<PAGE>
1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended June 30, 1999
[ X ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from January 1, 1999 to June 30, 1999
Commission file Number 333-68987
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CONSOL ENERGY INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0337383
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or Organization)
300 Delaware Avenue
Suite 567
Wilmington, Delaware 19801-1622
(Address of principal executive offices)
Registrant's telephone number, including area code: 412-831-4000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.):
Title of each Class
Common Stock ($.01 par value)
No securities are registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 15, 1999, aggregate market value of voting stock held by
nonaffiliates of the registrant was $294,628,338.25.
The number of shares outstanding of the registrant's common stock as of
September 15, 1999 is 80,233,458 shares, CONSOL Energy Common Stock, Par Value
$0.01 share.
Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):
<TABLE>
<CAPTION>
Incorporated By
Reference In Part No.
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<S> <C>
Portions of the S-1 dated April 29, 1999............................................................. I
Portions of the Proxy Statement for the annual shareholders' meeting to be held November 17, 1999.... III
</TABLE>
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TABLE OF CONTENTS
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SECTION PAGE
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<S> <C>
Business.................................................................... 3
Properties.................................................................. 20
Legal Proceedings........................................................... 21
Submission of Matters to a Vote of Security Holders......................... 21
Market for Registrant's Common Equity and Related Stockholder Matters....... 22
Selected Financial Data..................................................... 23
Management's Discussion and Analysis of Financial Condition and Results..... 26
Quantitative and Qualitative Disclosures About Market Risks................. 38
Index to the Consolidated Financial Statements.............................. 39
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures..................................................... 68
Directors, and Executive Officers of the Registrant......................... 68
Executive Compensation...................................................... 73
Security Ownership of Certain Beneficial Owners and Management.............. 73
Certain Relationships and Related Transactions.............................. 73
Index to the Exhibits, Financial Statement Schedules, and Reports of
Form 8-k.................................................................. 74
Signatures.................................................................. 78
</TABLE>
Forward-Looking Statements: With the exception of historical matters, the
matters discussed in this Annual Report are forward-looking statements (as
defined in Section 21E of the Securities and Exchange Act of 1934) that involve
risks, uncertainties and contingencies that could cause actual results to differ
materially from projected results. The risks, uncertainties and contingencies
include, but are not limited to, the following: the success or failure of CONSOL
Energy's competitors and its ability to respond to such actions; the effects of
market demand and price on performance; risks inherent in mining; the effects of
government regulation; the risk of work stoppages; the risks of transportation
disruptions that could impair CONSOL Energy's ability to sell coal; management's
ability to correctly estimate and accrue for contingent liabilities; and CONSOL
Energy's ability to successfully finance, consummate the acquisition of, and
integrate other companies as part of its acquisition strategy.
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PART I
Item 1. Business.
CONSOL Energy's History
CONSOL Energy Inc. ("CONSOL Energy") was organized as a Delaware
corporation in 1991 and on April 27, 1999 filed an initial public offering.
CONSOL Energy is a holding company for 63 direct and indirect wholly-owned
subsidiaries, including Consolidation Coal Company and CONSOL Inc. Consolidation
Coal Company is CONSOL Energy's principal operating subsidiary and earliest
predecessor, having been formed on March 9, 1860. CONSOL Inc. is CONSOL Energy's
direct holding company subsidiary that provides executive, management and
administrative services. CONSOL Energy and its subsidiaries are principally
engaged in the mining of bituminous coal.
The corporate headquarters of CONSOL Inc. are located at 1800 Washington
Road, Pittsburgh, PA 15241, telephone (412) 831-4000. The principal executive
offices of CONSOL Energy Inc. are located at 300 Delaware Avenue, Suite 567,
Wilmington, DE 19801, telephone (302) 477-1260.
CONSOL Energy ranks among the largest coal companies in the United States
based upon total revenue, net income and operating cash flow. CONSOL Energy's
production of 76 million tons of coal in 1998 accounted for 7% of total domestic
tons produced and for 13% of tons produced in the eastern United States.
Production in the six months ended June 30, 1999 totaled 38 million tons.
CONSOL Energy is one of America's premier coal companies by several measures.
[ ] It mines more high-Btu bituminous coal than any other U. S. producer.
[ ] It is the largest coal producer east of the Mississippi River.
[ ] It is the largest U. S. producer of coal from underground mines.
[ ] It exports more coal from the United States than any other coal
producer or trading company.
[ ] It has the second largest coal reserves among U. S. coal producers.
INDUSTRY SEGMENTS
Financial information concerning industry segments, as defined by generally
accepted accounting principles, for the transition period and the last three
fiscal years is as shown on pages 64 and 65 of this Form 10K.
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MINING OPERATIONS
CONSOL Energy currently has 24 mining complexes, including a 50% interest
in a surface mine in Alberta, Canada, all located in North America.
All of CONSOL Energy's mining complexes are underground operations except
the Mahoning Valley operation in Ohio and Cardinal River mines in Alberta,
Canada which employ only surface mining techniques. The Mill Creek complex in
Kentucky employs a combination of underground and surface mining systems. Mining
machinery used in all of CONSOL Energy's underground mines is powered by
electricity. Other mining complexes are located in Pennsylvania, West Virginia,
Virginia, Illinois, Kentucky, Ohio and Utah. For a complete list of mines, their
locations, annual production and assigned coal reserves, see page 47 of the
CONSOL Energy Form S-1 dated April 29, 1999.
The Company has a safety record two times better than the coal industry
average.
In the six months ended June 30, 1999, 95% of CONSOL Energy's production
came from underground mines and 5% from surface mines. The percentage of coal
produced by surface mines has declined in recent years because several CONSOL
Energy surface mines have depleted their minable reserves, and because
production from existing underground mines has increased. Nevertheless, CONSOL
Energy maintains engineering expertise in both mining methods.
Mining Production
Where the geology is favorable and where reserves are sufficient, CONSOL
Energy employs longwall mining systems in its underground mines. For the six
months ended June 30, 1999, 81% of CONSOL Energy'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 Energy has substantial reserves readily suitable to these operations,
these longwall mines can increase capacity at low incremental cost.
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The following table shows the growth in production from CONSOL Energy's
current longwall operations since 1994.
Production by Year
<TABLE>
<CAPTION>
Six
Months Compound
In millions of tons Ended Annual
June 30, Growth
Mine 1994 1995 1996 1997 1998 1999 Rate
- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Enlow Fork 8.1 8.0 8.7 8.4 8.8 5.0 4.7%
Bailey 6.6 7.3 7.5 7.5 8.3 4.4 6.4%
McElroy 4.1 4.1 4.2 5.2 6.6 3.5 11.9%
Robinson Run 3.3 3.7 4.2 4.8 5.6 2.3 7.4%
Loveridge 3.1 2.7 3.1 4.8 5.4 1.1 18.3%
Shoemaker 1.8 3.8 4.4 4.8 4.8 2.3 5.5%
Buchanan 3.0 3.2 3.6 4.3 4.3 2.4 10.5%
Dilworth 2.7 3.0 3.6 4.4 4.2 1.6 3.8%
Rend Lake 2.7 3.3 3.2 4.1 4.1 1.9 7.6%
Blacksville 3.7 3.8 3.5 3.4 3.9 2.4 5.8%
VP 8 0.9 2.3 2.8 1.3 2.7 0.5 8.0%
Mine No. 84 - - - - 1.0 2.9 -
</TABLE>
The calculation of the compound annual growth rate for the Shoemaker, VP 8
and Loveridge mines does not include periods during which such mines were shut
down. The calculation for the McElroy mine excludes 200,000 tons of coal mined
in connection with construction activities.
CONSOL Energy acquired Mine No. 84 in September 1998 as part of the
acquisition of the Rochester & Pittsburgh Coal Company. The 1998 amount of
production for Mine No. 84 represents three months of production following its
acquisition.
CONSOL Energy operates approximately 25% of the U.S. longwall mining
systems. Because of the high production levels of these mining systems, which
CONSOL Energy uses at 12 of its mines, it operates 8 of the 20 largest
underground mines in the United States. The following table ranks the 20 largest
underground mines in the United States by tons of coal produced in 1998.
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Major U.S. Underground Coal Mines, 1998
<TABLE>
<CAPTION>
In millions of tons
Mine Name Operating Company Production
--------- ----------------- ----------
<S> <C> <C>
Enlow Fork CONSOL 8.8
Twentymile Twentymile Coal Company 8.5
Bailey CONSOL 8.3
Mountaineer Arch Coal, Inc. 7.4
Baker Lodestar Energy, Inc. 6.7
McElroy CONSOL 6.6
Cumberland Cyprus Cumberland Resources Corp. 6.3
Mine No. 84 CONSOL 5.9
West Elk Arch Coal, Inc. 5.9
SUFCO Canyon Fuel Company 5.7
Upper Big Branch A. T. Massey Coal Co., Inc. 5.7
Robinson Run CONSOL 5.6
Galatia The American Coal Co. 5.5
Emerald Cyprus Emerald Resources Corp. 5.4
Loveridge CONSOL 5.4
Pinnacle (Gary No. 50) U. S. Steel Mining Co. 4.8
Shoemaker CONSOL 4.8
Federal No. 2 Eastern Associated Coal Corp. 4.7
Marissa Peabody 4.4
Buchanan CONSOL 4.3
</TABLE>
Source: National Mining Association
RECENT ACQUISITIONS
On September 22, 1998 CONSOL Energy acquired Rochester & Pittsburgh Coal
Company, a company which owned and operated coal mines in southwestern
Pennsylvania. On November 7, 1998 CONSOL Energy acquired by exchange the Vesta
Coal Reserve located in southwestern Pennsylvania.
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MARKETING AND SALES
CONSOL Energy sells coal produced by its mining complexes and additional
coal which is purchased for resale from other producers. CONSOL Energy maintains
U. S. sales offices in Atlanta, Chicago, Cleveland, Norfolk, Philadelphia,
Pittsburgh and overseas in Brussels, Belgium. In addition, CONSOL Energy sells
coal through agents, brokers and trading companies. In the six months ended June
30, 1999 CONSOL Energy sold 38.6 million tons of coal, 82% of which was sold in
domestic markets to electricity generators, steel companies and other consumers
of coal. Direct sales by CONSOL Energy to domestic electricity generators
represented 69% of total sales in the six months ended June 30, 1999. The two
largest customers were Allegheny Energy and First Energy. During the six months
ended June 30, 1999, CONSOL Energy derived 21% of its total revenue from sales
to its two largest customers. During the six months ended June 30, 1999,
contracts with Allegheny Energy accounted for more than 10% of CONSOL Energy's
revenues.
Coal Contracts
CONSOL Energy 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 Energy because of the number of
its mining complexes, particularly in northern Appalachia. During 1998, 66% of
CONSOL Energy's coal sales were to customers that have contracts with terms of
one year or more. The pricing mechanisms under these agreements typically
consist of
. 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
. 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 Energy an opportunity to
adjust price to a level close to then current market conditions. Each contract
is negotiated, and the triggers for reopener provisions differ from contract to
contract. Generally, the contracts provide for a periodic resetting of prices
assuming that market prices fall outside negotiated parameters. Almost all of
CONSOL Energy's existing contracts with reopener provisions adjust the contract
price to market price at the time the reopener provision is triggered. Market
price is generally based on recent published transactions for similar quantities
and quality of coal. Reopener provisions could result in early termination of a
contract or in requirements that certain volumes be purchased if the parties
were to fail to agree on price and other terms that may be subject to
renegotiations.
Contracts also typically contain force majeure provisions allowing
suspension of performance by CONSOL Energy or the customer for the duration of
certain events beyond
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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, which is 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 Energy 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.
The following table shows the total tons of coal delivered in 1997 and 1998
to customers with long-term contracts and the total stated tons of coal
deliverable in calendar years 1999, 2000, 2005 and 2010 for all long-term
contracts held by CONSOL Energy at December 31, 1998.
Contract Tons of Delivered Coal
In millions of nominal tons per year 1997 1998 1999 2000 2005 2010
---- ---- ---- ---- ---- ----
Volume under long-term contracts 47.7 51.0 48.0 32.6 5.3 1.1
CONSOL Energy routinely engages in efforts to renew or extend contracts
scheduled to expire. Although there are no guarantees that contracts will be
renewed, CONSOL Energy 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 renegotiations.
DISTRIBUTION
CONSOL Energy 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.
CONSOL Energy has five towboats and a fleet of nearly 300 barges to serve
customers along the Ohio and Monongahela rivers. The barge operation allows
CONSOL Energy to exercise control of delivery schedules and serves as temporary
floating storage of coal where land storage is unavailable. Nearly 34% of CONSOL
Energy-produced coal moved on the inland waterways in the six months ended
June 30, 1999. Water-borne shipments of coal originate from mines in every state
in which CONSOL Energy operates.
International customers and domestic coastal customers receive coal through
CONSOL Energy'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.
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RESEARCH AND DEVELOPMENT
CONSOL Energy'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 Energy'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 Energy'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 Energy'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 $12 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 Energy's products in the market
place and to address operational and environmental issues that can affect CONSOL
Energy's customers and, as a consequence, limit the market for CONSOL Energy's
coal. CONSOL Energy's research and development effort is directed at both
production ("upstream") and marketing ("downstream") issues. The goal of the
upstream research is to reduce costs, to improve productivity and to enhance the
safety of CONSOL Energy's mines and preparation plants. The downstream program
supports CONSOL Energy'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.
EMPLOYEES AND LABOR RELATIONS
At June 30, 1999, CONSOL Energy had a total of 7,658 employees, of whom
approximately 3,400 were represented by the United Mine Workers of America and
covered by the terms of the National Bituminous Coal Wage Agreement of 1998.
The National Bituminous Coal Wage Agreement became effective on January 1, 1998
and will expire on December 31, 2002. This agreement is negotiated with the
United Mine Workers of America by the Bituminous Coal Operators' Association on
behalf of its members, which includes several subsidiaries of CONSOL Energy.
The National Bituminous Coal Wage Agreement also serves as a pattern agreement
for other coal producers with employees represented by the United Mine Workers
of America. About 33% of U. S. miners are represented by the United Mine
Workers of America.
COMPETITION
The U. S. coal industry is highly competitive, with numerous producers in
all coal producing regions. CONSOL Energy competes against other large producers
and hundreds of small producers in the United States and overseas. The largest
producer is estimated to have less than 15% (based on tonnage sold) of the total
U. S. market. The U. S. Department
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of Energy reports 1,810 active coal mines in the United States in 1997, the
latest year for which government statistics are available. The most important
factors on which CONSOL Energy 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 Energy's coal and the prices that CONSOL
Energy obtains are affected by demand for electricity, environmental and
government regulation, technological developments and the availability and price
of competing coal and alternative fuel supplies, including nuclear, natural gas,
oil or renewable energy, including hydroelectric power.
In October 1992, the National Energy Policy Act was signed in the United
States, giving wholesale suppliers access to the electric transmission lines.
In April 1996, the Federal Energy Regulatory Commission 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 Federal Energy Regulatory Commission.
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 Energy believes that the move toward a competitive market for
electricity should prove beneficial to coal demand. According to Resource Data
International, Inc. (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.
NON-MINING OPERATIONS
Fairmont Supply Company
Fairmont Supply Company, 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
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operating) supply chain. Fairmont Supply offers value-added services including
on-site stores management and procurement strategies.
Fairmont Supply provides mine supplies to CONSOL Energy's mining
operations. Approximately 36% of Fairmont Supply's sales in the six months ended
June 30, 1999 were made to CONSOL Energy 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.
Approximately 32% of Fairmont Supply's sales in the six months ended June 30,
1999 were derived from sales made and services provided to DuPont, based on
contract terms and conditions.
Baltimore Terminal
More than 90 million tons of coal have been shipped through CONSOL Energy'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 Southern and CSX Transportation. In the six months ended June
30, 1999, 3 million tons of coal were shipped through the terminal.
Approximately three-fourths of the tonnage shipped was produced by CONSOL Energy
coal mines, the remainder by other coal producers through several coal trading
companies. In the six months ended June 30, 1999, about 22% of the revenue at
the terminal was generated from coal that CONSOL Energy shipped but that had
been produced by others. The terminal has capacity to ship 18 million tons
annually.
Neptune Bulk Terminal
CONSOL Energy has a 19% interest in the Neptune Bulk Terminal located in
Vancouver, Canada. The terms of the contract governing this joint venture
permit CONSOL Energy to transship its coal through the terminal at cost. CONSOL
Energy believes that this arrangement gives it a competitive advantage in
selling coal mined from its Cardinal River operations.
River Operations
CONSOL Energy's river operations transport coal from its 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 company-owned towboats and nearly 300 barges.
Coal is towed directly to customers. In the six months ended June 30, 1999, 7.1
million tons of coal was transported by river vessels owned by CONSOL Energy.
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Kellogg Dock
Kellogg Dock is located in Modoc, Randolph County on the Mississippi River
in southern Illinois. This facility transfers coal from CONSOL Energy's Rend
Lake Mine from railcars to barges. In the six months ended June 30, 1999, 0.5
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 in Fayette County,
Pennsylvania, 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.
Throughput was 1.6 million tons in the six months ended June 30, 1999.
Ash Disposal
CONSOL Energy operates an ash disposal facility on a 61-acre site in
northern West Virginia to handle ash residues for coal customers that are unable
to dispose of ash on-site at their generating facilities. This facility became
operational in early 1994. The ash disposal facility can process 200 tons of
material per hour.
CONSOL Energy has a long-term contract with a cogeneration facility to
supply coal and take the residual fly ash and bottom ash. The fly ash is
transported to the disposal site by CONSOL Energy-leased pressure differential
rail cars. Bottom ash is sold locally for road construction and other purposes.
Gas Operations
CONSOL Energy 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 34 million cubic feet per day in the six months ended June 30,
1999. A subsidiary of CONSOL Energy serves as operator of the Pocahontas Gas
Partnership and as operator of an adjacent coalbed methane property. The total
gas production supervised by CONSOL Energy from these two ventures was 97
million cubic feet per day in the six months ended June 30, 1999.
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Regulations
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 underground mining and the effects of mining on groundwater
quality and availability. In addition, the utility industry is subject to
extensive regulation regarding the environmental impact of its power generation
activities which could affect demand for CONSOL Energy's coal. The possibility
exists that new legislation or regulations may be adopted which have a
significant impact on CONSOL Energy's mining operations or its customers'
ability to use coal and may require CONSOL Energy or its customers to change
their operations significantly or incur substantial costs.
Numerous governmental permits or approvals are required for mining
operations. CONSOL Energy 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 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 Energy may be
more closely regulated. Such legislation and regulations, as well as future
interpretations of existing laws, may require substantial increases in equipment
and operating costs to CONSOL Energy and delays, interruptions or a termination
of operations, the extent of which cannot be predicted.
While it is not possible to quantify the costs of compliance with all
applicable federal and state laws, those costs have been and are expected to
continue to be significant. CONSOL Energy made capital expenditures for
environmental control facilities in the amount of approximately $1 million in
calendar year 1998, as compared to $4 million and $5 million in calendar year
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
was adopted. The Mine Health and Safety Act of 1969 resulted in increased
operating costs and reduced productivity. The Federal Mine Safety and Health Act
of 1977, which significantly expanded the enforcement of health and safety
standards of the Mine Health and Safety Act of 1969, 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
monitors compliance with these federal laws and regulations. In addition,
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as part of the Mine Health and Safety Act of 1969 and the Mine Safety and Health
Act of 1977, the Black Lung Acts require payments of benefits by all businesses
conducting current mining operations to coal miners with black lung and to
certain survivors of a miner who dies from black lung.
Most of the states in which CONSOL Energy 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 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
Energy's operating costs. However, CONSOL Energy's competitors in all of the
areas in which it operates are subject to the same degree of regulation.
Black Lung Legislation
In order to compensate
[ ] miners who are totally disabled due to black lung and
[ ] certain survivors of miners who died 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 miner's last
coal employment was after December 31, 1969, the 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 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
Energy self insures against potential cost using actuarially determined
estimates of the cost of present and future claims. CONSOL Energy's
subsidiaries are also liable under state statutes for black lung claims.
In the past, legislation on black lung reform has been introduced, but not
enacted, in Congress. It is possible that such legislation will be
reintroduced. 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,
-14-
<PAGE>
[ ] 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 Energy.
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 Energy, the extent of which cannot be accurately predicted.
Worker's Compensation
CONSOL Energy is required to compensate employees for work-related
injuries. Several states in which CONSOL Energy operates consider changes in
workers compensation laws from time to time. Such changes, if enacted, could
adversely affect CONSOL Energy's financial condition and results of operations.
Retiree Health Benefits Legislation
The Coal Industry Retiree Health Benefits Act of 1992 requires CONSOL
Energy to make payments to fund the cost of health benefits for its and other
coal industry retirees. As a result of a recent U.S. Supreme Court decision,
CONSOL Energy may be required to increase its share of such payments.
Environmental Laws
CONSOL Energy is subject to various federal environmental laws, including
[ ] the federal Surface Mining Control and Reclamation Act of 1977,
[ ] the Clean Air Act,
[ ] the Clean Water Act,
[ ] the federal Comprehensive Environmental Response, Compensation and
Liability Act, and
[ ] the federal Resource Conservation Recovery Act as well as state laws
of similar scope in each state in which we operate.
-15-
<PAGE>
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 mines and other facilities to assure compliance. CONSOL Energy
has ongoing compliance and permitting programs to assure compliance with such
environmental laws.
Given the retroactive nature of certain environmental laws, CONSOL Energy
has incurred and may in the future incur liabilities in connection with
properties and facilities currently or previously owned or operated as well as
sites to which CONSOL Energy sent waste materials.
Surface Mining Control and Reclamation Act
The Surface Mining Control and Reclamation Act establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
many aspects of deep mining. The act 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 the act, the appropriate state regulatory authority. All states
in which CONSOL Energy's active mining operations are located have achieved
primary jurisdiction for enforcement of the act through approved state programs.
The Surface Mining Control and Reclamation Act and similar state statutes,
among other things, require that mined property be restored in accordance with
specified standards and approved reclamation plans. The act requires CONSOL
Energy 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, which is part of the Surface Mining Control and Reclamation Act,
imposes a tax on all current mining operations, the proceeds of which are used
to restore mines closed before 1977. The maximum tax is $.35 per ton on
surface-mined coal and $.15 per ton on underground-mined coal.
CONSOL Energy 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 $324 million at June 30,
1999. The amount that was included as an operating expense for the six months
ended June 30, 1999 was $8 million and the related cash expense for such
liability in the six months ended June 30, 1999 was $13 million.
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<PAGE>
Under the Surface Mining Control and Reclamation Act, responsibility for
unabated violations, unpaid civil penalties and unpaid reclamation fees of
independent contract mine operators can be imputed to other companies which are
deemed, according to the regulations, to have "owned" or "controlled" the
contract mine operator. Sanctions against the "owner" or "controller" are quite
severe and can include being blocked from receiving new permits and revocation
of any permits that have been issued since the time of the violations or, in the
case of civil penalties and reclamation fees, since the time such amounts became
due. CONSOL Energy 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 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 has issued certain, and is considering further,
regulations relating to fugitive dust and coal combustion emissions which could
restrict CONSOL Energy's ability to develop new mines or require CONSOL Energy
to modify its operations. In July 1997, the Environmental Protection Agency
adopted new, more stringent National Ambient Air Quality Standards for
particulate matter which may require some states to change existing
implementation plans. These National Ambient Air Quality Standards are expected
to be implemented by 2003. Because coal mining operations emit particulate
matter, CONSOL Energy's mining operations and utility customers are likely to be
directly affected when the revisions to the National Ambient Air Quality
Standards are implemented by the states. Regulations may restrict CONSOL
Energy's ability to develop new mines or could require CONSOL Energy to modify
its existing operations, and may have a material adverse effect on CONSOL
Energy's financial condition and results of operations.
The Clean Air Act also indirectly affects coal mining operations by
extensively regulating the air emissions of coal-fueled electric power
generating plants. 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 for nitrogen oxides, which are precursors of
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<PAGE>
ozone. The 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 Environmental Protection Agency 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 reasonably available control technology and
additional control measures. Installation of reasonably available control
technology and additional measures required under the Environmental Protection
Agency 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 Energy's business,
financial condition and results of operations. The effect such regulations, or
other requirements that may be imposed in the future, could have on the coal
industry in general and on CONSOL Energy in particular cannot be predicted with
certainty.
Framework Connection 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 the Kyoto
Protocol, the signatories to the Framework Convention on Global Climate Change
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 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.
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 Energy 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.
Comprehensive Environmental Response, Compensation and Liability Act
The Comprehensive Environmental Response, Compensation and Liability Act
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
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<PAGE>
public health or welfare or the environment. Under the Comprehensive
Environmental Response, Compensation and Liability Act, 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 the Comprehensive
Environmental Response, Compensation and Liability Act, 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 Energy, and sites to which CONSOL Energy sent waste
materials, may be subject to liability under the Comprehensive Environmental
Response, Compensation and Liability Act and similar state laws.
CONSOL Energy 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 at several Superfund
sites. CONSOL Energy 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 Energy 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 the Surface
Mining Control and Reclamation Act permits are exempted from regulation under
the Resource Conservation Recovery Act by statute, the Environmental Protection
Agency may consider the possibility of expanding regulation of mining wastes
under the Resource Conservation Recovery Act. Such expansion could have a
material adverse affect on CONSOL Energy's results of operations and financial
condition.
Federal Coal Leasing Amendments Act
Although CONSOL Energy 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 amended the Mineral Lands Leasing Act of 1920 which
authorized the leasing of federal lands for coal mining. The Federal Coal
Leasing Amendments Act increased the royalties payable to the 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 Energy from federal leases if operations were
developed on such leases.
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<PAGE>
Other
Patents and licenses are not material to the operation of CONSOL Energy's
business.
CONSOL Energy has made no public announcement, nor has information
otherwise become public, about any new product or line of business which would
require the investment of a material amount of CONSOL Energy's total assets.
CONSOL Energy's business is not seasonal in any material respect.
Item 2. Properties.
COAL RESERVES
CONSOL Energy had an estimated 4.7 billion tons of proved and probable
reserves at June 30, 1999. Reserves are the portion of the "demonstrated"
tonnage (equivalent to "proved" and "probable") that meet CONSOL Energy'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 Energy's reserves are located in northern Appalachia (54%), central
Appalachia (11%), the midwestern United States (21%) and in the western United
States and in Canada (14%).
Reserve estimates are based on geological data assembled and analyzed by
staff, which includes 14 geologists and more than 40 mining engineers, located
at individual mines, operations offices and at CONSOL Inc.'s principal office.
The reserve estimates and general economic criteria upon which they are based
are reviewed and adjusted annually to reflect production of coal from the
reserves, analysis of new engineering and geological data, changes in property
control, modification of mining methods and other factors. Reserve information,
including the quantity and quality of reserves, coal and surface ownership,
lease payments and other information relating to CONSOL Energy's coal reserve
and land holdings, is maintained through a system of interrelated computerized
databases developed by CONSOL Energy.
CONSOL Energy's reserve estimates are predicated on information obtained
from its 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.
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<PAGE>
OTHER
In addition, CONSOL Energy owns or controls by lease or other document
approximately 600,000 acres of surface properties and approximately 500,000
acres of oil and gas properties.
Item 3. Legal Proceedings.
LEGAL PROCEEDINGS
CONSOL Energy is subject to numerous legal proceedings in the ordinary
course of its business. Except as described below, CONSOL Energy 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 Company (an indirect wholly owned subsidiary of CONSOL Energy
Inc.), 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 Coal Company on December 30, 1966.
Union Electric claimed that Consolidation Coal Company 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 disputed all of Union Electric's allegations and did not
believe that Union Electric suffered any gross inequity or was entitled to any
relief under the contract. Union Electric estimated its damages to be $124
million plus $66 million in interest. On August 31, 1998, CONSOL Energy and the
other defendants were awarded a summary judgment dismissing Union Electric's
claims. Union Electric then appealed the district court's order dismissing the
suit. On August 27, 1999, the United States Court of Appeals for the Eighth
Circuit affirmed the judgment of the district court.
CONSOL Energy 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 ("CAPCO"). CAPCO claims that CONSOL
Energy under the terms of the Mansfield Plant Coal Sales Agreement dated April
10, 1987 made improper adjustments to the coal price for certain labor,
retirement and benefit costs. CAPCO claims that they were improperly assessed
$50 million as a result of the price adjustments made by CONSOL Energy. CONSOL
Energy has responded to CAPCO and has denied the claims. The agreement provides
for resolution of disputes by arbitration. CONSOL Energy has received a notice
from CAPCO of its intention to submit the claims to arbitration.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Common Stock Market Prices and Dividends
CONSOL Energy's common stock commenced trading on the New York Stock Exchange
(ticker symbol CNX) on April 30, 1999 in connection with CONSOL Energy's initial
public offering. The approximate number of record holders of CONSOL Energy's
stock at June 30, 1999 was 6,200.
The table below sets forth the high and low stock prices and dividends since the
date of the initial public offering.
Cash
Sales Price Dividend
-------------------
Quarter Ended High Low Declared
- ------------- -------- ------- --------
June 30, 1999 16.0000 10.8750 -
A cash dividend of $0.28 per share was declared by the CONSOL Energy board of
directors on July 21, 1999 payable on September 2, 1999 to the common stock
holders of record on August 4, 1999.
CONSOL Energy paid dividends to its stockholders of $80 million in each of the
years ending December 31, 1996, 1997 and 1998. CONSOL Energy also paid an
extraordinary cash dividend to its stockholders of $380 million in 1997. A cash
dividend of $23 million was paid in April 1999, prior to the initial public
offering. The dividends historically paid by CONSOL Energy are not indicative
of its future dividend policy, particularly because CONSOL Energy was closely
held prior to the initial public offering.
CONSOL Energy expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends because they depend on
future earnings, capital requirements and financial condition.
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<PAGE>
Item 6. Selected Financial Data.
In thousands, except per share data
Statement of Income Data
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- --------------------------------------------------------------------
1998
Revenue 1999 (Unaudited) 1998 1997 1996 1995 1994
---- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales (1) $ 1,081,922 $ 1,133,484 $ 2,295,430 $ 2,285,197 $ 2,336,014 $ 2,269,211 $ 2,326,104
Other income 28,560 26,488 54,562 64,441 60,940 45,024 86,377
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total Revenue 1,110,482 1,159,972 2,349,992 2,349,638 2,396,954 2,314,235 2,412,481
Costs
Cost of goods sold and
other operating charges 792,597 747,849 1,594,523 1,592,413 1,687,836 1,600,271 1,703,678
Selling, general and
administrative expense 27,740 27,448 55,128 55,429 53,354 53,537 53,546
Depreciation, depletion
amortization 121,237 117,561 238,584 233,304 235,159 253,113 265,262
Interest expense 30,504 22,780 48,138 45,876 44,510 53,915 50,678
Taxes other than income 98,244 102,549 201,137 188,940 187,396 200,605 204,356
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total Costs 1,070,322 1,018,187 2,137,510 2,115,962 2,208,255 2,161,441 2,277,520
----------- ------------ ------------ ------------ ------------ ------------ ------------
Earnings before income
taxes 40,160 141,785 212,482 233,676 188,699 152,794 134,961
Income taxes 121 35,448 37,845 49,887 35,970 22,744 380
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net income $ 40,039 $ 106,337 $ 174,637 $ 183,789 $ 152,729 $ 130,050 $ 134,581
=========== ============ ============ ============ ============ ============ ============
Net income per share (2) $ .62 $ .98 $ 1.73 $ 1.69 $ 1.40 $ 1.20 $ 1.24
=========== ============ ============ ============ ============ ============ ============
Weighted average
number of common
shares outstanding 64,784,685 108,806,714 100,820,599 108,806,714 108,806,714 108,806,714 108,806,714
=========== ============ ============ ============ ============ ============ ============
Pro forma net income (3) $ 43,837
===========
Pro forma net income
per share (4) $ .55
===========
Pro forma weighted average
number of common shares
outstanding 80,267,558
===========
</TABLE>
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<PAGE>
In thousands
Balance Sheet Data
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital $ (261,427) $ 96,871 $ (602,428) $ 77,313 $ 358,030 $ 277,678 $ 208,079
Total assets 3,875,026 3,605,865 3,863,390 3,548,011 3,857,508 3,871,978 3,952,988
Short-term debt 345,525 49,120 551,719 55,051 46,378 78,166 132,567
Long-term debt
(including current portion) 326,495 396,600 430,888 397,257 449,170 442,385 450,332
Total deferred credits
and other liabilities 2,423,483 2,271,930 2,433,899 2,262,702 2,315,397 2,325,262 2,413,510
Stockholders' equity
(deficit) 254,725 409,102 (103,221) 302,765 578,976 506,247 456,197
</TABLE>
Other Operating Data
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- ------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Tons sold (in
thousands)(5) 38,553 37,512 77,729 75,170 77,000 72,741 74,199
Tons produced
(in thousands) 38,244 37,588 75,769 72,505 71,411 71,324 72,140
Productivity (tons
per manday) 39.86 40.70 40.11 38.46 34.57 31.22 29.60
Average production cost
($ per ton produced) $ 21.47 $ 20.93 $ 20.99 $ 21.05 $ 21.87 $ 22.31 $ 22.90
Average sales price of
tons produced ($ per
ton produced) $ 25.12 $ 26.92 $ 26.41 $ 26.49 $ 26.29 $ 26.61 $ 27.32
Coal reserves (tons in
millions) (6) 4,705 4,738 4,755 4,776 5,063 5,072 4,956
Number of mining complexes
(at period end) 24 24 25 24 26 26 30
Number of employees
(at period end) 7,658 7,355 8,578 7,711 8,206 8,743 9,739
</TABLE>
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<PAGE>
In thousands
Other Financial Data
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Capital expenditures $ 105,099 $ 118,947 $ 254,515 $ 200,617 $ 169,367 $ 179,022 $ 144,438
EBIT (7) 68,438 159,418 250,089 256,934 212,708 188,715 167,668
EBITDA (7) 189,675 276,979 488,673 490,238 447,867 441,828 432,930
Net cash provided by
operating activities 84,995 159,063 395,313 427,913 372,582 298,290 344,629
Net cash provided by
(used in) investing
activities (100,790) (150,392) (235,918) 52,243 (251,236) (160,856) (357,153)
Net cash provided by
(used in) financing
activities 8,069 (6,813) (146,898) (501,354) (119,254) (140,805) 50,418
</TABLE>
(1) Includes sales of Fairmont Supply Company, other than to CONSOL Energy, of
$76 million in the six months ended June 30, 1999, $89 million in the six
months ended June 30, 1998, $175 million in 1998, $217 million in 1997,
$203 million in 1996, $212 million in 1995, and $179 million in 1994.
(2) Basic earnings per share is computed using weighted average shares
outstanding. CONSOL Energy has no dilutive common stock equivalents.
(3) Pro forma net income assumes the application of the net proceeds from the
initial public offering as if it had occurred at the beginning of the year.
(4) Pro forma net income per share and pro forma weighted average number of
common shares outstanding assumes the issuance of shares of common stock in
the initial public offering occurred at the beginning of the year.
(5) Includes sales of coal produced by CONSOL Energy and purchased from third
parties. CONSOL Energy sold 2.2 million tons in the six months ended June
30, 1999, 1.4 million tons in the six months ended June 30, 1998, 3.2
million tons in 1998, 3.1 million tons in 1997, 3.2 million tons in 1996,
2.7 million tons in 1995 and 3.5 million tons in 1994 of coal that was
purchased from third parties.
(6) Represents proved and probable reserves at period end.
(7) EBIT is defined as earnings before deducting net interest expense (interest
expense less interest income) and income taxes. EBITDA is defined as
earnings before deducting net interest expense (interest expense less
interest income), income taxes and depreciation, depletion and
amortization. Although EBIT and EBITDA are not measures of performance
calculated in accordance with generally accepted accounting principles,
management believes that they are useful to an investor in evaluating
CONSOL Energy because they are widely used in the coal industry as measures
to evaluate a company's operating performance before debt expense and its
cash flow. EBIT and EBITDA do 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 and EBITDA are
not calculated identically by all companies, the presentation here may not
be comparable to other similarly titled measures of other companies.
Management's discretionary use of funds depicted by EBIT and EBITDA may be
limited by working capital, debt service and capital expenditure
requirements and by restrictions related to legal requirements, commitments
and uncertainties.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
CONSOL Energy's earnings over the last five years have been achieved primarily
by:
. Reducing unit cost of production through productivity improvements,
. Expanding CONSOL Energy mines by investing in technology, thereby
using the resulting production increases to replace older, higher cost
mines with depleted reserves,
. Investing in acquisitions that complement existing operations, and
. Successfully selling coal at prices that have enabled CONSOL Energy to
maintain margins despite the expiration of above-market sales
contracts.
CONSOL Energy will attempt to continue to use these methods in the future.
CONSOL Energy has maintained the delivered-cost competitiveness of its
coals by increasing productivity. CONSOL Energy has 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 Energy to generate positive cash margins even under pricing
pressures. CONSOL Energy increased tons produced in each of 1996, 1997 and 1998
while reducing employment and the number of mining complexes. Net income
increased from $130 million in 1995 to $153 million in 1996 to $184 million in
1997 and was $175 million in 1998. Net income was $40 million for the six months
ended June 30, 1999 compared to $106 million for the six months ended June 30,
1998. Net cash provided by operating activities increased from $298 million in
1995 to $373 million in 1996, to $428 million in 1997 and was $395 million in
1998. Net cash provided by operating activities for the six months ended June
30, 1999 was $85 million, compared to $159 million for the six months ended June
30, 1998.
CONSOL Energy expects to continue to reduce its unit cost of production in
the future. CONSOL Energy currently is expanding the preparation plant that
serves the Bailey and Enlow Fork operation and plans to improve underground
haulage ultimately to increase production nearly 25% from what already is a
record level. CONSOL Energy 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 Energy recently constructed a raw coal silo that allows
greater efficiency at both the plant and in the mine. At the Blacksville mine,
CONSOL Energy plans to accelerate the lifting of coal from the vertical shaft in
the mine, which is the current bottleneck. CONSOL Energy intends to convert the
Shoemaker mine to an all-belt haulage mine to further reduce its costs. CONSOL
Energy 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 depleted its reserves and it is anticipated that the expanded
McElroy and Shoemaker mines will more than offset the
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<PAGE>
production loss and do so at lower costs. CONSOL Energy incorporates such
improvements routinely in its plans to continue to reduce cost.
CONSOL Energy also will increase its production through acquisitions where
CONSOL Energy believes it has a competitive advantage and can generate value
from underperforming assets. In September 1998, CONSOL Energy acquired the
Rochester & Pittsburgh Coal Company. Rochester & Pittsburgh's principal asset
was Mine No. 84, which has similar characteristics to the Bailey and Enlow Fork
mines, and has the potential to become a highly efficient mine.
CONSOL Energy 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. The second phase of the implementation of the Clean Air
Act will take effect in the year 2000. CONSOL Energy 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 No. 84 mines, will be targeted to power plants that are
unscrubbed but that can continue to burn such coals with sulfur dioxide emission
allowances.
Although the Clean Air Act has had some effect on the price per ton of
high-sulfur coal, CONSOL Energy believes that production costs will continue to
be a significant factor in setting prices. The coal market is a very competitive
market in which prices often are set by marginal cost producers. As producers
deplete their reserves, their cost of mining will increase. To date,
productivity improvements throughout the industry have offset cost pressures
resulting from the depletion of existing reserves. Generally, the price of high-
sulfur coal on a delivered basis is less than the price of low-sulfur coal on a
delivered basis. CONSOL Energy believes that the price difference between high-
and low-sulfur coal likely will widen in the future because low-sulfur coal
producers will be required to mine higher cost reserves. The price of higher
sulfur coals also will rise because of depletion, but this increase may not be
as fast as the increase in low-sulfur coal. CONSOL Energy believes that it is in
a favorable position in which cost reductions are available through continued
productivity improvements by mining its extensive reserves that are accessible
to its existing mines.
CONSOL Energy believes that many currently 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, CONSOL Energy believes that technologically advantaged clean power
plants using high-Btu, low-delivered-cost coals are more competitive than plants
generating electricity with natural gas. Because scrubbers are needed for all
new power plants that burn coal and may be required for existing coal burning
plants to continue to operate under tighter air regulations, CONSOL Energy's
coals should sustain their advantage over low-sulfur coal that is produced
farther from CONSOL Energy's markets and, as a result, have higher
transportation costs.
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During 1998, sales to customers with long-term coal supply contracts
generated approximately 69% of CONSOL Energy's total revenue from coal sales.
These contracts contribute to the stability and profitability of operations by
providing predictability of production volumes and sales prices. Changes in
regulations governing the electric utility industry may make it more difficult
for CONSOL Energy to enter into long-term contracts with 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 pursuant to long-term contracts could subject CONSOL
Energy's revenue stream to increased volatility and adversely affect its
profitability.
The profitability of CONSOL Energy's 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, actual production
costs and other factors. In addition, provisions for adjustment or renegotiation
of prices and other provisions may increase exposure to short-term coal price
volatility. If a substantial portion of long-term contracts were modified or
terminated, CONSOL Energy would be adversely affected to the extent that it
would be unable to find other customers at the same level of profitability. Some
of CONSOL Energy's long-term contracts are for prices above current spot market
prices. The loss of certain long-term contracts could have a material adverse
effect on CONSOL Energy's business, financial condition and results of
operations.
Change of Fiscal Year
CONSOL Energy changed its fiscal year from a calendar year to a year ending
on June 30. CONSOL Energy had a transitional fiscal period ending June 30,
1999. CONSOL Energy's first full fiscal year ending June 30 will be the year
that started July 1, 1999 and ends June 30, 2000. CONSOL Energy is undertaking
this change in order to align its fiscal year with that of Rheinbraun A.G., its
majority shareholder. CONSOL Energy is a consolidated subsidiary of Rheinbraun.
Six Months Ended June 30, 1999 compared with Six Months Ended June 30, 1998
Net Income
CONSOL Energy's net income for the six months ended June 30, 1999 (the
1999 period) was $40 million compared with $106 million for the six months ended
June 30, 1998 (the 1998 period). The decrease of $66 million primarily was due
to a decline in coal prices and an increase in coal production costs in the 1999
Period compared with the 1998 Period.
The mild winter weather in the Eastern United States dampened demand for
coal by electricity generators, leaving utilities' coal inventories above
planned levels. Low prices for oil, certain petroleum by-products and natural
gas led to increase use of these fuels by electricity generators. Sales of U.S.
steam coal in Europe were adversely affected by competition from coal producers
in other countries. Also, annual negotiations of prices for
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metallurgical coal bound for overseas markets resulted in significant price
reductions, causing some U.S. producers to elect to offer these coals as a steam
coal in U.S. markets in an effort to obtain a higher price. The increase in
costs was due to the addition of production capacity by CONSOL Energy with no
commensurate increase in sales volumes due to these market factors.
Revenue
Sales decreased 4.6% to $1,082 million for the 1999 Period from $1,133
million for the 1998 Period. The decrease of $51 million was primarily due to a
decrease of $46 million in company-produced coal sales, a decrease of $12
million in industrial supply sales, partially offset by increased purchased coal
sales of $10 million. The decline in coal sales for the period was primarily
due to a decline in market prices, a higher proportion of sales of lower priced
coals, and a decline in contract prices. Coal sales volumes for the two periods
were similar. The decreased revenue for industrial supplies was mainly due to
decreased volumes. Increases in purchased coal revenues were primarily due to
higher volumes related to contracts acquired with the acquisition of Rochester
and Pittsburgh Coal Company (R&P) on September 22, 1998, partially offset by
decreased volumes due to the decline in the export market.
Related party sales declined from the 1998 period reflecting the change in
the categorization of sales to E.I. du Pont de Nemours and Company (DuPont) from
related party sales to outside sales due to the purchase of shares of the
company from DuPont Energy Company (DuPont Energy) on November 5, 1998, as a
result of which DuPont no longer is characterized as an affiliate.
Other income, which consists of interest income, gain on the disposition of
assets, service income, royalty income, rental income and miscellaneous income,
increased 7.8% to $29 million for the 1999 period from $27 million for the 1998
period. The increase of $2 million primarily was due to increased royalty
income and a one-time refund of harbor maintenance fees, offset partially by
reduced interest income.
Costs
Cost of goods sold and other operating charges increased $45 million or
6.0% to $793 million for the 1999 period from $748 million for the 1998 period.
Production cost increased $18 million and purchased coal cost increased $9
million primarily because of the inclusion of the R&P operations. Idle mine
costs increased $14 million due to weak market conditions. During the 1999
period, one mine was permanently closed and six mines were idled. Other
postretirement benefits other than pensions increased $10 million due to the
inclusion of R&P operations, discount rate changes and adverse experience. In
addition, costs have increased in the 1999 period due to the accrued expenses
for the Loveridge Mine fire. On June 22, an underground mine fire was
discovered at the Loveridge Mine. The expected cost to extinguish the fire and
rehabilitate the mine is $5 million. The mine has been sealed to deplete oxygen
underground and concrete plugs were injected through drill holes to isolate the
area where the fire occurred. The mine atmosphere is being monitored daily and
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readings indicate the fire is beginning to extinguish. The increased costs were
partially offset by a $13 million decrease in costs of goods sold for industrial
supply sales due mainly to a reduction in volumes.
Selling, general and administrative expenses remained stable at $28 million
in the 1999 period compared to $27 million in the 1998 period.
Depreciation, depletion and amortization increased 3.1% to $121 million in
the 1999 period from $118 million in the 1998 period. The increase of $3 million
was primarily due to the increase in depreciation related to assets acquired
with the R&P acquisition, offset partially by decreased cost depletion due to
several mines being temporarily idled due to market conditions in the 1999
period.
Interest expense increased 33.9% in the 1999 period to $31 million from $23
million in the 1998 period. The increase of $8 million primarily was due to
higher average debt levels outstanding during the 1999 period compared to the
1998 period. Higher debt levels resulted from the issuance of commercial paper
to finance the purchase of common stock from DuPont Energy in November 1998.
Taxes other than income decreased 4.2% to $98 million in the 1999 period
from $103 million in the 1998 period. The decrease of $5 million was primarily
due to lower West Virginia severance taxes resulting from decreased production
in the state. The reduction in severance taxes was partially offset by increased
payroll taxes due to the additional personnel added with the R&P acquisition.
Income Taxes
Income taxes decreased 99.7% to $0.1 million in the 1999 period from $35
million in the 1998 period. The decrease of $35 million primarily was due to
lower earnings before income taxes in the 1999 period and changes in percentage
depletion deductions for various operations. The effective tax rate for the 1999
period was 0.3% compared to 25.0% in the 1998 period primarily due to effects of
percentage depletion.
1998 Compared with 1997
Net Income
Net income decreased 5% to $175 million, or $1.73 per share, for 1998
compared with $184 million, or $1.69 per share, for 1997. The calculation of
net income per share for 1998 is based on 100,820,599 weighted average number of
common shares outstanding, reflecting the purchase in November 1998 of
51,139,156 shares of Common Stock from DuPont Energy Company.
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Revenue
Sales increased 0.5% to $2,295 million for 1998 from $2,285 million for
1997. The increase of $10 million primarily was due to an increase of $58
million in sales of company produced coal, partially offset by decreased sales
of industrial supplies of $42 million and decreased revenues from gas operations
of $3 million. Sales volumes of company produced coal for 1998 increased 3.5%
over 1997 while coal prices for 1998 were comparable to those for 1997. Sales
of industrial supplies decreased mainly due to a loss of a sales contract. Gas
operations revenues decreased primarily due to a 12.7% decrease in spot market
prices.
Other income, which consists of interest income, gain on the disposition of
assets, service income, royalty income, rental income and miscellaneous income,
decreased 15.3% to $55 million for 1998 compared with $64 million for 1997. The
decrease of $9 million was primarily due 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. The decrease was partially offset by a
one-time payment received in 1998 pursuant to an agreement by which we were
compensated for not mining certain coal reserves.
Costs
Cost of goods sold and other operating charges increased 0.1% to $1,595
million for 1998 from $1,592 million in 1997. Cost of goods sold increased due
to the 3.5% increase in sales volume of company produced coal. Cost per ton
produced decreased 2.3% due mainly to increased coal mine productivity
(calculated in tons per manday). This productivity increased 4.3% for 1998 from
1997. 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. The increase in cost of goods sold was offset in part by
decreased industrial supply cost of sales.
Selling, general and administrative expenses remained stable at $55 million
for 1998 and 1997.
Depreciation, depletion and amortization increased 2.3% to $239 million for
1998 compared with $233 million for 1997. The increase of $6 million was
primarily due to the increase in depreciation related to the assets acquired
with the R&P acquisition on September 22, 1998.
Interest expense increased 4.9% to $48 million in 1998 compared with $46
million in 1997. The increase of $2 million was primarily the result of higher
average principal balances outstanding during 1998 compared to 1997.
Taxes other than income increased 6.5% to $201 million for 1998 compared
with $189 million for 1997. The increase of $12 million was primarily the
result of an increase in production related taxes due to increased production
volumes. In addition, the West Virginia
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Business Investment and Jobs Expansion Tax Credit carry-forward of $3 million
utilized in 1997 was exhausted in 1998.
Income Taxes
Income taxes decreased 24.1% to $38 million for 1998 compared to $50
million in 1997. The $12 million decrease reflects decreased earnings in 1998
compared to 1997. The effective tax rate was 17.8% for 1998 compared to 21.3%
for 1997. The decreased effective tax rate for 1998 resulted primarily from an
increase in percentage depletion.
1997 Compared with 1996
Net Income
Net income increased 20.3% to $184 million, or $1.69 per share, for 1997
compared with $153 million, or $1.40 per share, for 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
of 1.8 million tons sold, or 2.4%, 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 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 Energy-produced coal sold in 1997 and lower average
production costs per ton. Coal mine productivity increased 11.3% in 1997 from
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.
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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 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.
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.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $85 million in the 1999
period and $159 million in the 1998 period. The change in net cash provided by
operating activities was primarily caused by a decrease in the 1999 period net
income compared to the 1998 period.
Net cash used in investing activities was $101 million in the 1999 period
and $150 million in the 1998 period. The change in cash used in investing
activities in the 1999 period from the 1998 period reflects the decrease in the
liquidation of marketable securities and a decrease in capital expenditures.
Net cash provided by financing activities was $8 million in the 1999
period. Net cash used in financing activities was $7 million in the 1998 period.
The increase in cash provided from financing activities in the 1999 period from
the 1998 period reflects the proceeds, net of expenses, from the Initial Public
Offering. This increase was offset by the increased payments on outstanding
commercial paper balances, the scheduled retirement of a long term note and a
dividend payment in the 1999 period.
Capital Expenditures
Capital expenditures were $105 million in the 1999 period and $119 million
in the 1998 period. CONSOL Energy made such expenditures for replacement of
mining equipment, the expansion of mining capacity and projects to improve the
efficiency of mining
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operations. CONSOL Energy used cash generated from operations and cash made
available from the issuance of commercial paper to fund capital expenditures.
CONSOL Energy anticipates making capital expenditures of approximately $200
million during the fiscal year ended June 30, 2000 and approximately $200
million during the fiscal year ended June 30, 2001. Capital expenditures for
pollution abatement and reclamation are projected to be $5 million for the
fiscal year ended June 30, 2000 and $13 million for the fiscal year ended June
30, 2001.
Debt
At June 30, 1999, CONSOL Energy had total long-term debt of $327 million,
including current portion of long-term debt of $14 million. Such long-term debt
consisted of:
. An aggregate principal amount of $156 million of unsecured notes which bear
interest at rates ranging from 8.21% to 8.28% per annum and are due at
various dates between 2002 and 2007,
. An aggregate principal amount of $103 million of two series of industrial
revenue bonds which were issued in order to finance CONSOL Energy's
Baltimore port facility and bear interest at the rate of 6.5% per annum and
mature in 2010 and 2011,
. An aggregate principal amount of $12 million of variable rate notes due at
various dates through 2001,
. $28 million in advance royalty commitments,
. An aggregate principal amount of $5 million of notes maturing at various
dates through 2031, and
. An aggregate principal amount of $23 million of capital leases.
At June 30, 1999, CONSOL Energy had an aggregate principal amount of $346
million of commercial paper outstanding which had maturities ranging up to 47
days and bore interest at rates ranging from 5.15% to 5.33% per annum.
CONSOL Energy currently has a 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 $800 million. Borrowings under this revolving credit facility bear
interest based on the London Interbank Offer Rate (LIBOR) or the Prime Rate at
CONSOL Energy's option. Funds may be borrowed for periods of 1 to 360 days
depending on the interest rate method. There were no borrowings under this
facility at June 30, 1999 and at June 30, 1998.
Stockholders' Equity and Dividends
CONSOL Energy had stockholders' equity of $255 million at June 30, 1999,
and $409 million at June 30, 1998. CONSOL Energy paid ordinary cash dividends
of $23 million during the 1999 period. No dividends were paid during the six
months ended June 30, 1998. The Board of Directors declared a dividend on July
21, 1999 of $0.28 per share of common stock for shareholders of record on August
4, 1999, payable on September 2, 1999. The Board of Directors currently intends
to pay quarterly dividends on the common stock. The
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declaration and payment of dividends by CONSOL Energy is subject to the
discretion of the Board of Directors, and no assurance can by given that CONSOL
Energy 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 Energy's financial results, contractual and legal
restrictions regarding the payment of dividends by CONSOL Energy, the credit
ratings of CONSOL Energy, planned investments by CONSOL Energy and such other
factors as the Board of Directors deems relevant. Current outstanding
indebtedness of CONSOL Energy does not restrict CONSOL Energy's ability to pay
cash dividends.
On August 23, 1999, CONSOL Energy announced its plans to repurchase up to
1,000,000 shares of its common stock. The stock will be used in connection with
benefit plan administration. As of September 15, 1999, 34,100 shares of CONSOL
Energy common stock has been repurchased.
RWE A.G., majority owner of CONSOL Energy common stock, announced a similar
plan in late May 1999. 3,594,000 shares of CONSOL Energy common stock have been
purchased on the open market. RWE announced completion of the program on August
23, 1999.
Inflation
Inflation in the United States has been relatively low in recent years and
did not have a material impact on CONSOL Energy's results of operations for the
1999 or 1998 periods.
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. Any of CONSOL
Energy'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 Energy 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 Energy
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 Energy currently does not anticipate, the year 2000 issue
could have a material impact on the operations of CONSOL Energy.
CONSOL Energy's plan to resolve year 2000 issues involves four phases:
assessment, remediation, testing and implementation. In September 1997, CONSOL
Energy 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
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not modified and has initiated a program to modify or replace portions of its
software so that CONSOL Energy's computer systems will function properly in the
year 2000 and thereafter. To date, CONSOL Energy is 99% complete on the
remediation and testing phase of the systems. CONSOL Energy expects software
reprogramming and replacement, testing and implementation to be completed prior
to December 31, 1999.
CONSOL Energy has assessed 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 Energy has completed formal
communications with all of its significant equipment vendors and other
suppliers. CONSOL Energy has not obtained timetables of expected completion
dates of modification, testing and implementation from all of the important
vendors and suppliers. CONSOL Energy does not control its suppliers and vendors,
but is attempting to have such timetables submitted. The effect on CONSOL
Energy's operations of not having these systems remediated, while not estimable
at this time could be significant.
CONSOL Energy conducts transactions that interface directly with systems of
suppliers and customers. There is no guarantee that the systems of other
companies on which CONSOL Energy's systems rely will be timely converted and
would not have an adverse effect on CONSOL Energy's systems. Furthermore, there
can be no assurance that CONSOL Energy's suppliers will not experience material
business disruptions that could affect CONSOL Energy as a result of the year
2000 problem. CONSOL Energy has completed communications with important
suppliers and customers as to their year 2000 readiness. The communications to
date from such third parties to CONSOL Energy'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 Energy. For example, the failure to be year 2000 compliant by
banks with whom CONSOL Energy has material banking relationships could cause
significant disruptions in CONSOL Energy's ability to make payments, deposit
funds and make investments, which could have a material adverse effect on CONSOL
Energy's financial condition.
CONSOL Energy 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 $2.0 million and is being expensed as incurred and
funded through operating cash flow. Since September of 1997 CONSOL Energy has
expensed $1.1 million related to all phases of the year 2000 project. In fiscal
year 2000, CONSOL Energy expects to expense less than $0.9 million on year 2000
related activities.
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CONSOL Energy is in the process of developing contingency plans in case of
failure of its information technology systems for all business units. In the
event CONSOL Energy's intermediaries or vendors do not expect to be year 2000
compliant, CONSOL Energy's contingency plan may include replacing such
intermediaries or vendors or conducting the particular operations itself.
CONSOL Energy's 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 Energy has not employed the
services of independent contractors to verify CONSOL Energy'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.
CONSOL Energy believes that it is difficult to fully assess the risks of
the year 2000 issue due to numerous uncertainties surrounding the issue.
Management believes that the primary risks are external to CONSOL Energy and
relate to the year 2000 readiness of customers, suppliers, transportation
suppliers such as railroads, barge lines, terminal operators, ocean vessel
brokers, and others. In the worst case scenario, CONSOL Energy's utility
customers may not purchase coal if their generators fail to operate, CONSOL
Energy may not be able to access its bank accounts or receive payments and its
transportation providers may not be able to make timely coal shipments to
customers. CONSOL Energy's mines and processing plants are highly mechanized
and employ equipment that incorporates microprocessing chips. The failure of
such embedded chips in critical equipment due to the year 2000 problem could
cause significant coal mining and processing disruptions.
The inability of CONSOL Energy or such third parties to adequately address
the year 2000 issues on a timely basis could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions. Accordingly, CONSOL Energy plans to devote the resources it
concludes are appropriate to address all significant year 2000 issues in a
timely manner.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Instruments Market Risks
CONSOL Energy's interest expense is sensitive to changes in the general
level of interest rates in the United States. At June 30, 1999, CONSOL Energy
had outstanding $289.6 million aggregate principal amount of debt under fixed-
rate instruments and $359.6 million aggregate principal amount of debt under
variable-rate instruments. CONSOL Energy's primary exposure to market risk for
changes in interest rates relates to its commercial paper program. At June 30,
1999, CONSOL Energy had an aggregate of $345.5 million in commercial paper
outstanding. CONSOL Energy's commercial paper bore interest at an average rate
of 5.26% during the six months ended June 30. 1999. A 100 basis-point increase
in the average rate for CONSOL Energy's commercial paper would have decreased
CONSOL Energy's 1999 net income by approximately $2.0 million. The fair value of
CONSOL Energy's financial instruments is set forth in Note 22 of the Notes to
Consolidated Financial Statements.
Almost all of CONSOL Energy's transactions are denominated in U.S. dollars,
and, as a result, it does not have material exposure to currency exchange-rate
risks.
CONSOL Energy has not engaged in any interest rate, foreign currency
exchange rate or commodity price hedging transactions.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors..................................................... 40
Consolidated Statements of Income for the Six Months Ended June 30, 1999 and
the Years Ended December 31, 1998, 1997 and 1996................................. 41
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 and 1997........ 42
Consolidated Statements of Stockholders' Equity for the Six Months Ended
June 30, 1999 and the Years Ended December 31, 1998, 1997,and 1996............... 44
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999
and the Years Ended December 31, 1998, 1997 and 1996............................. 45
Notes to Consolidated Financial Statements......................................... 46
</TABLE>
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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 Energy) as of June 30, 1999 and December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for the six months ended June 30, 1999 and each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of CONSOL Energy's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
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
Energy at June 30, 1999 and at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the six months ended June
30, 1999 and for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania
July 19, 1999
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<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended --------------------------------------------
June 30,1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales - Outside $ 1,076,528 $ 2,190,753 $ 2,146,936 $ 2,207,570
Sales - Related Parties (Note 3) 5,394 104,677 138,261 128,444
Other Income (Note 4) 28,560 54,562 64,441 60,940
----------- ------------ ------------ ------------
Total Revenue 1,110,482 2,349,992 2,349,638 2,396,954
Costs of Goods Sold and Other
Operating Charges 792,597 1,594,523 1,592,413 1,687,836
Selling, General and
Administrative Expenses 27,740 55,128 55,429 53,354
Depreciation, Depletion
and Amortization 121,237 238,584 233,304 235,159
Interest Expense (Note 5) 30,504 48,138 45,876 44,510
Taxes Other Than Income (Note 6) 98,244 201,137 188,940 187,396
----------- ------------ ------------ ------------
Total Costs 1,070,322 2,137,510 2,115,962 2,208,255
Earnings Before Income Taxes 40,160 212,482 233,676 188,699
Income Taxes (Note 7) 121 37,845 49,887 35,970
----------- ------------ ------------ ------------
Net Income $ 40,039 $ 174,637 $ 183,789 $ 152,729
=========== ============ ============ ============
Earnings Per Share $ .62 $ 1.73 $ 1.69 $ 1.40
=========== ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 64,784,685 100,820,599 108,806,714 108,806,714
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-41-
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
- ------
Current Assets:
Cash and Cash Equivalents $ 23,559 $ 31,285 $ 18,788
Marketable Securities, Available-for-Sale - - 114,829
Accounts and Notes Receivable:
Trade 241,054 261,215 252,901
Related Parties (Note 3) 743 1,358 6,305
Other Receivables 21,030 26,760 23,392
Inventories (Note 8) 206,995 170,574 140,724
Deferred Income Taxes (Note 7) 94,575 96,412 94,027
Prepaid Expenses 34,692 27,585 19,273
---------- ---------- ----------
Total Current Assets 622,648 615,189 670,239
Property, Plant and Equipment (Note 9):
Property, Plant and Equipment 4,863,138 4,843,147 4,506,797
Less - Accumulated Depreciation, Depletion
and Amortization 2,188,872 2,157,023 2,067,707
---------- ---------- ----------
Total Property, Plant and Equipment - Net 2,674,266 2,686,124 2,439,090
Other Assets:
Deferred Income Taxes (Note 7) 267,304 245,964 201,270
Advance Mining Royalties 117,808 119,160 131,079
Other 193,000 196,953 106,333
---------- ---------- ----------
Total Other Assets 578,112 562,077 438,682
---------- ---------- ----------
Total Assets $3,875,026 $3,863,390 $3,548,011
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-42-
<PAGE>
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts Payable $ 194,592 $ 211,835 $ 200,985
Short-Term Notes Payable (Note 10) 345,525 551,719 55,051
Current Portion of Long-Term Debt and
Capital Lease Obligations 13,752 115,793 7,639
Accrued Income Taxes 2,393 11,260 13,581
Other Accrued Liabilities (Note 11) 327,813 327,010 315,670
---------- ---------- ----------
Total Current Liabilities 884,075 1,217,617 592,926
Long-Term Debt:
Long-Term Debt (Note 12) 294,311 294,375 389,618
Capital Lease Obligations (Note 13) 18,432 20,720 -
---------- ---------- ----------
Total Long-Term Debt 312,743 315,095 389,618
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than
Pensions (Note 14) 1,177,639 1,174,964 1,082,061
Pneumoconiosis Benefits (Note 15) 473,459 483,423 500,429
Mine Closing 278,452 277,026 232,767
Workers' Compensation 216,846 212,807 177,453
Reclamation 14,397 12,859 24,331
Other 262,690 272,820 245,661
---------- ---------- ----------
Total Deferred Credits and Other Liabilities 2,423,483 2,433,899 2,262,702
Stockholders' Equity (Deficit):
Common Stock, $.01 Par Value; 500,000,000
Shares Authorized; 80,267,558 Issued and
Outstanding in 1999, 57,667,558 Issued and
Outstanding in 1998 and 108,806,714
Issued and Outstanding in 1997 803 577 1,088
Capital in Excess of Par Value 642,947 302,427 801,916
Retained Earnings Deficit (388,063) (405,602) (500,239)
Other Comprehensive Loss (Note 17) (962) (623) -
---------- ---------- ----------
Total Stockholders' Equity (Deficit) 254,725 (103,221) 302,765
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $3,875,026 $3,863,390 $3,548,011
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-43-
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Other Total
Capital in Retained Compre- Stockholders'
Common Excess of Earnings hensive Equity
Stock Par Value Deficit Loss (Deficit)
-------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(as previously reported) $ 100 $ 802,904 $ (296,757) $ - $ 506,247
Recapitalization effected as an
approximate 1,088 to 1
Stock Split 988 (988) - - -
-------- ------------ ---------- --------- -------------
Balance at December 31, 1995
(as adjusted) 1,088 801,916 (296,757) - 506,247
Net Income - - 152,729 - 152,729
Dividends ($.74 per Share) - - (80,000) - (80,000)
-------- ------------ ---------- --------- -------------
Balance at December 31, 1996 1,088 801,916 (224,028) - 578,976
Net Income - - 183,789 - 183,789
Dividends ($4.23 per Share) - - (460,000) - (460,000)
-------- ------------ ---------- --------- -------------
Balance at December 31, 1997 1,088 801,916 (500,239) - 302,765
Net Income - - 174,637 - 174,637
Unrealized Loss on Securities
(Net of $171 tax) - - - (270) (270)
Minimum Pension Liability
(Net of $224 tax) - - - (353) (353)
-------- ------------ ---------- --------- -------------
Comprehensive Income - - 174,637 (623) 174,014
Repurchase and
Retirement of Common Stock (511) (499,489) - - (500,000)
Dividends ($.90 per Share) - - (80,000) - (80,000)
-------- ------------ ---------- --------- -------------
Balance at December 31, 1998 577 302,427 (405,602) (623) (103,221)
Net Income - - 40,039 - 40,039
Unrealized Loss on Securities
(Net of $228 tax) - - - (354) (354)
Minimum Pension Liability
(Net of $10 tax) - - - 15 15
-------- ------------ ---------- --------- -------------
Comprehensive Income - - 40,039 (339) 39,700
Sale of Common Stock under
Public Offering, Net of Expenses 226 340,520 - - 340,746
Dividends ($.39 per Share) - - (22,500) - (22,500)
-------- ------------ ---------- --------- -------------
Balance at June 30, 1999 $ 803 $ 642,947 $ (388,063) $ (962) $ 254,725
======== ============ ========== ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-44-
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended -----------------------------------
June 30, 1999 1998 1997 1996
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 40,039 $ 174,637 $ 183,789 $ 152,729
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 121,237 238,584 233,304 235,159
Gain on Sale of Assets (6,171) (7,690) (13,134) (13,959)
Amortization of Advance Mining Royalties 6,063 16,920 14,617 22,809
Deferred Income Taxes (19,285) (26,375) (16,024) (23,149)
Changes in Operating Assets:
Accounts and Notes Receivable 26,613 33,296 19,185 (7,787)
Inventories (36,421) (15,687) (8,997) 60,884
Prepaid Expenses (7,107) (7,542) (2,699) 7,396
Changes in Other Assets (2,237) 23,576 4,892 2,931
Changes in Operating Liabilities:
Accounts Payable (17,057) (23,804) 18,920 (27,492)
Other Operating Liabilities (7,991) (12,283) 42,864 (22,959)
Changes in Other Liabilities (9,810) (9,812) (47,415) (13,088)
Other (2,878) 11,493 (1,389) (892)
--------- --------- --------- ---------
44,956 220,676 244,124 219,853
--------- --------- --------- ---------
Net Cash Provided by Operating Activities 84,995 395,313 427,913 372,582
Cash Flows from Investing Activities:
Capital Expenditures (105,099) (254,515) (200,617) (169,367)
Additions to Advance Mining Royalties (3,645) (5,833) (6,119) (5,444)
Proceeds from Sales of Assets 7,954 10,009 19,535 19,669
Acquisitions - Net of Cash Acquired (Note 2) - (100,408) - -
Changes in Marketable Securities - Net - 114,829 239,444 (96,094)
--------- --------- --------- ---------
Net Cash (Used in) Provided by Investing Activities (100,790) (235,918) 52,243 (251,236)
Cash Flows from Financing Activities:
(Payments on) Proceeds from Short-Term Borrowings (204,780) 494,448 8,711 (31,646)
Payments on Long-Term Notes (100,000) (55,133) (44,000) -
Payments on Miscellaneous Borrowings (5,397) (6,213) (6,065) (7,608)
Sale of Common Stock under Public
Offering, Net of Expenses 340,746 - - -
Repurchase and Retirement of Common Stock - (500,000) - -
Dividends Paid (22,500) (80,000) (460,000) (80,000)
--------- --------- --------- ---------
Net Cash Provided by (Used in) Financing Activities 8,069 (146,898) (501,354) (119,254)
--------- --------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (7,726) 12,497 (21,198) 2,092
Cash and Cash Equivalents at Beginning of Period 31,285 18,788 39,986 37,894
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 23,559 $ 31,285 $ 18,788 $ 39,986
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-45-
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1999
-------------
(Dollars in thousands, except per share data)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------
A summary of the significant accounting policies of CONSOL Energy Inc. and
subsidiaries (CONSOL Energy) is presented below. These, together with the other
notes that follow, are an integral part of the consolidated financial
statements.
FISCAL YEAR:
- -----------
CONSOL Energy changed its fiscal year from a year ending December 31 to a year
ending June 30. The transitional fiscal period is the six months ended June 30,
1999. CONSOL Energy's first full fiscal year ended June 30 will be the year
that starts July 1, 1999 and ends June 30, 2000. This change was made in order
to align its fiscal year with that of RWE A. G. which beneficially owns directly
or through subsidiaries approximately 72% of the common stock of CONSOL Energy.
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 Energy 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.
INVESTMENTS IN DEBT AND EQUITY SECURITIES:
- -----------------------------------------
CONSOL Energy accounts for its investments in debt and equity securities in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
These investments are adjusted to market value at the end of each accounting
period.
This standard requires securities to be classified into one of three categories:
(1) trading, (2) available-for-sale or (3) held-to-maturity. All securities at
June 30, 1999, December 31, 1998 and 1997 are classified as available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. 115.
-46-
<PAGE>
Management determines the proper classification at the time of purchase and
reevaluates such designations at the end of each accounting period. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading with unrealized holding gains and losses included
in earnings. Securities not classified as trading are classified as available-
for-sale with unrealized gains or losses, net of income taxes, included in other
comprehensive income.
Interest and dividends are included in interest income. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is also included in interest income.
The cost of investments sold is determined on a specific identification basis.
INVENTORIES:
- -----------
Inventories are stated at the lower of cost or market.
Cost is determined by the last-in, first-out (LIFO) method for 60%, 58% and 46%
of coal inventories at June 30, 1999, December 31, 1998 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.
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.
Development and implementation costs for purchased and internally developed
software are expensed until it has been determined that the software will result
in probable future economic benefits and management has committed to funding the
project. Thereafter, all direct costs of materials and services incurred in
developing or obtaining software are capitalized and amortized using the
straight-line method over its estimated useful life not to exceed seven years.
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.
-47-
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS:
- -------------------------------
Impairment of long-lived assets is recorded when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying value. The carrying value of the
assets is then reduced to their estimated fair value which is usually measured
based on an estimate of future discounted cash flows.
INCOME TAXES:
- ------------
The provision for income taxes has been determined under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires use
of the asset and liability approach to account 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 Energy is required by federal and state statutes to provide benefits to
employees for awards related to coal workers' pneumoconiosis. CONSOL Energy 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. Accrued mine closing
and perpetual care costs are regularly reviewed by management and are revised
for changes in future estimated costs and regulatory requirements.
WORKERS' COMPENSATION:
- ---------------------
CONSOL Energy is primarily self-insured for workers' compensation. Annual
provisions are made for the estimated liability for awarded and pending claims.
RECLAMATION:
- -----------
During active mining operations, expenditures relating to reclamation and
regulatory requirements are expensed as incurred. Postclosure reclamation costs
are estimated and charged to expense using the units-of-production method over
the estimated recoverable tons. Accrued reclamation costs are regularly
reviewed by management and are revised for changes in future estimated costs and
regulatory requirements.
REVENUE RECOGNITION:
- -------------------
Coal sales are generally recognized when coal is loaded onto transportation
vehicles for shipment to customers. For domestic sales, this generally occurs
when coal is loaded at mine or offsite storage locations. For export sales,
this generally occurs when coal is loaded onto marine vessels at terminal
locations. Industrial supplies and equipment sales are recorded when the
products are shipped.
-48-
<PAGE>
STOCK-BASED COMPENSATION:
- ------------------------
CONSOL Energy has implemented the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Note 16). CONSOL Energy continues to measure compensation
expense for its stock-based compensation plans using the intrinsic value based
methods of accounting prescribed by Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees".
EARNINGS PER COMMON SHARE:
- -------------------------
Basic earnings per share are computed using weighted average shares outstanding.
CONSOL Energy has no dilutive common stock equivalents.
RECLASSIFICATIONS:
- -----------------
Certain reclassifications of prior years' data have been made to conform to 1999
classifications.
NOTE 2 - ACQUISITIONS:
- ---------------------
On September 22, 1998, CONSOL Energy acquired Rochester and Pittsburgh Coal
Company. Rochester and Pittsburgh Coal Company is primarily engaged in
underground bituminous coal operations in Pennsylvania. CONSOL Energy paid
$100,408 (net of $49,275 cash acquired).
The acquisition was accounted for under the purchase method. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed,
based on the fair values at the date of the acquisition. CONSOL Energy's
financial statements also include the results of Rochester and Pittsburgh Coal
Company on a consolidated basis from the date of the acquisition.
Pro forma revenues, assuming the acquisition of Rochester and Pittsburgh Coal
Company had occurred on January 1, would be $2,604,726 for 1998 and $2,578,666
for 1997. Pro forma net income and pro forma earnings per share for these
periods, after giving effect to certain purchase accounting adjustments, would
not materially change. These pro forma results are not necessarily indicative
of what would have occurred if the acquisition had been made at the beginning of
1997. In addition, they are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from combined
operations.
On November 7, 1998, CONSOL Energy exchanged the Holden Complex and the Twin
Branch Complex for the Vesta Coal Reserves located in Southwestern Pennsylvania.
The transaction was recorded as an exchange of similar productive assets with no
gain or loss recognized.
-49-
<PAGE>
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES:
- ------------------------------------------
Upon completion of its Initial Public Offering (IPO) on April 29, 1999, CONSOL
Energy was owned 68% directly or by subsidiaries of RWE A.G. of Germany
(collectively Rheinbraun). Since the IPO, Rheinbraun has increased its
ownership to 72%. Prior to completion of the IPO, CONSOL Energy was owned 94%
by Rheinbraun and 6% by E. I. du Pont de Nemours and Company (DuPont). Prior to
November 5, 1998, CONSOL Energy was owned 50% by DuPont and 50% by Rheinbraun.
CONSOL Energy sells coal to Rheinbraun and DuPont and industrial supplies to
DuPont on a basis reflecting the market value of the products. Through December
31, 1998, transactions with DuPont were accounted for as related party
transactions. Beginning January 1, 1999, transactions with DuPont are no longer
classified as related party due to the change in ownership percentages. Such
sales were as follows:
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended ----------------------------------------
June 30, 1999 1998 1997 1996
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Coal sales $ 5,394 $ 21,678 $ 39,406 $ 39,212
Industrial supplies and
equipment sales - 82,999 98,855 89,232
-------- ---------- ---------- ----------
Total Sales - Related Parties $ 5,394 $ 104,677 $ 138,261 $ 128,444
======== ========== ========== ==========
</TABLE>
DuPont and CONSOL Energy had an annually renewable service agreement to provide
each other with certain services and functions. Charges were based on each
party's fully allocated cost as distributed to its own organizational units and
were paid currently. Net amounts charged and credited under this agreement were
not significant in 1998, 1997 or 1996. This service agreement was terminated as
of December 31, 1998.
NOTE 4 - OTHER INCOME:
- ---------------------
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended ----------------------------------
June 30, 1999 1998 1997 1996
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Royalty income $ 8,378 $ 14,209 $ 13,338 $ 9,758
Interest income 2,226 10,531 22,618 20,501
Gain on disposition of assets 6,171 7,690 13,134 13,959
Rental income 1,577 5,336 5,165 6,020
Proceeds from relinquishment
of mining rights - 5,250 - -
Service income 4,059 5,180 5,702 6,277
Other 6,149 6,366 4,484 4,425
-------- -------- -------- --------
Total Other Income $ 28,560 $ 54,562 $ 64,441 $ 60,940
======== ======== ======== ========
</TABLE>
-50-
<PAGE>
NOTE 5 - INTEREST EXPENSE:
- -------------------------
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended ----------------------------------
June 30, 1999 1998 1997 1996
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest on debt $ 26,094 $ 38,590 $ 32,021 $ 34,505
Non-cash interest accretion 2,896 6,823 6,425 4,975
Interest on other payables 2,772 6,017 9,246 7,742
Interest capitalized (1,258) (3,292) (1,816) (2,712)
-------- -------- -------- --------
Total Interest Expense $ 30,504 $ 48,138 $ 45,876 $ 44,510
======== ======== ======== ========
</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 Six For the Year Ended December 31,
Months Ended -----------------------------------
June 30, 1999 1998 1997 1996
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Production taxes $ 61,271 $ 132,187 $ 121,969 $ 113,452
Payroll taxes 22,048 37,745 37,346 39,632
Property taxes 13,430 27,377 27,786 32,099
Other 1,495 3,828 1,839 2,213
-------- --------- --------- ---------
Total Taxes Other Than Income $ 98,244 $ 201,137 $ 188,940 $ 187,396
======== ========= ========= =========
</TABLE>
NOTE 7 - INCOME TAXES:
- ---------------------
Income taxes provided on earnings consisted of:
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended ----------------------------------------
June 30, 1999 1998 1997 1996
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
U.S. federal $ 15,013 $ 52,084 $ 52,015 $ 50,533
U.S. state 2,664 7,958 6,677 5,928
Non-U.S. 1,729 4,178 7,219 2,658
--------- ---------- ---------- ----------
19,406 64,220 65,911 59,119
Deferred:
U.S. federal (16,987) (23,267) (14,001) (19,288)
U.S. state (2,884) (4,109) (2,413) (3,518)
Non-U.S. 586 1,001 390 (343)
--------- ---------- ---------- ----------
(19,285) (26,375) (16,024) (23,149)
--------- ---------- ---------- ----------
Total Income Taxes $ 121 $ 37,845 $ 49,887 $ 35,970
========= ========== ========== ==========
</TABLE>
-51-
<PAGE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Deferred Tax Assets:
Postretirement benefits other than pensions $ 486,973 $ 484,037 $ 445,527
Pneumoconiosis benefits 189,086 191,567 198,939
Mine closing 105,244 105,149 96,965
Workers' compensation 97,199 95,441 78,273
Alternative minimum tax 63,813 62,811 48,307
Reclamation 12,566 12,005 14,560
Net operating loss 8,653 8,653 -
Other 135,873 137,726 111,677
---------- ---------- ----------
Total Deferred Tax Assets 1,099,407 1,097,389 994,248
Deferred Tax Liabilities:
Property, plant and equipment (655,899) (675,189) (636,756)
Advance mining royalties (34,591) (35,118) (38,950)
Other (47,038) (44,706) (23,245)
---------- ---------- ----------
Total Deferred Tax Liabilities (737,528) (755,013) (698,951)
---------- ---------- ----------
Net Deferred Tax Asset $ 361,879 $ 342,376 $ 295,297
========== ========== ==========
</TABLE>
Due to the acquisition of Rochester and Pittsburgh Coal Company (R&P), the 1998
components of deferred tax assets and liabilities have been affected by $111,237
and $90,928, respectively.
At June 30, 1999, also due to the acquisition of R&P, CONSOL Energy has net
operating loss carry-forwards for federal income tax purposes of $22,141 which
are available to offset future federal taxable income through 2010. A portion of
these carry-forwards is also available for state income tax purposes. These
carry-forwards are primarily related to mine development expenditures.
The following is a reconciliation, stated as a percentage of pretax income of
the U.S. statutory federal income tax rate to CONSOL Energy's effective tax
rate:
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended ----------------------------------
June 30, 1999 1998 1997 1996
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% 35.0%
Excess tax depletion (33.5) (17.4) (13.8) (17.3)
Nonconventional fuel tax credit (1.9) (0.8) (1.2) (0.8)
Net effect of state tax (0.6) 1.2 1.2 0.8
Net effect of foreign tax 1.9 1.0 1.3 (0.5)
Other (0.6) (1.2) (1.2) 1.9
----- ----- ----- -----
Effective Income Tax Rate 0.3% 17.8% 21.3% 19.1%
===== ===== ===== =====
</TABLE>
Foreign income before taxes totaled $3,964 for the six months of 1999, $11,165
in 1998, $13,832 in 1997 and $10,273 in 1996.
-52-
<PAGE>
NOTE 8 - INVENTORIES:
- --------------------
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Coal $ 127,019 $ 91,886 $ 57,947
Merchandise for resale 36,614 37,209 38,994
Supplies 43,362 41,479 43,783
--------- --------- ---------
Total Inventories $ 206,995 $ 170,574 $ 140,724
========= ========= =========
</TABLE>
Replacement cost of coal inventories approximated LIFO cost at June 30, 1999.
Replacement cost of coal inventories exceeded LIFO cost by $6,051 and $10,476 at
December 31, 1998 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 $5,110 at June 30, 1999, $5,254 at December 31, 1998 and $6,261 at December
31,1997.
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT:
- --------------------------------------
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Coal and surface lands $1,431,385 $1,442,394 $1,417,847
Plant and equipment 2,830,768 2,807,274 2,681,224
Mine development and airshafts 600,985 593,479 407,726
---------- ---------- ----------
4,863,138 4,843,147 4,506,797
Less - Accumulated depreciation,
depletion and amortization 2,188,872 2,157,023 2,067,707
---------- ---------- ----------
Net Property, Plant and Equipment $2,674,266 $2,686,124 $2,439,090
========== ========== ==========
</TABLE>
Plant and equipment includes gross assets under capital lease of $19,627 at June
30, 1999 and December 31,1998. Accumulated amortization for capital leases was
$3,013 at June 30, 1999 and $993 at December 31, 1998. There were no assets
under capital lease included in gross assets or accumulated amortization at
December 31, 1997.
NOTE 10 - SHORT-TERM NOTES PAYABLE:
- ----------------------------------
CONSOL Energy has commercial paper notes outstanding of $345,525, $551,719 and
$55,051 (net of discount of $460, $1,441 and $114) at June 30, 1999, December
31, 1998 and 1997, respectively. The weighted average interest rate of the
commercial paper notes outstanding was 5.26, 6.10 and 6.26 percent with an
average maturity of 9, 16 and 14 days at June 30, 1999 and at December 31, 1998
and 1997, respectively.
CONSOL Energy has a $800,000 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 $800,000. Borrowings under this revolving credit facility bear
interest based on the London Interbank Offer Rate (LIBOR) or the Prime Rate at
CONSOL Energy's option. Funds may be borrowed for periods of 1 to 360 days
depending on the interest rate method. There were no borrowings under this
facility at June 30, 1999 and at December 31, 1998 and 1997.
-53-
<PAGE>
NOTE 11 - OTHER ACCRUED LIABILITIES:
- -----------------------------------
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Accrued payroll and benefits $ 50,050 $ 51,733 $ 41,559
Accrued other taxes 36,313 37,370 35,133
Subsidence 16,392 14,454 10,074
Accrued royalties 6,846 10,791 14,230
Loveridge fire loss 5,417 - -
Accrued interest 3,036 7,598 9,930
Other 45,024 41,661 34,122
Current portion of long-term liabilities:
Postretirement benefits other than pensions 74,219 69,346 63,254
Workers' compensation 41,900 41,420 33,213
Mine closing 17,954 19,644 16,824
Reclamation 12,947 19,453 20,221
Pneumoconiosis benefits 12,621 9,039 10,982
Salary retirement 500 500 20,013
Other 4,594 4,001 6,115
--------- --------- ---------
Total Other Accrued Liabilities $ 327,813 $ 327,010 $ 315,670
========= ========= =========
</TABLE>
NOTE 12 - LONG-TERM DEBT:
- ------------------------
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Unsecured Debt:
Notes due 2002 at average of 8.28% $ 66,000 $ 66,000 $ 66,000
Notes due 2004 at 8.21% 45,000 45,000 45,000
Notes due 2007 at 8.25% 44,797 44,788 44,771
Notes due 1999 at 7.88% - 100,000 99,970
Baltimore Port Facility revenue bonds
in series due 2010 and 2011 at 6.50% 102,865 102,865 102,865
Variable rate notes payable due at
various dates through 2001 14,118 14,972 3,709
Advance royalty commitments 28,146 27,057 28,328
Other long-term notes maturing at
various dates through 2031 2,742 5,438 6,614
--------- --------- ---------
303,668 406,120 397,257
Less amounts due in one year 9,357 111,745 7,639
--------- --------- ---------
Total Long-Term Debt $ 294,311 $ 294,375 $ 389,618
========= ========= =========
</TABLE>
The variable rate notes, advance royalty commitments and the other long-term
notes had an average interest rate of approximately 7.1% at June 30, 1999, 7.2%
at December 31, 1998 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.
-54-
<PAGE>
Annual undiscounted maturities on long-term debt during the next five years are
as follows:
<TABLE>
<CAPTION>
Year ended
June 30, Amount
- ---------- ----------
<S> <C>
2000 $ 9,357
2001 $ 10,370
2002 $ 68,464
2003 $ 2,285
2004 $ 46,990
</TABLE>
NOTE 13 - LEASES:
- ----------------
CONSOL Energy uses various leased facilities and equipment in its operations.
Future minimum lease payments under capital and operating leases, together with
the present value of the net minimum capital lease payment, at June 30, 1999,
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000 $ 5,940 $13,575
2001 5,162 9,774
2002 4,817 4,324
2003 4,790 3,294
2004 4,683 1,314
Remainder 2,178 10,880
------- -------
Total minimum lease payments 27,570 $43,161
=======
Less imputed interest (7.05% - 7.50%) 4,743
-------
Present value of minimum lease payment 22,827
Less amounts due in one year 4,395
-------
Total Long-Term Capital Lease Obligation $18,432
=======
</TABLE>
Rental expense under operating leases was $10,565 in the six months of 1999,
$17,912 in 1998, $18,722 in 1997 and $19,936 in 1996.
NOTE 14 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:
- --------------------------------------------------------
CONSOL Energy 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.
Certain subsidiaries of CONSOL Energy 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 generally unfunded. The medical plan contains certain cost sharing and
containment features, such as deductibles, coinsurance, health care networks and
coordination with Medicare.
-55-
<PAGE>
The reconciliation of changes in benefit obligation, plan assets and funded
status of these plans at June 30, 1999 and at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------- -----------------------------------------
December 31, December 31,
June 30, ----------------------- June 30, --------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of Benefit Obligation:
Benefit obligation at
beginning of year $ 301,813 $ 227,671 $ 220,643 $ 1,312,596 $ 955,151 $ 938,877
Service cost 7,468 13,054 12,657 4,429 7,486 9,884
Interest cost 9,759 16,738 15,107 42,096 79,615 65,968
Actuarial loss (gain) 3,601 31,686 534 (65,268) 242,494 -
Acquisition - 42,908 - - 92,609 -
Benefits paid (12,944) (30,244) (21,270) (35,521) (64,759) (59,578)
---------- ---------- ---------- ----------- ----------- -----------
Benefit obligation
at end of year $ 309,697 $ 301,813 $ 227,671 $ 1,258,332 $ 1,312,596 $ 955,151
========== ========== ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------- -----------------------------------------
December 31, December 31,
June 30, ----------------------- June 30, --------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of Fair Value of Plan
Assets:
Fair value of plan assets
at beginning of year $ 294,211 $ 173,287 $ 158,453 $ 8,136 $ - $ -
Actual return on plan assets 12,168 37,837 26,273 352 626 -
Acquisition - 103,035 - - 7,510 -
Company contributions 361 10,296 9,831 34,535 64,759 59,578
Benefits and other payments (12,944) (30,244) (21,270) (35,521) (64,759) (59,578)
---------- ---------- ---------- ----------- ----------- -----------
Fair value of plan assets
at end of year $ 293,796 $ 294,211 $ 173,287 $ 7,502 $ 8,136 $ -
========== ========== ========== =========== =========== ===========
Funded Status:
Status of Plan (underfunded) $ (15,901) $ (7,602) $ (54,384) $(1,250,830) $(1,304,460) $ (955,151)
Unrecognized prior
service cost 1,900 2,076 2,434 (26,281) (30,697) (39,528)
Unrecognized net actuarial
loss (gain) 42,422 40,382 30,324 25,253 90,847 (150,636)
---------- ---------- ---------- ----------- ----------- -----------
Prepaid (accrued) benefit cost $ 28,421 $ 34,856 $ (21,626) $(1,251,858) $(1,244,310) $(1,145,315)
========== ========== ========== =========== =========== ===========
Amounts Recognized in Statement
of Financial Position consist of:
Prepaid benefit cost $ 64,420 $ 35,433 $ 172 $ - $ - $ -
Accrued benefit liability (35,447) - (21,798) (1,251,858) (1,244,310) (1,145,315)
Accumulated other
comprehensive loss (552) (577) - - - -
---------- ---------- ---------- ----------- ----------- -----------
Net amount recognized $ 28,421 $ 34,856 $ (21,626) $(1,251,858) $(1,244,310) $(1,145,315)
========== ========== ========== =========== =========== ===========
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------- ---------------------------------
December 31, December 31,
June 30, ----------------------- June 30, --------------------
1999 1998 1997 1999 1998 1997
--------- --------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions:
Discount rate 7.00% 6.75% 7.25% 7.00% 6.75% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% -
Rate of compensation increase 4.43% 4.43% 4.68% - - -
</TABLE>
For measurement purposes, a 7.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999, gradually decreasing to
4.5% in 2004, and remaining level thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------- ---------------------------------------
For the Six For the Year Ended For the Six For the Year Ended
Months Ended December 31, Months Ended December 31,
June 30, ------------------------------- June 30, ---------------------------
1999 1998 1997 1996 1999 1998 1997 1996
-------- -------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Components of Net Periodic Benefit Cost:
Service cost $ 7,468 $ 13,054 $ 12,657 $ 12,556 $ 4,429 $ 7,486 $ 9,884 $ 9,227
Interest cost 9,759 16,738 15,107 14,418 42,096 79,615 65,968 62,736
Expected return
on plan assets (10,832) (17,822) (13,239) (12,963) (306) (181) - -
Amortization of prior
service cost 176 351 1,270 353 (4,416) (8,831) (8,831) (8,831)
Recognized net
actuarial loss (gain) 1,345 1,040 2,759 215 280 567 (6,445) (9,447)
-------- -------- -------- -------- ------- ------- ------- --------
Benefit cost $ 7,916 $ 13,361 $ 18,554 $ 14,579 $42,083 $78,656 $60,576 $53,685
======== ======== ======== ======== ======= ======= ======= ========
</TABLE>
Net periodic pension cost is determined using the assumptions as of the
beginning of the year, and the funded status is determined using the assumptions
as of the end of the year.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $881, $881, and $607, respectively, as of June 30,
1999, $903, $903 and $568, respectively, as of December 31, 1998, and $888, $888
and $509, respectively, as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the medical plan. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and
interest costs components $ 6,309 $ (5,253)
Effect on accumulated postretirement
benefit obligation $158,847 $(131,758)
NOTE 15 - OTHER EMPLOYEE BENEFIT PLANS:
- --------------------------------------
UMWA Pension and Benefit Trusts:
- -------------------------------
Certain subsidiaries of CONSOL Energy are required under the National Bituminous
Coal Wage Agreement (NBCWA) of 1998 with the United Mine Workers of America
(UMWA) to pay amounts to the UMWA Pension
-57-
<PAGE>
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 $273 in
the six months of 1999, $3,395 in 1998, $5,831 in 1997 and $6,441 in 1996. The
Employee Retirement Income Security 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 Energy 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 $9,370 in the six months of 1999,
$28,428 in 1998, $32,980 in 1997 and $25,828 in 1996.
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 $126 in the six months of 1999, $5,649
in 1998, $5,564 in 1997 and $3,269 in 1996.
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 thirteen cents per hour worked by UMWA represented employees. The
NBCWA of 1998 specifies that benefits provided under this plan are to be
incorporated into the current agreement and will be in effect for the duration
of the contract. Amounts charged to expense for the UMWA 1993 Benefit Plan were
$520 in the six months of 1999, $999 in 1998, $779 in 1997 and $857 in 1996.
At June 30, 1999, approximately 45% of CONSOL Energy's workforce was represented
by the UMWA. The current UMWA labor agreement is effective from January 1, 1998
through December 31, 2002.
Investment Plan:
- ---------------
CONSOL Energy has two investment plans covering all domestic, non-represented
employees. One is available to all employees of Rochester & Pittsburgh Coal
Company. This plan matches employee contributions up to $750 per year. The
other plan, available to all other non-represented employees, matches employee
contributions for an amount up to 6 percent of the employee's base pay. Amounts
charged to expense were $5,841 in the six months of 1999, $11,343 in 1998,
$11,372 in 1997 and $11,324 in 1996.
Long-Term Disability:
- --------------------
CONSOL Energy 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.
Liabilities (net of Plan Assets) included in Deferred Credits and Other
Liabilities - Other amounted to $27,854 at June 30, 1999, $25,391 at December
31, 1998 and $22,342 at December 31, 1997. The expense was determined using a
discount rate of 6.75% for the six months of 1999, and 7.25% in 1998, 1997 and
1996. Amounts charged to expense were $2,464 in the six months of 1999, $7,557
in 1998, $8,449 in 1997 and $2,988 in 1996.
Coal Workers' Pneumoconiosis (CWP):
- ----------------------------------
CONSOL Energy is liable under the Federal Coal Mine Health and Safety Act of
1969, as amended, for medical
-58-
<PAGE>
and disability benefits to employees and their dependents resulting from
occurrences of coal workers' pneumoconiosis disease. CONSOL Energy is also
liable under various state statutes for pneumoconiosis benefits. CONSOL Energy
provides for these claims through a self-insurance program.
CONSOL Energy 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 14.5 years. The expense was
determined using a discount rate of 6.75% in 1999 and 7.25% in 1998, 1997 and
1996.
Coal Workers' Pneumoconiosis cost included the following components:
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended --------------------------------------------
June 30, 1999 1998 1997 1996
-------------- ---------------- --------------- ---------
<S> <C> <C> <C> <C>
Service cost $ 3,795 $ 6,333 $ 7,128 $ 8,971
Interest cost 6,439 14,201 16,075 20,436
Amortization of actuarial gain (10,766) (21,294) (18,756) (17,326)
Return on Plan Assets (813) (1,487) - -
-------- -------- -------- --------
Net Coal Workers' Pneumoconiosis cost $ (1,345) $ (2,247) $ 4,447 $ 12,081
======== ======== ======== ========
</TABLE>
CWP payments were $5,037 in the six months of 1999, $10,003 in 1998, $10,928 in
1997 and $12,543 in 1996.
NOTE 16 - STOCK-BASED COMPENSATION:
- ----------------------------------
CONSOL Energy adopted the CONSOL Energy Inc. Equity Incentive Plan on April 7,
1999. The initial number of shares of common stock reserved for issuance under
the plan is 3,250,000, of which 1,000,000 are available for issuance of awards
other than stock options.
During the six months ended June 30, 1999, 784,000 employee stock options were
granted at an exercise price equal to the initial public offering price of $16
per share. No compensation expense was recognized because the exercise price of
the stock options equals the market price of the underlying stock at the date of
the grant and the number of shares issued is fixed. These stock options will
terminate ten years after the date on which they were granted. The stock
options will vest 25% per year, beginning one year after the grant date. The
vesting of the options will accelerate in the event of death, disability or
retirement and may accelerate upon a change of control of CONSOL Energy. There
were no other grants, exercises or forfeitures of employee options under the
Equity Incentive Plan in 1999.
CONSOL Energy accounts for its stock options granted to employees in accordance
with APB Opinion 25, "Accounting for Stock Issued to Employees", and related
interpretations. If the compensation cost of these plans had been determined
using the fair-value method prescribed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the change in net
income and earnings per share would be diminimus for the six months ended June
30, 1999. Under Statement of Financial Accounting Standards No. 123, the fair
value of each option grant is estimated on the day of the grant using the Black-
Scholes option-pricing model. The weighted average assumptions used were 7% for
the expected dividend yield, 45% for the expected volatility, 6% for the risk-
free interest rate and 5 years for the expected life.
Director compensation also includes an initial stock option of 4,000 shares and
an annual grant of stock options of 2,000 shares valued at the fair market value
at the date of the grant. Certain directors of CONSOL Energy are entitled under
the plan to receive annual shares of common stock having a fair market value of
$225 per grant and stock options having a fair market value of $25 per annum.
No shares or options have yet been granted under this portion of the plan. For
the six months ended June 30, 1999, $125 of expense has been accrued for this
program, which will be accounted for under Statement of Financial Accounting
Standards No. 123.
-59-
<PAGE>
NOTE 17 - OTHER COMPREHENSIVE LOSS:
- ----------------------------------
Components of other comprehensive loss consist of the following:
<TABLE>
<CAPTION>
Accumulated
Unrealized Minimum Other
Loss on Pension Comprehensive
Securities Liability Loss
----------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1998 $(270) $(353) $(623)
Current period change (354) 15 (339)
----- ----- -----
Balance at June 30, 1999 $(624) $(338) $(962)
===== ===== =====
</TABLE>
NOTE 18 - RESEARCH AND DEVELOPMENT COSTS:
- ----------------------------------------
CONSOL Energy operates a research and development facility devoted to the mining
and the use of coal. Costs related to research and development are expensed as
incurred. These costs were $4,382 in the six months of 1999, $9,222 in 1998,
$9,484 in 1997 and $9,442 in 1996.
NOTE 19 - SUPPLEMENTAL CASH FLOW INFORMATION:
- --------------------------------------------
<TABLE>
<CAPTION>
For the Six For the Year Ended December 31,
Months Ended --------------------------------
June 30, 1999 1998 1997 1996
------------- ----------- --------- --------
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized) $30,291 $ 41,119 $ 33,031 $36,544
Income taxes paid $26,942 $ 63,216 $ 55,554 $64,547
Dividends to stockholders $22,500 $ 80,000 $460,000 $80,000
Non-cash investing and financing activities:
Business acquired (Note 2):
Fair value of assets acquired - $438,699 - -
Liabilities assumed - $338,291 - -
Coal property exchange (Note 2):
Net fair value of assets acquired - $ (1,312) - -
Net liabilities assumed - $ (1,312) - -
Charitable contribution of property - $(13,480) - -
</TABLE>
NOTE 20 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
- ----------------------------------------------------------
CONSOL Energy 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 June 30, 1999, December 31, 1998 and 1997,
accounts receivable from utilities were $134,581, $150,755 and $137,857,
respectively, and from steel and coke producers were $42,998, $52,538 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 Energy 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.
-60-
<PAGE>
Sales (including spot sales) to CONSOL Energy's largest customer, Allegheny
Energy, were $155,991 in the six months of 1999, $354,333 in 1998, $357,605 in
1997 and $318,899 in 1996. Accounts receivable from Allegheny Energy were
$43,250 as of June 30, 1999 and $32,246 and $31,818 as of December 31, 1998 and
1997, respectively.
In the six months of 1999, CONSOL Energy had export sales of $173,667. In the
years 1998, 1997 and 1996, CONSOL Energy had export sales of $395,171, $408,013
and $473,590, respectively. These sales were made principally to Canada and
Western Europe. CONSOL Energy's U.S. operations had export sales of $133,309 in
the six months of 1999 and $321,708, $329,134 and $360,874 in 1998, 1997 and
1996, respectively.
NOTE 21 - MARKETABLE SECURITIES:
- -------------------------------
Included in Other Assets are investments in securities considered available-for-
sale.
The following is a summary of available-for-sale securities at June 30, 1999:
<TABLE>
<CAPTION>
Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government and agencies $46,194 $ - $(1,023) $45,171
Other Debt securities 203 - - 203
------- ---------- ---------- -------
Total debt securities 46,397 - (1,023) 45,374
Cash Equivalents included in
non-current funding 3,205 - - 3,205
------- ---------- ---------- -------
$49,602 $ - $(1,023) $48,579
======= ========== ========== =======
Schedules of maturities:
One year or less $10,107 $10,064
One year through five years 28,640 28,011
Five years through ten years 7,650 7,299
------- -------
$46,397 $45,374
======= =======
The following is a summary of available-for-sale securities at December 31, 1998:
Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
<C> <C> <C> <C>
U.S. Government and agencies $46,282 $ 109 $ (550) $45,841
Other Debt securities 210 - - 210
------- ---------- ---------- -------
Total debt securities 46,492 109 (550) 46,051
Cash Equivalents included in
non-current funding 2,184 - - 2,184
------- ---------- ---------- -------
$48,676 $ 109 $ (550) $48,235
======= ========== ========== =======
Schedules of maturities:
One year or less $ 6,194 $ 6,122
One year through five years 32,565 32,330
Five years through ten years 7,733 7,599
------- -------
$46,492 $46,051
======= =======
</TABLE>
Proceeds from the sales of securities in this portfolio were $3,860 for the six
months of 1999 and $6,209 in 1998. Gross realized gains and losses on those
sales were not significant.
-61-
<PAGE>
At December 31, 1997, marketable securities were considered available-for-sale
and consisted primarily of financial instruments for which the yield (dividend
or interest) was 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. At December 31, 1997, these securities generally had no
contractual maturity dates, but had yield reset periods of less than 30 days.
During the three years ended December 31, 1998, all transactions in the
portfolio were at par resulting in no realized gains or losses from the
contractual yields. The entire portfolio was liquidated in 1998.
NOTE 22 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
- ----------------------------------------------
The following methods and assumptions were used to estimate the fair values of
financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value due to the short
maturity of these instruments.
Marketable securities: The carrying value of available-for-sale marketable
securities approximates fair value based on impending auction dates and routine
trading at par value for those or similar investments.
Marketable securities included in Other Assets: The fair values for financial
instruments included in Other Assets were estimated based on quoted market
prices for the same or similar issues.
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 Energy'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,
----------------------------------------------
June 30, 1999 1998 1997
-------------------------- ---------------------- ----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 23,559 $ 23,559 $ 31,285 $ 31,285 $ 18,788 $ 18,788
Marketable securities $ - $ - $ - - $ 114,829 $ 114,829
Marketable securities
included in Other Assets $ 48,579 $ 48,579 $ 48,235 $ 48,235 $ - $ -
Short-term notes payable $ (345,525) $ (345,525) $(551,719) $(551,719) $ (55,051) $ (55,051)
Long-term debt $ (303,668) $ (301,149) $(406,120) $(427,546) $(397,257) $(420,215)
</TABLE>
NOTE 23 - COMMITMENTS AND CONTINGENT LIABILITIES:
- ------------------------------------------------
CONSOL Energy has various purchase commitments for materials, supplies and items
of permanent investment incidental to the ordinary conduct of business. Such
commitments are not at prices in excess of current market.
CONSOL Energy 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. The costs of mine closing and reclamation are
accrued over the productive life of the mine. In addition, CONSOL Energy has
accrued $3,275 in other liabilities for remediation of a waste disposal site.
In the opinion of management, the ultimate liabilities resulting from such
lawsuits and claims will not materially affect CONSOL Energy.
-62-
<PAGE>
On June 22, 1999, an underground mine fire was discovered at the idled Loveridge
Mine. The expected costs of extinguishing the fire and rehabilitating the mine
are $5,417 which is recorded in Other Accrued Liabilities. CONSOL Energy has
sealed the mine to deplete oxygen underground, and has poured concrete seals to
isolate the area where the fire occurred. The mine atmosphere is being
monitored daily and readings indicate that the fire is beginning to extinguish.
A public utility filed suit against CONSOL Energy alleging breach of a long-term
coal supply contract based upon CONSOL Energy's refusal to agree to reductions
in the price for coal under the contract's "gross inequities" clause. Damages
claimed, including interest, are approximately $190 million. On August 31,
1998, CONSOL Energy was awarded a summary judgement dismissing the claims
against it. The public utility has appealed the court's order dismissing the
suit. Management believes that the claims are without merit and, accordingly,
CONSOL Energy has not accrued any liability associated with the action.
CONSOL Energy 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 $50 million for coal under the price adjustment clause of the
contract. In accordance with contract procedure, CONSOL Energy 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
Energy 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 $28,964 at June 30, 1999), as such amounts
are funded and guaranteed by, and are under the responsibility and control of,
the group of public utilities.
-63-
<PAGE>
NOTE 24 - INDUSTRY SEGMENT INFORMATION:
- --------------------------------------
CONSOL Energy 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
Energy'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.
Industry segment results for the six months ended June 30, 1999 are:
<TABLE>
<CAPTION>
Industrial
Supplies &
Coal Equipment Elimination Consolidated
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales - outside $1,000,077 $ 76,451 $ - $1,076,528
Sales - related companies 5,394 - - 5,394
Intersegment transfers - 42,195 (42,195) -
---------- -------- ---------- ----------
Total Sales $1,005,471 $118,646 $ (42,195) $1,081,922
========== ======== ========== ==========
Earnings before income taxes $ 39,529 $ 631 $ 40,160
Income taxes (124) 245 121
---------- -------- ----------
Net Income $ 39,653 $ 386 $ 40,039
========== ======== ==========
Identifiable assets $3,815,191 $ 59,835 $3,875,026
========== ======== ==========
Depreciation, depletion and
amortization $ 120,913 $ 324 $ 121,237
========== ======== ==========
Additions to property, plant
and equipment $ 111,012 $ 591 $ 111,603
========== ======== ==========
</TABLE>
Industry segment results for 1998 are:
<TABLE>
<CAPTION>
Industrial
Supplies &
Coal Equipment Elimination Consolidated
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales - outside $2,098,571 $ 92,182 $ - $2,190,753
Sales - related companies 21,678 82,999 - 104,677
Intersegment transfers - 83,818 (83,818) -
---------- -------- ---------- ----------
Total Sales $2,120,249 $258,999 $ (83,818) $2,295,430
========== ======== ========== ==========
Earnings before income taxes $ 209,804 $ 2,678 $ 212,482
Income taxes 36,846 999 37,845
---------- -------- ----------
Net Income $ 172,958 $ 1,679 $ 174,637
========== ======== ==========
Identifiable assets $3,802,961 $ 60,429 $3,863,390
========== ======== ==========
Depreciation, depletion and
amortization $ 237,553 $ 1,031 $ 238,584
========== ======== ==========
Additions to property, plant
and equipment $ 505,666 $ 1,020 $ 506,686/(1)/
========== ======== ==========
</TABLE>
(1) Includes $248,879 acquired from Rochester and Pittsburgh Coal Company.
-64-
<PAGE>
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>
-65-
<PAGE>
NOTE 25 - STOCK SPLIT AND RECAPITALIZATION:
- ------------------------------------------
On April 29, 1999, CONSOL Energy offered 22,600,000 shares of common stock to
the public at a price of $16.00 per share. The net proceeds from the offering
were $340,746. CONSOL Energy used the proceeds to repay outstanding commercial
paper.
On February 26, 1999, the Board of Directors acted to recapitalize CONSOL Energy
with one class of common stock with a par value of $.01 per share and authorized
500 million shares. Upon the effective date of recapitalization, 57,667,558
shares were issued in exchange for the shares previously outstanding to effect
an approximate 1,088 for 1 stock split.
The Board of Directors also authorized the issuance of up to 15 million shares
of preferred stock. The Board of Directors is authorized to establish the
prices, rights, preferences, privileges and designations of one or more series
of preferred stock without further stockholder approval. To date, no shares of
preferred stock have been issued, and the Board of Directors does not have any
current plans to issue shares of preferred stock.
NOTE 26 - SUPPLEMENTAL COAL DATA (UNAUDITED):
- --------------------------------------------
<TABLE>
<CAPTION>
(Millions of tons)
------------------------------
1999 1998 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Proved and probable coal reserves
at January 1* 4,755 4,776 5,063 5,072
Purchased reserves 4 148 10 120
Reserves sold in place (11) (29) (31) (17)
Production (38) (76) (73) (72)
Revisions and other changes (5) (64) (193) (40)
----- ----- ----- -----
Proved and Probable Coal Reserves
at the end of the period * 4,705 4,755 4,776 5,063
===== ===== ===== =====
</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 June 30, 1999, 836 million tons were assigned to mines either
in production or under development. The proved and probable reserves at June 30,
1999 include 4,015 million tons of steam coal, of which approximately 19 percent
has a sulfur content equivalent to less than 1.2 pounds sulfur dioxide per
million British thermal unit (Btu), and an additional 13 percent has a sulfur
content equivalent to between 1.2 and 2.5 pounds sulfur dioxide per million Btu.
The reserves also include 690 million tons of metallurgical coal, of which
approximately 67 percent has a sulfur content equivalent to less than 1.2 pounds
sulfur dioxide per million Btu, and the remaining 33 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.
-66-
<PAGE>
NOTE 27 - QUARTERLY INFORMATION (UNAUDITED):
- ------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, June 30,
1999 1999
------------ -------------
<S> <C> <C>
Sales $ 567,493 $ 514,429
============ ============
Cost of goods sold and other
operating charges $ 397,793 $ 394,804
============ ============
Net income $ 25,605 $ 14,434
============ ============
Earnings per share $ .44 $ .20
============ ============
Average shares outstanding 57,667,558 71,823,602
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 585,661 $ 547,823 $ 546,579 $ 615,367
============ ============ ============ ============
Cost of goods sold and other
operating charges $ 375,527 $ 372,322 $ 409,825 $ 436,849
============ ============ ============ ============
Net income $ 66,391 $ 39,946 $ 18,360 $ 49,940
============ ============ ============ ============
Earnings per share $ .61 $ .37 $ .17 $ .64
============ ============ ============ ============
Average shares outstanding 108,806,714 108,806,714 108,806,714 77,678,532
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 575,173 $ 540,696 $ 568,654 $ 600,674
============ ============ ============ ============
Cost of goods sold and other
operating charges $ 403,755 $ 371,584 $ 414,306 $ 402,768
============ ============ ============ ============
Net income $ 36,443 $ 48,985 $ 34,456 $ 63,905
============ ============ ============ ============
Earnings per share $ .33 $ .45 $ .32 $ .59
============ ============ ============ ============
Average shares outstanding 108,806,714 108,806,714 108,806,714 108,806,714
============ ============ ============ ============
</TABLE>
-67-
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are the names and ages at September 1999, 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 for the consolidated
group. 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>
J. Brett Harvey 49 Director and President and Chief Executive
Officer, CONSOL Energy Inc. and CONSOL Inc.
Ronald J. FlorJancic 49 Executive Vice President-Marketing, CONSOL Inc.
C. Wesley McDonald/1/ 58 Executive Vice President-Operations, CONSOL Inc.
Ronald E. Smith 50 Executive Vice President-Engineering Services,
Environmental Affairs and Exploration, CONSOL Inc.
Dr. Rolf Zimmermann 55 Executive Vice President of CONSOL Energy Inc.
and CONSOL Inc. and Director, CONSOL Energy Inc.
and CONSOL Inc.
Michael F. Nemser 49 Vice President and Treasurer, CONSOL Energy
Inc. and Senior Vice President-Chief Financial
Officer, CONSOL Inc.
Grayson G. Heard 52 Senior Vice President-Mining and Director,
Consolidation Coal Company
Benjamin M. Statler/2/ 48 Senior Vice President-Mining and Director,
Consolidation Coal Company
Daniel L. Fassio 52 Vice President and Secretary of CONSOL Energy
Inc. and Vice President, General Counsel and
Secretary of CONSOL Inc.
John L. Whitmire 58 Chairman of the Board of Directors, CONSOL Energy Inc.
and CONSOL Inc.
B. R. Brown 67 Director, CONSOL Energy Inc. and CONSOL Inc.
Dr. Dieter Henning 63 Director, CONSOL Energy Inc. and CONSOL Inc.
</TABLE>
___________________________________
/1/ Elected to retire effective 9-1-99.
/2/ Resigned effective 9-15-99.
-68-
<PAGE>
<TABLE>
<S> <C> <C>
Berthold Bonekamp 49 Director, CONSOL Energy Inc. and CONSOL Inc.
Bernd J. Breloer 56 Director, CONSOL Energy Inc. and CONSOL Inc.
Philip W. Baxter 51 Director, CONSOL Energy Inc. and CONSOL Inc.
</TABLE>
The information, with respect to directors of CONSOL Energy required by
Item 401 and 405 of Regulation S-K is incorporated by reference to CONSOL
Energy's Definitive Proxy Statement (the "Definitive Proxy Statement") which
will be filed within the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
Form 10-K. The information as to executive officers is included in the Proxy
statement.
J. Brett Harvey has been President, Chief Executive Officer and a Director
of CONSOL Energy Inc. and CONSOL Inc. since January 1998. Prior to joining
CONSOL Energy, Mr. Harvey served as the president and chief executive officer
of PacifiCorp Energy Inc., a subsidiary of PacifiCorp, 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 from
January 1992 to December 1993 and Vice President-Sales from December 1993 to May
1995. From September 1982 to January 1992, he served as Vice President-Supply
and Distribution for Consolidation Coal Company. Prior to September 1982, 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, from Indiana
University (Bloomington).
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 advised the University on engineering program matters. Mr.
McDonald elected to retire effective September 1, 1999.
-69-
<PAGE>
Ronald E. Smith has been Executive Vice President-Engineering Services,
Environmental Affairs and Exploration of CONSOL Inc. since January 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 and 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.
Dr. Rolf Zimmermann has been Executive Vice President of CONSOL Inc. since
January 1999 and of CONSOL Energy Inc. since February 1999. He has been on the
Board of CONSOL Energy Inc. and of CONSOL Inc. since November 1993, where he
serves as a representative of Rheinbraun A. G. 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 A. G.
in 1989 and was the head of Corporate Structure and the 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 A. G. and 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.
Michael F. Nemser has been Vice President and Treasurer for CONSOL Energy
Inc. since January 1992 and has been Senior Vice President-Chief Financial
Officer for CONSOL Inc. since January 1999. He was Senior Vice President-
Administration for CONSOL Inc. from January 1996 until January 1999. He was Vice
President and Treasurer of Consolidation Coal Company from September 1987 to
January 1992. Before joining CONSOL Energy, 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 Department. He
received a bachelor's degree in economics from Hobart College and a master's
degree of business administration 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 Institutes
and Chairman of the Finance Advisory Board of Duquesne University A. J. Palumbo
School of Business.
Grayson Heard has been Senior Vice President-Mining and 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.
-70-
<PAGE>
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 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 and 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 the
Wheeling Symphony. He is also a member of the West Virginia University
Visitation Committee, which advises the University on engineering program
matters. Mr. Statler resigned effective September 15, 1999.
Daniel L. Fassio has been Secretary for CONSOL Energy Inc. and Vice
President, General Counsel and Secretary of CONSOL Inc. since March 1994. He has
been Vice President of CONSOL Energy Inc. 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, Smith & 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 memberships
in the American Bar Association and the Pennsylvania Bar Association, Mr. Fassio
is Chairman of the Lawyers Committee for the Bituminous Coal Operators
Association and a Trustee of the Eastern Mineral Law Foundation.
John L. Whitmire has served as Chairman of the Board of Directors of CONSOL
Energy Inc. and CONSOL Inc. since March 3, 1999, and Mr. Whitmire will act as
one of CONSOL Energy Inc.'s independent directors. Prior to his election, Mr.
Whitmire has been the Chairman of the Board and Chief Executive Officer of Union
Texas Petroleum Holdings, Inc., a position that he held from January 1996 until
September 1998 when Union Texas Petroleum was acquired by ARCO. Before joining
Union Texas Petroleum Holdings, Inc., Mr. Whitmire served for more than 30 years
in various executive capacities with Phillips Petroleum Company, including as
Executive Vice President - Exploration and Production and as a director from
January 1994 to January 1996. Mr. Whitmire is a director of the National Audobon
Society, Thermon Industries and Global Marine, Inc. Mr. Whitmire received a
bachelor of science degree in mechanical engineering from New Mexico State
University.
B. R. Brown has served as a Director of CONSOL Energy Inc. and CONSOL Inc.
since January 1992. Mr. Brown was the Chairman of the Board of CONSOL Energy
Inc. and CONSOL Inc. from January 1992 until February 1999. From January 1992 to
January 1996, he served as CONSOL Energy Inc.'s and CONSOL Inc.'s President and
Chief Executive Officer and served in the Executive Office of Chairman of the
Board from January 1996 until February 1999. Mr. Brown joined Consolidation Coal
Company in March 1977 as Executive
-71-
<PAGE>
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 Company, Inc. He
also has served as a Director and 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
Dr. Ing. Dieter Henning has been a member of the Board of CONSOL Energy
Inc. and CONSOL Inc. since November 1, 1994 where he serves as a representative
of Rheinbraun A. G. He started as Superintendent at the former Frechen open cast
mine of Rheinbraun A.G. in 1969. After various positions in the headquarters and
mines of Rheinbraun A. G., 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 A. G.
(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 A. G. and is a
member of the Executive Board of RWE A. G. 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 an
honorary doctorate (Dr. Ing. E. h.) from the University of Aachen.
Berthold Bonekamp has served on the Board of CONSOL Energy Inc. and CONSOL
Inc. since July 1998 where he serves as a representative of Rheinbraun A. G. He
started in the accounting department of Rheinbraun A. G. 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 a member of the Executive Board of
Rheinbraun A. G., where he serves as Executive Vice President -International
Operations. Mr. Bonekamp holds a mechanical engineering degree from the Munster
College of Applied Science in Germany and holds a master's degree in business
administration (Diplom-Kaufmann) from the University of Muenster in Germany.
Bernd Jobst Breloer has served on the Board of CONSOL Energy Inc. and
CONSOL Inc. since September 1998, where he serves as a representative of
Rheinbraun A. G. Mr. Breloer has held various executive positions in the RWE A.
G. 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
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<PAGE>
Rheinbraun A. G., where he became a 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 the University
of Muenster in Germany.
Philip W. Baxter, Director, CONSOL Energy Inc. and CONSOL Inc., was elected
to the Board of CONSOL Energy Inc. on August 1, 1999, and to the Board of CONSOL
Inc. on August 12, 1999, and Mr. Baxter will act as one of CONSOL Energy Inc.'s
independent directors. Mr. Baxter is a former chief financial officer of the
Tulsa-based energy conglomerate Mapco Inc., which merged with The Williams
Company in March 1998. Prior to his career at Mapco, he held a number of
financial positions with Williams Energy Company, a subsidiary of The Williams
Company. Currently, Mr. Baxter volunteers as the executive business
administrator of a Tulsa Methodist church and is a director for BuyItNow.com, an
Internet retailer. He is also a director and the board's treasurer for Gilcrese
Museum and a board member of Nature Conservancy. Mr. Baxter holds a bachelor's
degree in Business Administration from the University of Oklahoma which he
received in 1970.
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K is incorporated
herein by reference to the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 403 of Regulation S-K is incorporated
herein by reference to the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-K is incorporated
by reference to the Definitive Proxy Statement.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
EXHIBIT INDEX
(a)(1) Financial Statements: Page
----
The following consolidated financial statements of
CONSOL Energy Inc. and subsidiaries are
included in this filing on the pages indicated:
Report of Independent Auditors 40
Consolidated Statements of Income for the Six
Months Ended June 30, 1999 and for the Years
Ended December 31, 1998, 1997 and 1996 41
Consolidated Balance Sheets for the Six Months
Ended June 30, 1999 and for the Years Ended
December 31, 1998 and 1997 42
Consolidated Statements of Stockholders' Equity
(Deficit) for Six Months Ended June 30, 1999
and for the Years Ended December 31, 1998,
1997 and 1996 44
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and for the Years
Ended December 31, 1998, 1997 and 1996 45
Notes to Consolidated Financial Statements 46
(a)(2) Financial Statement Schedules:
No schedules are required to be presented by
CONSOL Energy.
(a)(3) Exhibits filed as part of this Report:
The response to this portion of Item 14 is
submitted as a separate part of this report.
(b)(1) Reports on Form 8-K:
None.
-74-
<PAGE>
(c) Exhibits:
3.1 Certificate of Incorporation of CONSOL Energy Inc. incorporated
by reference to Exhibit 3.1 to Amendment No. 2 to Registration
Statement Form S-1 (Registration No. 333-68987) filed on March 24,
1999, ("Amendment No. 2")
3.2 By-Laws of CONSOL Energy.
10.1 Senior Revolving Loan Agreement dated as of December 23, 1993
between Consolidation Coal Company and Morgan Guaranty Trust Company of
New York for a maximum principal amount at any one time outstanding not
to exceed $25,000,000, incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to Registration on Form S-1 (Registration No. 333-
68987) filed on March 24, 1999 ("Amendment No.1")
10.2 First Amendment to Senior Revolving Loan Agreement dated as of
November 28, 1994 between Consolidation Coal Company and Morgan
Guaranty Trust Company of New York, incorporated by reference to
Exhibit 10.2 to Amendment No. 1.
10.3 Second Amendment to Senior Revolving Loan Agreement dated as of
October 1, 1995, between Consolidation Coal Company and Morgan Guaranty
Trust Company of New York, incorporated by reference to Exhibit 10.3 to
Amendment No. 1.
10.4 Third Amendment to Senior Revolving Loan Agreement dated as of
December 14, 1995 between Consolidation Coal Company and Morgan
Guaranty Trust Company of New York, incorporated by reference to
Exhibit 10.4 to Amendment No. 1.
10.5 Fourth Amendment to Senior Revolving Loan Agreement dated as of
March 1, 1996 between Consolidation Coal Company and Morgan Guaranty
Trust Company of New York, incorporated by reference to Exhibit 10.5 to
Amendment No. 1.
10.6 Fifth Amendment to Senior Revolving Loan Agreement dated as of
December 2, 1997 between Consolidation Coal Company and Morgan Guaranty
Trust Company of New York, incorporated by reference to Exhibit 10.6 to
Amendment No. 1.
10.7 Sixth Amendment to Senior Revolving Loan Agreement dated as of
October 29, 1998 between Consolidation Coal Company and Morgan Guaranty
Trust, incorporated by reference to Exhibit 10.7 to Amendment No. 1.
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<PAGE>
Company of New York, incorporated by reference to Exhibit 10.7 to
Amendment No. 1.
10.8 Seventh Amendment to Senior Revolving Loan Agreement dated as of
January 19, 1999 between Consolidation Coal Company and Morgan Guaranty
Trust Company of New York, incorporated by reference to Exhibit 10.8 to
Amendment No. 1.
10.9 Senior Revolving Loan Agreement dated as of October 29, 1998
between Consolidation Coal Company and First National Bank of Chicago
for a maximum principal amount at any one time outstanding not to
exceed $100,000,000, incorporated by reference to Exhibit 10.9 to
Amendment No. 1.
10.10 Note issued by Consolidation Coal Company in the aggregate
principal amount of $100,000,000, incorporated by reference to Exhibit
10.10 to Amendment No. 1.
10.11 Parent Guaranty dated November 13, 1998 from CONSOL Energy Inc.,
and CONSOL Energy Inc. to First National Bank of Chicago, incorporated
by reference to Exhibit 10.11 to Amendment No. 1.
10.12 Significant Subsidiary Guaranty dated November 13, 1998 among
CONSOL Energy Inc. and certain subsidiaries of CONSOL Energy Inc. for
the benefit of the First National Bank of Chicago, incorporated by
reference to Exhibit 10.12 to Amendment No. 1.
10.13 Subordination Agreement dated November 13, 1998 among CONSOL
Energy Inc. and certain subsidiaries of CONSOL Energy Inc. for the
benefit of the First National Bank of Chicago, incorporated by
reference to Exhibit 10.13 to Amendment No. 1.
10.14 Share Purchase Agreement dated September 14, 1998 among E. I. du
Pont de Nemours and Company, Du Pont Energy Company, Rheinbraun A. G.
and CONSOL Energy Inc., incorporated by reference to Exhibit 10.14 to
Amendment No. 1.
10.15 Amendatory Amendment No. 3 dated October 1, 1997 to the
Shareholders Agreement dated December 6, 1991, as amended, incorporated
by reference to Exhibit 10.15 to Amendment No. 1.
-76-
<PAGE>
10.16 Amendatory Amendment No. 4 dated September 14, 1998 to the
Shareholders Agreement dated December 6, 1991, as amended, incorporated
by reference to Exhibit 10.16 to Amendment No. 1.
10.17 Consulting Agreement dated as of February 1, 1999 between CONSOL
Energy Inc. and B. R. Brown, incorporated by reference to Exhibit 10.17
to Amendment No. 1.
10.18 Employment Agreement dated December 11, 1997 between CONSOL
Energy Inc. and J. Brett Harvey, incorporated by reference to Exhibit
10.18 to Amendment No. 1.
10.19 Agreement dated February 22, 1999 between CONSOL Energy Inc. and
John L. Whitmire, incorporated by reference to Exhibit 10.19 to
Amendment No. 2.
10.20 CONSOL Energy Inc. Equity Incentive Plan, as amended,
incorporated by reference to Exhibit 10.20 to Amendment No. 2.
10.21 Subsidiaries of CONSOL Energy, incorporated by reference to
Exhibit 10.21 to Amendment No. 2.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule
Supplemental Information
No annual report or proxy material has been sent to shareholders of CONSOL
Energy at the time of filing of this form 10-K. An annual report and proxy
material will be sent to stockholders subsequent to the filing of this form 10-
K. Said annual report and proxy material will be forwarded to the commission
when the same are sent to shareholders of CONSOL Energy.
-77-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized and in the capacities
indicated, as of the 28th day of September, 1999.
CONSOL ENERGY INC.
(Registrant)
/s/ M. F. Nemser
By:____________________________________________
M. F. Nemser
Senior Vice President and
Chief Financial Officer
(Chief Financial Officer)
/s/ W. J. Lyons
By:____________________________________________
W. J. Lyons
Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed as of the 28th day of September, 1999, by the following
persons on behalf of the Registrant in the capacities indicated:
Chairman of the Board
/s/ J. L. Whitmire
___________________________
J. L. Whitmire
<TABLE>
<S> <C>
President and Chief Executive Officer Executive Vice President and Director:
and Director:
/s/ J. Brett Harvey /s/ R. Zimmermann
_____________________________________ _______________________________________
J. Brett Harvey R. Zimmermann
Directors:
/s/ P. Baxter /s/ B. R. Brown
_____________________________________ _________________________________________
P. Baxter B. R. Brown
/s/ B. Bonekamp /s/ B. J. Breloer
_____________________________________ _________________________________________
B. Bonekamp B. J. Breloer
/s/ D. Henning
_____________________________________
D. Henning
</TABLE>
-78-
<PAGE>
EXHIBIT 3.2
CONSOL ENERGY INC.
WRITTEN ACTION BY DIRECTORS
The undersigned, being all of the members of the Board of Directors of
CONSOL Energy Inc., a Delaware corporation, entitled to receive notice of a
meeting of the Board of Directors of the Corporation, do hereby waive notice of
such a meeting and, in lieu thereof, do hereby consent and agree to the adoption
of the following resolutions by written consent pursuant to Section 141(f) of
the General Corporation Law of the State of Delaware:
INITIAL PUBLIC OFFERING.
RESOLVED, that the Corporation shall effect an initial public
offering (the "Offering") of shares of Common Stock of the
Corporation, $0.01 Par value each; and it is further,
RESOLVED, that the filing by the Corporation of the Registration
Statement on Form S-1 (Registration No. 333-68987) covering the
registration under the Securities Act of 1933, as amended (the
"Securities Act"), of the offer and sale by the Corporation of shares
of Common Stock in a firm commitment offering to underwriters (the
"Underwriters") for which J.P. Morgan Securities Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated will act as representatives
of the several Underwriters (together, the "Representatives") be, and
it hereby is, ratified and approved in all respects; and it is
further,
RESOLVED, that the filing of amendment No. 1 to the Registration
Statement registering the offer and sale to the public of 25,990,000
shares of Common Stock, including up to 3,390,000 shares of Common
Stock issuable upon the exercise of an over-allotment option to be
granted to the Underwriters, and of amendment No. 2 to the
Registration Statement be, and they hereby are, ratified and approved
in all respects; and it is further,
RESOLVED, that the President of the Corporation and each Vice
President of the Corporation (the "Senior Officers") be, and each
hereby is, authorized and directed, from time to time, to execute, in
the name and on behalf of the Corporation, to procure all necessary
signatures to and to file with the Securities and Exchange Commission
(the "Commission"), such further amendments, including post-effective
amendments,
<PAGE>
to the registration Statement or additional registration statements pursuant to
Rule 462 promulgated under the Securities Act (together with appropriate
exhibits) as such Senior Officer shall deem necessary or appropriate and to
prepare and file a request for acceleration of the effective date of the
Registration Statement; and it is further,
RESOLVED, that a Pricing Committee (the "Pricing Committee") of the Board
of Directors of the Corporation consisting of Messrs. Bernd Breloer, Berthold
Bonekamp, John Whitmire and J. Brett Harvey be, and it hereby is, authorized
and empowered, on behalf of the Corporation, to (i) determine whether or not to
proceed with the Offering in light of then current market conditions and (ii)
agree upon and fix, in conjunction with the Representatives, (a) the price of
the shares of Common Stock to be offered and sold in the Offering, and (b) the
underwriting discounts to be incurred in connection with the Offering; provided,
however, that the number of shares of Common Stock to be offered in the Offering
shall not be greater than 31.02% of the aggregate number of outstanding shares
of Common Stock upon the consummation of the Offering and the price per share
shall not be less than $18.00; and it is further,
RESOLVED, that each officer or director of the Corporation who may be
required to execute the Registration Statement and any amendment thereto to be
filed with the Commission be, and each of them hereby is, authorized and
empowered to appoint J. Brett Harvey and Daniel L. Fassio, or either or them, as
his true and lawful attorney-in-fact, to act with full power of attorney,
substitution and resubstitution, for him and in his name, place and stead, in
his capacity as an officer or director or both, as the case may be, of the
Corporation to execute the Registration Statement, and any and all amendments
thereto, and all instruments necessary or incidental in connection therewith,
and to file the same with the Commission, with full power and authority in said
attorney to do and perform, in the name and on behalf of each said officer or
director every act whatsoever necessary or desirable to be done, as fully and to
all intents and purposes as an officer or director might or could do in person.
2
<PAGE>
REGISTRATION UNDER THE SECURITIES EXCHANGE ACT OF 1934.
RESOLVED, that, in connection with the Offering, the Corporation
register the shares of Common Stock pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with the
Commission; and it is further,
RESOLVED, that all actions heretofore taken by the Senior
Officers or any of them in the name and on behalf of the Corporation,
to prepare or cause to be prepared, Registration Statement on Form 8-A
(the "8-A Registration Statement") in order to register the shares of
Common Stock under the Exchange Act, be, and they hereby are, in all
respects ratified and approved; and it is further,
RESOLVED, that the execution and filing in the name and on behalf
of the Corporation an 8-A Registration Statement (together with the
appropriate exhibits thereto) by the Senior Officers with the
Commission be, and it hereby is ratified and approved; and it is
further,
RESOLVED, that the Senior Officers and counsel to the Corporation
be, and each of them hereby is, authorized, empowered and directed, in
the name and on behalf of the Corporation, to prepare and file with
the Commission such amendments to the 8-A Registration Statement as
they, or any of them, deem necessary or appropriate; and it is
further,
RESOLVED, that each of the Senior Officers, or such counsel as
such Senior Officers shall choose to represent the Corporation, with
full authority to act without the other, be, and each hereby is,
authorized to appear in the name and on behalf of the Corporation
before the Commission in connection with any matter relating to the
Registration Statement and 8-A registration Statement and any
amendments thereto; and it is further,
RESOLVED, that Daniel L. Fassio be, and he hereby is, appointed
the Corporation's agent for service of process in connection with
claims arising from the Offering under the federal and state
securities laws of the United States.
3
<PAGE>
UNDERWRITING AGREEMENT.
RESOLVED, that the Corporation enter into an Underwriting Agreement (the
"Underwriting Agreement"), by and among the Corporation and the Underwriters in,
or substantially in the form, and containing substantially the terms and
provisions of the Underwriting Agreement annexed hereto as Exhibit A; and that
the form, terms and provisions of the underwriting Agreement annexed hereto as
Exhibit A; and that the form, terms and provisions of the Underwriting Agreement
annexed hereto as Exhibit A be, and they hereby are, in all respects approved;
and the Senior Officers be, and each hereby is, authorized and directed to
execute and deliver the Underwriting Agreement, in the name and on behalf of the
Corporation, and under its corporate seal or otherwise, in, or substantially in,
such form, with such changes therein or modifications thereof as any such Senior
Officer, by his execution and delivery thereof, shall approve; and it is
further,
RESOLVED, that subject to the Registration Statement being declared
effective by the Commission and the determination by the Pricing Committee to
proceed with the Offering, the Corporation issue and sell to the underwriters
the number of shares of Common Stock to be offered at the price per share set
forth in the Underwriting Agreement; and when such shares of Common Stock are so
issued and sold such shares of Common Stock shall be fully paid and non-
assessable; and the Senior Officers be, and each hereby is, authorized and
directed to issue and deliver certificates representing such shares of Common
Stock, and to request the Corporation's transfer agent and registrar to make an
original issue of shares of Common Stock in such names and denominations and in
such manner as designated by the Representatives, and to deliver such
certificates as so directed by any such Senior Officer.
NEW YORK STOCK EXCHANGE LISTING.
RESOLVED, that the Corporation apply to list the shares of Common Stock on
the New York Stock Exchange (the "NYSE"); and that the Senior Officers be, and
each hereby is, authorized, empowered and directed, in the name and on behalf of
the Corporation, to execute and deliver to the NYSE such listing applications,
amendments to listing applications, additional listing applications, listing
agreements, listing fee agreements,
<PAGE>
indemnity agreements relating to the use of facsimile signatures, undertakings
and other documents as may be required by the NYSE, all in such form as any such
Senior Officer may approve, which approval shall be conclusively evidenced by
the execution of such applications, agreements or documents, to make all
payments of all filing, listing or application fees to the NYSE, to prepare
temporary and permanent certificates representing the Common Stock, and to
appear before any official of the NYSE; and it is further,
RESOLVED, that the Corporation shall file all reports required of it by the
Commission pursuant to the Exchange Act with the Commission and with the NYSE,
as the case may be, as may be required; and the Senior Officers be, and each
hereby is, authorized to sign and deliver such reports on behalf of the
Corporation.
TRANSFER AGENT.
RESOLVED, that First Chicago Trust Company of New york be, and it hereby
is, appointed to act as registrar and transfer agent of the Corporation with
full power and authority to take all actions necessary in order to register and
effect transfers of the corporation's Common Stock; and that the Corporation
execute and deliver a Stock Transfer Agency Agreement between First Chicago
Trust Company of New York and the Corporation (the "Stock Transfer Agency
Agreement"), a draft copy of which is attached hereto as Exhibit B; and that the
terms and provisions of said Stock Transfer Agency Agreement in, or
substantially in, the form annexed hereto be, and they hereby are, authorized
and approved in all respects; and the Senior Officer, by his execution and
delivery thereof, shall approve; and that the Senior Officers, be, and each of
such Senior Officers hereby is, authorized and directed to execute and deliver
the Stock Transfer Agency Agreement in the name and on behalf of the Corporation
and under its corporate seal or otherwise in, or substantially in, the form
annexed hereto, with such changes therein as any such Senior Officers, be, and
each hereby is, authorized, empowered and directed to execute and deliver, in
the name and on behalf of the Corporation such agreements, certificates and
documents relating to such appointment of First Chicago Trust Company of New
York as
5
<PAGE>
registrar and transfer agent for the Corporation's Common Stock and
containing such terms and provisions as the Senior Officer or Officers
executing the same shall approve, the execution thereof by such Senior
Officer or Officers to be conclusive evidence of such approval; and it is
further,
RESOLVED, that First Chicago Trust Company of New York be, and it
hereby is, authorized and directed as registrar and transfer agent of the
Corporation's Common Stock to use facsimile signatures in connection with
the countersigning and registering of stock certificates representing
Common Stock.
BLUE SKY.
RESOLVED, that the Board hereby ratifies and approves all action
heretofore taken, and authorizes and empowers the Senior Officers to take
such further action as may be necessary or appropriate in connection with
the registration and qualification in various states of the Common Stock;
and it is further,
RESOLVED, that the Board of Directors hereby adopts any and all
resolutions which may be required by any state securities administrator in
connection with the qualification and registration in various states of the
Common Stock, the adoption of any such resolutions to be conclusively
evidenced by the execution of a certification of such resolution by the
Secretary of the Corporation.
EQUITY INCENTIVE PLAN.
RESOLVED, that pursuant to Section 157 of the Delaware General
Corporation Law, the Board, subject to the approval of the Stockholders of
the Corporation, hereby adopts the 1999 Equity Incentive Plan set forth in
Exhibit C annexed hereto (the "Plan"); and it is further,
RESOLVED, that the number of shares of Common Stock of the
Corporation, $0.01 par value each
(i) authorized and reserved for issuance pursuant to the Plan
shall be 3,250,000 shares;
6
<PAGE>
(ii) covered by all stock options granted under the Plan by the
Corporation at the time the Corporation completes an initial public
offering of Common Stock of the Corporation shall not exceed 800,000
shares; and it is further,
RESOLVED, that subject to the due approval of the Plan by the
Stockholders, and subject to the condition that the closing of an initial
public offering be completed successfully, the Corporation hereby
authorizes the grant of stock options under the Plan, with a per share
exercise price equal to the per share price to the public in such offering,
to the following officers of the Corporation in the following amounts,
respectively: 120,000 shares to J. Brett Harvey; 60,000 shares to C. Wesley
McDonald; 60,000 shares to Ronald J. FlorJancic; 44,000 shares to Ronald E.
Smith and to the directors, officers and employees of the Corporation and
its subsidiaries listed on Exhibit D hereto, in the amounts shown thereon;
and it is further,
RESOLVED, that the Senior Officers are and each hereby is authorized,
empowered and directed to (i) execute and deliver in the name and on behalf
of the Corporation to each officer and employee awarded options, such
agreements, documents or instruments as may be appropriate to evidence the
grant of such stock options, all in such form as any such Senior Officer
may approve, which approval (and the approval of this Board) shall be
conclusively evidenced by the execution thereof, (ii) instruct the transfer
agent to reserve from the Corporation's authorized shares of Common Stock
such number of shares as may be necessary from time to time for issuance,
including upon exercise of the then outstanding stock options, under the
Plan, (iii) take such actions, with the advice and assistance of counsel,
to comply with any requirements of the Securities Act with respect to the
issuance of shares of Common Stock upon exercise of stock options under the
Plan, including without limitation (x) the filing of a registration
statement on Form S-8, or such other form of the Commission as is
appropriate, to register the issuance and sale of shares of Common Stock
upon exercise of stock options, and (y) the preparation and distribution to
option holders of an
7
<PAGE>
information memorandum with respect to the Plan, (iv) register or qualify
the offer and sale of the shares upon exercise of the stock options under
applicable foreign and state securities and blue sky laws and (v) list the
shares issuable under the Plan with the NYSE.
FISCAL YEAR.
RESOLVED, that the Board hereby ratifies and approves a change from a
fiscal year beginning on January 1 and ending on December 31 to a fiscal
year commencing on July 1 and ending on June 30, such change to be
effective and the first such fiscal year to commence on July 1, 1999; and
it is further,
OMNIBUS.
RESOLVED, that the Senior Officers be, and each hereby is, authorized,
empowered and directed, in the name and on behalf of the Corporation, to
take all such further actions and to execute, deliver, file, certify and
record such additional agreements, instruments, certificates and other
documents and to pay all such expenses and taxes, as any of them or counsel
to the Corporation determine may be necessary, proper or advisable in order
to carry out fully the intent and to accomplish the purposes of each of the
foregoing resolutions; and it is further,
RESOLVED, that all actions heretofore taken by a Senior Officer of or
counsel for the Corporation in connection with the matters referenced in
the foregoing resolutions be, and they hereby are, ratified, confirmed and
approved in all respects; and it is further,
RESOLVED, that this action and consent in writing shall be duly
recorded in the minute book of the Corporation.
8
<PAGE>
WITNESS the execution by the undersigned as of the 7th day of April, 1999.
/s/ J. L Whitmire /s/ J. Brett Harvey
- ------------------------------ ---------------------------
J. L Whitmire J. Brett Harvey
/s/ B. Bonekamp /s/ Bernd J. Breloer
- ------------------------------ ---------------------------
Berthold Bonekamp Bernd J. Breloer
/s/ B. R. Brown /s/ D. Henning
- ------------------------------ ---------------------------
B. R. Brown D. Henning
/s/ R. Zimmermann
----------------------
Rolf Zimmermann
9
<PAGE>
Exhibit 23.1
Board of Directors and Stockholders
CONSOL Energy Inc.
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the CONSOL Energy Equity Incentive Plan of CONSOL Energy
Inc. filed September 22, 1999 of our report dated July 19, 1999, with respect to
the consolidated financial statements of CONSOL Energy Inc. included in this
Annual Report (Form 10-K) of CONSOL Energy Inc.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
September 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1999 DEC-31-1998
<PERIOD-START> JAN-1-1999 JAN-1-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 23,559 31,285
<SECURITIES> 0 0
<RECEIVABLES> 262,827 269,333
<ALLOWANCES> 0 0
<INVENTORY> 206,995 170,574
<CURRENT-ASSETS> 622,648 615,189
<PP&E> 4,863,138 4,843,147
<DEPRECIATION> 2,188,872 2,157,023
<TOTAL-ASSETS> 3,875,026 3,863,390
<CURRENT-LIABILITIES> 884,075 1,217,617
<BONDS> 312,743 315,095
0 0
0 0
<COMMON> 803 577
<OTHER-SE> 253,922 (103,798)
<TOTAL-LIABILITY-AND-EQUITY> 3,875,026 3,863,390
<SALES> 1,081,922 2,295,430
<TOTAL-REVENUES> 1,110,482 2,349,992
<CGS> 792,597 1,594,523
<TOTAL-COSTS> 1,070,322 2,137,510
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,504 48,138
<INCOME-PRETAX> 40,160 212,482
<INCOME-TAX> 121 37,845
<INCOME-CONTINUING> 40,039 174,637
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40,039 174,637
<EPS-BASIC> 0.62 1.73
<EPS-DILUTED> 0 0
</TABLE>
