciation, depletion and
amortization.......................... $ 251,830 $ 1,283 $ 253,113
========== ========== ============
Additions to property, plant and
equipment............................. $ 237,475 $ 1,307 $ 238,782(1)
========== ========== ============
</TABLE>
______________
(1) Includes $52,513 acquired from Greene Hill Coal Company.
F-27
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 22 -- SUPPLEMENTAL COAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------
(Millions of Tons) 1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Proved and probable coal reserves at January 1*.............. 4,956 5,072 5,063
Purchased reserves........................................... 191 120 10
Reserves sold in place....................................... (65) (17) (31)
Production................................................... (71) (72) (73)
Revisions and other changes.................................. 61 (40) (193)
----- ----- -----
Proved and Probable Coal Reserves at December 31*............ 5,072 5,063 4,776
===== ===== =====
</TABLE>
______________
* Proved and probable coal reserves are the equivalent of "demonstrated
reserves" under the coal resource classification system of the U.S. Geological
Survey. Generally, these reserves would be commercially minable at year-end
prices and cost levels, using current technology and mining practices.
The coal reserves are located in nearly every major coal-producing region in
North America. At December 31, 1997, 858 million tons were assigned to mines
either in production or under development. The proved and probable reserves at
December 31, 1997 include 4,020 million tons of steam coal, of which
approximately 15 percent has a sulfur content equivalent to less than 1.2 pounds
sulfur dioxide per million British thermal unit (Btu), and an additional 15
percent has a sulfur content equivalent to between 1.2 and 2.5 pounds sulfur
dioxide per million Btu. The reserves also include 756 million tons of
metallurgical coal, of which approximately 65 percent has a sulfur content
equivalent to less than 1.2 pounds sulfur dioxide per million Btu, and the
remaining 35 percent has a sulfur content equivalent to between 1.2 and 2.5
pounds sulfur dioxide per million Btu. A significant portion of this
metallurgical coal can also serve the steam coal market.
F-28
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------------
AT SEPTEMBER 30,
AT DECEMBER 31, 1998 PRO FORMA
1997 HISTORICAL (SEE NOTE 2)
----------------- ---------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents.............................. $ 18,788 $ 37,926 $ 37,926
Marketable Securities.................................. 114,829 60,545 60,545
Accounts and Notes Receivable
Trade............................................... 252,901 288,394 288,394
Related Parties..................................... 6,305 4,309 4,309
Other Receivables................................... 23,392 23,971 23,971
Inventories............................................ 140,724 160,029 160,029
Deferred Income Taxes.................................. 94,027 92,105 92,105
Prepaid Expenses....................................... 19,273 28,878 28,878
---------- ---------- ----------
Total Current Assets............................. 670,239 696,157 696,157
Property, Plant and Equipment
Property, Plant and Equipment.......................... 4,506,797 4,973,932 4,973,932
Less -- Accumulated Depreciation, Depletion and
Amortization....................................... 2,067,707 2,204,903 2,204,903
---------- ---------- ----------
Total Property, Plant and Equipment -- Net...... 2,439,090 2,769,029 2,769,029
Other Assets
Deferred Income Taxes.................................. 201,270 206,882 206,882
Advance Mining Royalties............................... 131,079 125,377 125,377
Other.................................................. 106,333 191,784 191,784
---------- ---------- ----------
Total Other Assets............................... 438,682 524,043 524,043
---------- ---------- ----------
Total Assets..................................... $3,548,011 $3,989,229 $3,989,229
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------
AT SEPTEMBER 30,
AT DECEMBER 31, 1998 PRO FORMA
1997 HISTORICAL (SEE NOTE 2)
---------------- ---------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Liabilities
Current Liabilities
Accounts Payable........................................ $ 211,059 $ 225,021 $ 225,021
Short-Term Notes Payable................................ 55,051 105,476 665,153
Current Portion of Long-Term Debt....................... 7,639 108,540 108,540
Accrued Income Taxes.................................... 13,581 5,279 5,279
Other Accrued Liabilities............................... 305,596 329,456 329,456
---------- ---------- ----------
Total Current Liabilities............................ 592,926 773,772 1,333,449
Long-Term Debt............................................. 389,618 321,887 321,887
Deferred Credits and Other Liabilities
Postretirement Benefits Other Than Pensions............. 1,082,061 1,222,716 1,222,716
Pneumoconiosis Benefits................................. 500,429 484,234 484,234
Mine Closing............................................ 232,767 268,996 268,996
Workers' Compensation................................... 177,453 215,094 215,094
Reclamation............................................. 24,331 17,902 17,902
Other................................................ 245,661 257,166 257,166
---------- ---------- ----------
Total Deferred Credits and Other Liabilities......... 2,262,702 2,466,108 2,466,108
Stockholders' Equity
Common Stock, $1.00 Par Value; 100,000 shares
authorized, issued and outstanding, actual;
53,000 shares authorized, issued and
outstanding, pro forma............................... 100 100 53
Capital in Excess of Par Value.......................... 802,904 802,904 302,951
Retained (Deficit)...................................... (500,239) (375,542) (435,219)
---------- ---------- ----------
Total Stockholders' Equity........................... 302,765 427,462 (132,215)
---------- ---------- ----------
Total Liabilities and Stockholders' Equity........... $3,548,011 $3,989,229 $3,989,229
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
===================================
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1997 1998
-------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales.............................................. $ 1,684,523 $ 1,680,063
Other Income....................................... 50,968 37,450
-------------- -------------
Total Revenue................................ 1,735,491 1,717,513
Costs of Goods Sold and Other Operating Charges.... 1,189,645 1,157,674
Selling, General and Administrative Expense........ 41,109 40,689
Depreciation, Depletion and Amortization........... 171,353 175,575
Interest Expense................................... 34,468 32,496
Taxes Other Than Income............................ 143,208 147,951
-------------- -------------
Total Costs.................................. 1,579,783 1,554,385
-------------- -------------
Earnings Before Income Taxes....................... 155,708 163,128
Income Taxes....................................... 35,824 38,431
-------------- -------------
Net Income................................... $ 119,884 $ 124,697
============== =============
</TABLE>
THE accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
=======================================================
COMMON CAPITAL IN RETAINED TOTAL
STOCK EXCESS OF PAR EARNINGS STOCKHOLDER'S
VALUE DEFICIT EQUITY
------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Balance December 31, 1997............ $ 100 802,904 (500,239) 302,765
Net Income........................... -- -- 124,697 124,697
Dividends............................ -- -- -- --
------------- ------------- ---------- -------------
Balance September 30, 1998........... $ 100 $802,904 $(375,542) $427,462
============= ============= ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
===================================
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1997 1998
-------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING
Net Income................................................... $ 119,884 $ 124,697
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Depreciation, Depletion and Amortization............... 171,353 175,575
(Gain) Loss on Sale of Assets.......................... (10,944) (2,618)
Amortization for Advance Mining Royalties.............. 9,651 10,877
Deferred Income Taxes.................................. (8,228) (3,690)
Changes in Operating Assets................................. (16,967) (8,059)
Changes in Other Assets..................................... 1,728 (207)
Changes in Operating Liabilities............................ 5,244 (36,895)
Changes in Other Liabilities................................ (27,781) 4,695
Other....................................................... (675) (1,858)
-------------- -------------
123,381 137,820
-------------- -------------
Net Cash Provided by Operating Activities................... 243,265 262,517
CASH FLOW FROM INVESTING ACTIVITIES
Capital Expenditures............................................ (135,330) (188,624)
Additions to Advance Mining Royalties........................... (5,083) (5,068)
Acquisition of R&P Coal Co. -- Net of Cash Acquired............. -- (100,410)
Proceeds from Sale of Assets.................................... 14,865 6,394
Changes in Marketable Securities -- Net......................... 50,698 54,284
-------------- -------------
Net Cash Used in Investing Activities........................... (74,850) (233,424)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Long-Term Notes................................. (44,000) --
Payments (Proceeds) on Borrowings............................... (43,356) (9,955)
-------------- -------------
Net Cash Used in Financing Activities........................... (87,356) (9,955)
-------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents............ 81,059 19,138
Cash and Cash Equivalents at Beginning of Period................ 39,986 18,788
-------------- -------------
Cash and Cash Equivalents at End of Period...................... $ 121,045 $ 37,926
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The Company considers that all adjustments (all of which are normal recurring
accruals) necessary for a fair statement of financial position and results of
operations for these periods have been made; however, results for such interim
periods are subject to year-end audit adjustments. Results for such interim
periods are not necessarily indicative of results for a full year.
NOTE 2 - ACQUISITION
On September 22, 1998, CONSOL purchased 100% of the outstanding stock of the
Rochester and Pittsburgh Coal Company (R&P) for $149,683. The acquisition has
been accounted for as a purchase and, accordingly, the operating results of R&P
have been included in the Company's consolidated financial statements since the
date of acquisition. Revenues for R&P were $88,474 and $45,927 for the third
quarter 1998 and 1997 respectively, and were $254,734 and $158,506 for the nine
months ended September 30, 1998 and 1997 respectively. Net income was not
material for these periods.
NOTE 3 - PRO FORMA TRANSACTION
On September 14, 1998, the Company entered into a definitive agreement to
purchase 47,000 shares of Class A Common Stock from DuPont and affiliated
companies at a price of $500 million. The closing of the transaction occurred
on November 5, 1998. The Board of Directors agreed that prior to the closing,
CONSOL would pay the pro rata annual dividend based on to-date results for the
days of 1998 elapsed prior to the payment of the purchase price of the shares.
The pro rata dividend of $60 million was paid on November 5, 1998. The Company
issued $600 million in commercial paper in November 1998 in order to finance,
together with other available funds, the purchase of the shares, the payment of
the dividend and the acquisition of R&P and the refinancing of certain
indebtedness incurred by R&P.
F-34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering, all of which
will be borne by CONSOL, are as follows:
SEC Registration Fee............................... $2,780.00
Blue Sky Fees and Expenses......................... *
Printing and Engraving Expenses.................... *
Legal Fees......................................... *
Accounting Fees.................................... *
NASD Filing Fee.................................... *
Miscellaneous...................................... *
---------
TOTAL......................................... $ *
- ------------
*To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
CONSOL's Certificate of Incorporation and By-Laws provide, in part, that
CONSOL shall indemnify its directors, officers, employees and agents to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL").
The DGCL permits Delaware corporations to indemnify their directors and
officers against all reasonable expenses incurred in the defense of any lawsuit
to which they are made parties by reason of being directors or officers, in
cases of successful defense, and against such expenses in other cases, subject
to specified conditions and exclusions. Such indemnification is not exclusive of
any other rights to which those indemnified may be entitled under any by-law,
agreement, vote of stockholders or otherwise.
The DGCL contains a provision eliminating the personal liability of a
director to a corporation or its stockholders for monetary damages for breach
of, or failure to perform, any duty resulting solely from his status as a
director, except with respect to (a) a willful failure to deal fairly with the
corporation or its stockholders where a director has a material conflict of
interest, (b) a violation of criminal law unless the director had reasonable
cause to believe his conduct was lawful, (c) a transaction yielding an improper
personal profit, and (d) willful misconduct. The foregoing statute also is
applicable to situations wherein a director has voted for, or assented to the
declaration of, a dividend, repurchase of shares, distribution, or the making of
a loan to an officer or director, in each case where the same occurs in
violation of applicable law.
CONSOL has purchased directors' and officers' liability insurance covering
certain liabilities incurred by its directors in connection with the performance
of their duties.
The Underwriting Agreement filed herewith as Exhibit 1 contains provisions
by which the Underwriters agree to indemnify CONSOL, each person who controls
CONSOL within the meaning of Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended, each director of CONSOL and
each officer of CONSOL who signs the Registration Statement with respect to
information furnished in writing by the Underwriters for use in the Registration
Statement.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
CONSOL has not issued securities during the prior three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
--------
1 -- Form of Underwriting Agreement between CONSOL,
J.P. Morgan & Co. Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated as
Representatives of the several Underwriters.*
3.1 -- Certificate of Incorporation of CONSOL.*
3.2 -- By-Laws of CONSOL.*
4.1 -- Specimen Common Stock Certificate.*
5 -- Opinion of Thelen Reid & Priest LLP regarding
legality.*
11 -- Statement regarding computation of per share
earnings.*
21 -- Subsidiaries of CONSOL.*
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Thelen Reid & Priest LLP (included as
part of Exhibit 5 above).*
24 -- Power of Attorney (included on signature page).
27 -- Financial data schedule.
(b) Schedules
---------
No schedules are required to be presented by CONSOL pursuant to
Regulation S-X in connection with the filing of this Registration
Statement.
- ---------------------------------
*To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by
II-2
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Pittsburgh,
Pennsylvania on December 14, 1998.
CONSOL ENERGY INC.
By: /s/ J. Brett Harvey
-------------------------------------
J. Brett Harvey,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below hereby constitutes appoints J. Brett Harvey and Daniel L. Fassio, and each
of them acting singly, as his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, to act, without the other, for
him and in his name, place and stead, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this Registration
Statement, including any subsequent registration statement for the same offering
that may be filed under Rule 462(b), and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ B. R. Brown Chairman of the Board and December 14, 1998
- ----------------------
B. R. Brown Chairman of the Board of
Directors
/s/ J. Brett Harvey President and Chief Executive December 14, 1998
- ----------------------
J. Brett Harvey Officer and Director
(Principal Executive Officer)
/s/ Michael F. Nemser Vice President and Treasurer December 14, 1998
- ----------------------
Michael F. Nemser (Principal Financial Officer)
/s/ William J. Lyons Vice President and Controller December 14, 1998
- ----------------------
William J. Lyons (Principal Accounting Officer)
II-4
<PAGE>
Name Title Date
---- ----- ----
/s/ Dieter Henning Director December 14, 1998
- -----------------------------
Dr. Dieter Henning
/s/ Berthold Bonekamp Director December 14, 1998
- -----------------------------
Berthold Bonekamp
/s/ Bernd J. Breloer Director December 14, 1998
- -----------------------------
Bernd J. Breloer
/s/ Rolf Zimmermann Director December 14, 1998
- -----------------------------
Dr. Rolf Zimmermann
II-5
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document Page
- ------- -------- ----
23.1 -- Consent of Ernst & Young LLP
27 -- Financial data schedule
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young
We consent to the reference to our firm under the captions "Prospectus Summary",
"Selected Consolidated Financial and Operating Data" and "Experts" and the use
of our report dated February 15, 1998, with respect to the financial statements
of Consol Energy, Inc. included in the Registration Statement on Form S-1 and
the related Prospectus for the registration of shares of its common stock.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 SEP-30-1998
<CASH> 39,986 18,788 37,926
<SECURITIES> 354,273 114,829 60,545
<RECEIVABLES> 301,783 282,598 316,674
<ALLOWANCES> 0 0 0
<INVENTORY> 132,677 140,724 160,029
<CURRENT-ASSETS> 926,232 670,239 696,157
<PP&E> 4,351,574 4,506,797 4,973,932
<DEPRECIATION> 1,872,996 2,067,707 2,204,903
<TOTAL-ASSETS> 3,857,508 3,548,011 3,989,229
<CURRENT-LIABILITIES> 568,202 592,926 773,772
<BONDS> 394,933 389,618 321,887
0 0 0
0 0 0
<COMMON> 100 100 100
<OTHER-SE> 578,876 302,665 427,362
<TOTAL-LIABILITY-AND-EQUITY> 3,857,508 3,548,011 3,989,229
<SALES> 2,336,014 2,285,197 1,680,063
<TOTAL-REVENUES> 2,396,954 2,349,638 1,717,513
<CGS> 2,163,745 2,070,086 1,157,674
<TOTAL-COSTS> 2,163,745 2,070,086 1,521,889
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 44,510 45,876 32,496
<INCOME-PRETAX> 188,699 233,676 163,128
<INCOME-TAX> 35,970 49,887 38,431
<INCOME-CONTINUING> 152,729 183,789 124,697
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 152,729 183,789 124,697
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0 0
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