<PAGE>
2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to _____________.
Commission file number 333-68987
---------
CONSOL ENERGY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 51-0337383
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
300 Delaware Avenue
Suite 567
Wilmington, Delaware 19801-1622
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: 412-831-4000
Securities registered pursuant to Section 12(b) of the Act
Name of each exchange on which registered
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___
---
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 18, 2000, aggregate market value of voting stock held by
nonaffiliates of the registrant was $394,883,048.
The number of shares outstanding of the registrant's common stock as of
September 18, 2000 is 78,577,581 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.
---------------------
<S> <C>
Proxy Statement for the annual shareholders' meeting to be held October 25, 2000.................................III
</TABLE>
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TABLE OF CONTENTS
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SECTION PAGE
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Business........................................................................... 2
Properties......................................................................... 22
Legal Proceedings.................................................................. 25
Submission of Matters to a Vote of Security Holders................................ 26
Market for Registrant's Common Equity and Related Shareholder Matters.............. 26
Selected Financial Data............................................................ 27
Management's Discussion and Analysis of Financial Condition and Results............ 29
Quantitative and Qualitative Disclosures About Market Risks........................ 40
Index to the Consolidated Financial Statements..................................... 41
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures........................................................... 78
Directors, and Executive Officers of the Registrant................................ 78
Executive Compensation............................................................. 78
Security Ownership of Certain Beneficial Owners and Management..................... 78
Certain Relationships and Related Transactions..................................... 78
Index to the Exhibits, Financial Statement Schedules, and Reports of
Form 8-K........................................................................ 79
Signatures......................................................................... 83
</TABLE>
Forward-Looking Statements
CONSOL Energy is including the following cautionary statement in this
Report on Form 10-K to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by, or on behalf of CONSOL Energy. With the
exception of historical matters, the matters discussed in this Report on Form
10-K are forward-looking statements (as defined in Section 21E of the Exchange
Act) that involve risks and uncertainties that could cause actual results to
differ materially from projected results. In addition to other factors and
matters discussed elsewhere in this Report on Form 10-K, these risks,
uncertainties and contingencies include, but are not limited to, the following:
the success or failure of CONSOL Energy's efforts to implement its business
strategy; reliance on major customers and long-term contracts; the effects of
market demand and price on performance; the ability to renew coal and gas sales
agreements upon expiration; the price of coal and gas sold under any new sales
agreements; fluctuating sales prices; contract penalties; actions of CONSOL
Energy's competitors and CONSOL Energy's ability to respond to such actions;
risks inherent in mining and gas production including geological conditions,
mine and gas operations accidents; weather-related factors; results of
litigation; the effects of government regulation; the risk of work stoppages;
the risk of transportation disruptions that could impair CONSOL Energy's ability
to sell coal and gas; management's ability to correctly estimate and accrue for
contingent liabilities; and CONSOL Energy's ability to identify suitable
acquisition candidates and to successfully finance, consummate the acquisition
of, and integrate these candidates as part of its acquisition strategy.
1
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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 29, 1999 filed an initial public offering.
CONSOL Energy is a holding company for 55 direct and indirect wholly-owned
subsidiaries. CONSOL Energy and its subsidiaries are principally engaged in the
mining and sale of bituminous coal, the production and sale of coalbed methane
gas, and the sale and distribution of industrial supplies.
CONSOL Inc. is CONSOL Energy's direct holding company subsidiary that
provides executive, management and administrative services. Consolidation Coal
Company is a principal operating subsidiary engaged in the mining of bituminous
coal. Consolidation Coal Company is CONSOL Energy's earliest predecessor, having
been formed on March 9, 1860. Buchanan Production Company ("BPC") and Pocahontas
Gas Partnership ("PGP") are entities engaged in the production of coalbed
methane gas. Fairmont Supply Company is a subsidiary engaged in the sale and
distribution of industrial supplies and equipment. Consolidation Coal Sales
Company is a subsidiary with responsibility for the operation of CONSOL Energy's
coal export terminal at the Port of Baltimore.
The general office of CONSOL Inc. is 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 73 million tons of coal in the fiscal year ended June 30, 2000
accounted for 7% of total domestic tons produced and for 14% of tons produced in
the eastern United States. 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.
2
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RECENT DEVELOPMENTS
During the fiscal year ended June 30, 2000, CONSOL Energy implemented
changes in its organizational structure based upon a review of coal operations
and of administrative and research services. These changes resulted in an
overall reduction in employee positions and in cost savings associated with
these positions.
CONSOL Energy further diversified its reserves of fossil fuels in fiscal
year ended June 30, 2000, with an acquisition of coalbed methane gas operations.
The acquisition of these gas operations in southwestern Virginia was completed
in February 2000, when CONSOL Energy purchased approximately 275 billion cubic
feet (Bcf) of proven coalbed methane gas reserves and a related gas gathering
system for a total of $163.5 million. These purchases comprised the entire
assets of BPC, MCNIC Oakwood Gathering Inc. ("OGI") and a subsidiary of MCN
Energy Group Inc. that owned a 50% interest in Cardinal States Gathering
Company. Average daily production is approximately 70 MMcf. BPC has
approximately 500 wells, connected by 150 miles of gathering lines. BPC owns or
leases approximately 91,000 acres of land.
INDUSTRY SEGMENTS
CONSOL Energy operates three industry segments: Coal Operations, Gas
Operations and Energy Services, which includes industrial supplies and equipment
and other support activities. Financial information concerning industry
segments, as defined by generally accepted accounting principles, for the fiscal
year, the transition period and the last two calendar years is as shown on pages
70 and 71 of this Form 10-K.
COAL OPERATIONS
CONSOL Energy currently has 22 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 mine in Alberta, Canada
which employ only surface mining techniques. The Mill Creek complex in Kentucky
employs a combination of underground and surface mining systems. Other mining
complexes are located in Pennsylvania, West Virginia, Virginia, Illinois,
Kentucky, Ohio and Utah.
The following table provides the location and a summary of the main
characteristics of CONSOL Energy's mining complexes and the coal reserves
associated with these operations.
3
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Consol Energy Mining Complexes
Average Quality and Reserves as of 6/30/00
<TABLE>
<CAPTION>
Average Quality Assigned Operating Reserves Total
--------------------------------
(Dry Basis) (6/30/00) Accessible
----------- --------------------------------
Heat Sulfur Total & Assigned Year
Content Content (000 Owned Lease Reserves Established
(Btu/lb) (%) tons) (%) (%) (000 tons) Or Acquired
-------- --- ----- --- --- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Northern
Appalachia
Enlow Fork 14,173 1.62 28,055 24 76 177,685 1990
Bailey 14,101 1.85 61,286 - 100 241,168 1984
Dilworth 14,340 1.51 13,635 - 100 13,635 1984
Mine 84 14,036 1.71 27,473 100 - 145,852 1998
McElroy 13,999 3.18 191,262 100 - 191,262 1968
Shoemaker 13,877 3.67 80,192 96 4 95,828 1966
Loveridge 13,969 2.40 14,469 100 - 121,502 1956
Robinson Run 14,126 3.36 46,591 81 19 172,371 1966
Blacksville 2 14,165 2.69 52,572 100 - 172,834 1970
Humphrey 13,600 2.75 5,240 100 - 5,240 1956
Mahoning Valley 12,345 2.29 684 79 21 684 1974
Central Appalachia
Buchanan 14,950 0.78 53,126 6 94 140,861 1983
VP-3 15,185 0.77 7,890 - 100 7,890 1993
VP-8 14,903 0.81 12,048 - 100 12,048 1993
Mill Creek 13,381 1.27 11,830 98 2 32,486 1994
Jones Fork 13,657 1.14 16,672 62 38 51,215 1992
Amonate 14,064 0.70 8,686 61 39 8,686 1925
Elk Creek 13,986 0.86 10,836 38 62 24,293 1993
Illinois Basin
Rend Lake 13,738 1.02 24,018 19 81 58,994 1986
Ohio 11 13,500 3.13 8,310 - 100 10,508 1993
Western U. S.
Emery 12,933 0.74 14,600 96 4 28,552 1945
Western Canada
Cardinal River 14,000 0.37 3,232 - 100 3,232 1969
</TABLE>
Assigned coal reserves are either owned in fee or leased. The leases have
terms extending up to 30 years and generally provide for renewal through the
anticipated life of the associated mine. These renewals are exercisable by the
payment of minimum royalties.
Total accessible and assigned reserves represent proved and probable coal
reserves as of June 30, 2000. CONSOL Energy assigns coal reserves to each of its
mining operations, but each mine also may have access to reserves that have not
yet been assigned to any particular mine. Unassigned reserves may be accessed by
more than one mining operation. Information with respect to proved and probable
coal
4
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reserves has been determined by CONSOL Energy's geologists and mining engineers.
See Note 28 of Notes to Consolidated Financial Statements.
In the fiscal year ended June 30, 2000, 97% of CONSOL Energy's production
came from underground mines and 3% 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.
Production
Where the geology is favorable and where reserves are sufficient, CONSOL
Energy employs longwall mining systems in its underground mines. For the fiscal
year ended June 30, 2000, 84% 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.
The following table shows the growth in production from CONSOL Energy's
current longwall operations since 1995.
Production by Year
<TABLE>
<CAPTION>
Calendar Year Six Months FY
-----------------------------------------
In millions of tons Ended Ended Compound
June 30, June 30, Annual Growth
Mine 1995 1996 1997 1998 1999 2000 Rate
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Enlow Fork 8.0 8.7 8.4 8.8 5.0 10.1 5.3%
Bailey 7.3 7.5 7.5 8.3 4.4 9.2 5.3%
McElroy 4.1 4.2 5.2 6.6 3.5 7.2 13.3%
Robinson Run 3.7 4.2 4.8 5.6 2.3 6.1 11.7%
Mine No. 84 - - - 1.0 2.9 5.7 /A/
Blacksville 3.8 3.5 3.4 3.9 2.4 4.7 4.8%
Dilworth 3.0 3.6 4.4 4.2 1.6 4.7 10.5%
Buchanan 3.2 3.6 4.3 4.3 2.4 4.6 8.4%
Shoemaker 3.8 4.4 4.8 4.8 2.3 3.8 /B/
Rend Lake 3.3 3.2 4.1 4.1 1.9 3.4 0.7%
VP 8 2.3 2.8 1.3 2.7 0.5 2.0 /B/
Loveridge 2.7 3.1 4.8 5.4 1.1 - /B/
</TABLE>
/A/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.
/B/The calculation of the compound annual growth rate for the Shoemaker and
VP 8 mines are not shown because of production cutbacks due to market conditions
and due to the shutdown caused by a mine fire at Loveridge Mine.
5
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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 11 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 calendar year
1999.
Major U.S. Underground Coal Mines, 1999
In millions of tons
Mine Name Operating Company Production
--------- ----------------- ----------
Enlow Fork CONSOL Energy 9.8
Twentymile Twentymile Coal Company 8.6
Bailey CONSOL Energy 8.5
West Elk Arch Coal, Inc. 7.1
McElroy CONSOL Energy 7.0
Mountaineer Arch Coal, Inc. 6.7
Galatia The American Coal Co. 6.5
Cumberland RAG Cumberland Resources Corp. 6.4
Mine No. 84 CONSOL Energy 5.8
SUFCO Canyon Fuel Company 5.8
Baker Lodestar Energy, Inc. 5.7
Robinson Run CONSOL Energy 5.3
Upper Big Branch A. T. Massey Coal Co., Inc. 5.1
Shoal Creek Drummond Company, Inc. 4.8
Buchanan CONSOL Energy 4.7
Blacksville CONSOL Energy 4.6
Federal No. 2 Eastern Associated Coal Corp. 4.5
Shoemaker CONSOL Energy 4.4
Powhatan No. 6 Ohio Valley Coal Co. 4.4
Emerald RAG Emerald Resources Corp. 4.3
Source: National Mining Association
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, Norfolk, Philadelphia, Pittsburgh and
overseas in Brussels, Belgium. In addition, CONSOL Energy sells coal through
agents, brokers and trading companies. In the fiscal year ended June 30, 2000,
CONSOL Energy sold 78.7 million tons of coal, 84% of which was sold in domestic
markets to electricity generators, steel companies and other consumers of coal.
Direct sales by CONSOL Energy to domestic electricity generators represented 69%
of total sales in the fiscal year ended June 30, 2000. The two largest customers
were Allegheny Energy and First Energy. During the fiscal year ended June 30,
2000, CONSOL Energy derived 19% of its total revenue from sales to its two
largest customers. During the fiscal year ended June 30, 2000, sales to
Allegheny Energy accounted for more than 10% of CONSOL Energy's revenues.
6
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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 the fiscal
year ended June 30, 2000, 70% 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 separately, 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 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 calendar
years 1998 and 1999 to customers with long-term contracts and the total stated
tons of coal
7
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deliverable in calendar years 2000, 2001, 2005 and 2010 for all long-term
contracts held by CONSOL Energy at June 30, 2000.
Contract Tons of Delivered Coal
<TABLE>
<CAPTION>
In millions of nominal tons per year 1998 1999 2000 2001 2005 2010
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Volume under contracts with terms
greater than one year 51.0 46.9 47.3 41.7 5.5 1.1
</TABLE>
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. Approximately 30% of
CONSOL Energy-produced coal moved on the inland waterways in the fiscal year
ended June 30, 2000. 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.
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.
8
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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.
Market 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 only about 16% (based on tonnage sold) of the
total U. S. market. The U. S. Department of Energy reports 1,720 active coal
mines in the United States in 1999, 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. As deregulation occurs and
competition among generators increases, electricity generators will become
increasingly sensitive to fuel costs
9
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because such costs typically represent about 80% of the variable cost of
generating electricity from fossil fuels.
GAS OPERATIONS
CONSOL Energy acquired 275 billion cubic feet of proven coalbed methane gas
reserves and related gas gathering systems in February 2000. In addition, CONSOL
Energy owns 50% of PGP, a general partnership, which owns or leases a gas field
that is adjacent to the BPC gas field acquired by CONSOL Energy in February
2000. Conoco Inc. holds the other 50% in PGP. For the fiscal year ended June 30,
2000, CONSOL Energy's share of PGP's average daily production was 20MMcf. PGP
had approximately 500 wells, connected by 210 miles of gathering lines and owns
or leases approximately 82,000 acres of land.
In the eastern United States, conventional natural gas fields are typically
discovered in sandstone formations, at depths ranging from 2,000 to 15,000 feet.
Exploration companies often put their capital at risk by searching for gas in
commercially exploitable quantities. Coalbed methane, by contrast, is pipeline-
quality gas that resides in coal seams. Gas in the coal seams that CONSOL Energy
anticipates drilling is typically in formations less than 2,500 feet deep which
usually are better defined than deeper formations. CONSOL Energy believes that
this contributes to reducing its exploration cost from those incurred by
producers that operate in deeper, less defined sandstone formations.
CONSOL Energy believes that the coal seams it controls, particularly those
in southwestern Virginia, contain large quantities of methane. CONSOL Energy has
filed no reserve estimates with any federal agency. During the 1990s, CONSOL
Energy drilled more than 1,000 wells into the coal seams in southwestern
Virginia. Many of the wells were drilled to capture and remove gas in advance of
mining activities. Removing methane before mining greatly enhances the safety of
mining operations. Certain wells were drilled to collect gas from active mine
areas and sealed gob areas, which are rock-filled areas left behind after the
extraction of coal.
Production
The average daily rate of production controlled by CONSOL Energy as of June
30, 2000, was 90 MMcf. The following tables show the exploration, drilling and
production activities for fiscal years ended June 30, 1998, 1999, and 2000 and
the developed and undeveloped surface acreage.
10
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<TABLE>
<CAPTION>
Drilling Activity
------------------------------------------------------------------
For the Twelve Months Ended June 30,
1998 1999 2000
------------------ ------------------ ------------------
Gross/4/ Net/5/ Gross Net Gross Net
-------- ------ ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Working Interest Wells Drilled:/1/
Exploratory:/2/
Productive - - - - - -
Dry - - 1.0 0.4 - -
------- ----- ------ ---- ------ ----
Total Exploratory - - 1.0 0.4 - -
Development:/3/
Productive 94.0 41.1 108.0 47.6 130.0 71.2
Dry - - - - - -
------- ----- ------ ---- ------ ----
Total Development 94.0 41.1 108.0 47.6 130.0 71.2
------- ----- ------ ---- ------ ----
Total Working Interest Wells Drilled 94.0 41.1 109.0 48.0 130.0 71.2
======= ===== ====== ==== ====== ====
</TABLE>
/1/ Working interest wells are wells in which CONSOL Energy shares ownership.
/2/ Exploratory wells are wells drilled in unproven reserves.
/3/ Development wells are wells drilled as part of an expansion of an existing
operation in proven reserves.
/4/ Gross means total interest of PGP and BCP.
/5/ Net means CONSOL Energy's ownership share.
Average Gas Sales Price and Lifting Cost/6/
-------------------------------------------
For the Twelve Months Ended June 30,
1998 1999 2000
---- ---- ----
Average Gas Sales Price (per MMBtu) $ 2.66 $ 2.07 $ 3.06
Average Lifting Cost (per Mcf) $ 0.51 $ 0.72 $ 0.59
/6/ Lifting cost means the cost of raising gas to the gathering system.
Producing Wells and Acreage at end of Fiscal Year Ended June 30, 2000
Gross Net
----- ---
Producing Wells 842 545
Developed Acreage 52,116 34,474
Undeveloped Acreage 142,059 96,312
Twelve wells were in the process of being drilled at the end of the fiscal
year ended June 30, 2000. All of the above wells and acreage are located in
southwestern Virginia. Some leases are beyond their primary term, but such
leases are extended by their terms as long as continuous drilling commitments
are satisfied.
CONSOL Energy, through PGP and BCP, currently plans to drill approximately
200 wells in the fiscal year ending June 30, 2001. One hundred eighteen of these
wells are proposed to be conventional coalbed methane wells drilled into coal
seams not yet mined. The remaining wells are to be drilled into mine areas to
produce gob gas.
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Sales
As of June 30, 2000, CONSOL Energy has a contract to sell 38MMcfd, or
approximately 40 percent of the production in each of the first four months of
fiscal year 2001 ("FY2001"), at an average price of $3.20 per million Btus,
where a million Btus nearly equals one thousand cubic feet. The remainder of the
gas produced is sold under short-term contracts with a term, typically, of
thirty days.
Distribution
PGP and BPC have built separate gathering systems in their respective gas
fields to deliver the gas to market. Both gathering systems begin at the
individual wells, and are funneled from smaller pipelines to larger pipelines.
Eventually, the gas from both systems reaches Cardinal States Gathering
Company's ("CSGC") major pipeline system. Both PGP and BPC possess capacity
rights on CSGC's system. CSGC owns and operates two major pipelines and is owned
75% by CONSOL Energy's entities. The first pipeline is a fifty-mile, 16-inch
pipeline that is capable of transporting 100 million cubic feet of gas per day.
This pipeline has processing and compression facilities and connects with a
Columbia Transmission pipeline located in Mingo County, West Virginia. The
second pipeline is a thirty-mile, 20-inch pipeline capable of transporting 150
million cubic feet of gas per day. This pipeline also connects with a Columbia
Transmission pipeline in Wyoming County, West Virginia.
Market Competition
According to the Energy Information Administration ("EIA"), "Natural gas is
injected into pipelines every day and transported to millions of consumers all
over the country. Virtually all the gas comes from either domestic gas well
production, imports, or withdrawals from storage facilities. During the summer,
domestic gas well production and imported gas can more than satisfy customer
demand, and excess supplies are placed into storage facilities. In the winter,
demand for gas generally exceeds production and import capabilities, so
withdrawals from storage are used to provide the extra gas needed to meet
customer requirements."
. CONSOL Energy's gas operations primarily compete regionally in the
northeastern United States. Competition throughout the country is
regionalized.
. CONSOL Energy believes that the gas market is highly fragmented and
not dominated by any single producer. CONSOL Energy believes that
several of its competitors have devoted far greater resources than it
to gas exploration and development.
. CONSOL Energy believes that competition within its market is based
primarily on price and the proximity of gas fields to customers.
Included among CONSOL Energy's customers are electricity producers,
industrial users and local distribution companies.
12
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ENERGY SERVICES
Fairmont Supply Company
Fairmont Supply Company, located in Washington County, Pennsylvania, is
one of the largest general-line distributors of mining and industrial supplies
in the United States. Fairmont Supply has more than 30 customer service
centers nationwide. All Fairmont Supply sites are linked by computer to manage
large inventories of name-brand parts, supplies and equipment, which helps
reduce Fairmont Supply's distribution and product acquisition costs.
Fairmont Supply also provides integrated supply procurement and management
services. Integrated supply procurement is a materials management strategy that
utilizes a single, full-line distributor to minimize total cost in the MRO
(maintenance, repair and operating) supply chain. Fairmont Supply offers value-
added services including on-site stores management and procurement strategies.
Fairmont Supply provides mine supplies to CONSOL Energy's mining
operations. Approximately 34% of Fairmont Supply's sales in the twelve months
ended June 30, 2000 were made to CONSOL Energy mines. Fairmont Supply also
serves E.I. du Pont de Nemours and Company ("DuPont") sites in the United States
providing maintenance and repair services and operating supplies and equipment
in a central location near each plant. Approximately 28% of Fairmont Supply's
sales in the twelve months ended June 30, 2000 were derived from sales made and
services provided to DuPont.
Baltimore Terminal
More than 119 million tons of coal have been shipped through CONSOL
Energy's exporting terminal in the Port of Baltimore during the terminal's 16
years of operation. Constructed in the early 1980s, 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 twelve months ended June 30, 2000, 6.3
million tons of coal were shipped through the terminal. Approximately 80% of the
tonnage shipped was produced by CONSOL Energy coal mines. During the fiscal year
ended June 30, 2000, the terminal generated approximately 20% of its revenue
from shipping coal 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.
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River Operation
CONSOL Energy's River Operation, located in Elizabeth, Pennsylvania,
transports coal from its mines with river loadout facilities along the
Monongahela and Ohio Rivers in northern West Virginia and southwestern
Pennsylvania to customers along these rivers. The River Operation employs five
company-owned towboats and nearly 300 barges. In the twelve months ended June
30, 2000, 15.4 million tons of coal were transported by river vessels owned by
CONSOL Energy.
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 year ended June 30, 2000, 0.6 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 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 2.4 million tons in the twelve months ended June 30, 2000.
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.
Universal Aggregates
CONSOL Energy, through its CONSOL Inc. subsidiary, obtained a U. S. patent
for manufacturing aggregate from coal combustion by-products. CONSOL Inc. has
entered into a joint venture, Universal Aggregates, LLC ("Universal
Aggregates"), with SynAggs Inc., a privately held Pittsburgh, Pennsylvania
company, to commercialize the technology. The aggregate is manufactured from
flue gas desulfurization (scrubber) sludge, pulverized coal fly ash and spray
dryer ash and is manufactured into temperature-cured pellets. The product is to
be used for highway paving material and the production of
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concrete block. Universal Aggregates will continue testing its product at
various northeastern and southeastern U. S. locations through June 2001.
RESTRUCTURING
CONSOL Energy made several changes to its organizational structure in the
fiscal year ended June 30, 2000, in order to reduce costs, increase operating
efficiency and improve responsiveness to changing market dynamics. The number of
operating groups was reduced from seven to four, operations vice president
positions were eliminated, and the operations support functions were
consolidated. CONSOL Energy's restructuring also included a review of its
administrative and research services during the fiscal year ended June 30, 2000.
CONSOL Energy engaged an outside consultant to review its business processes to
respond to the cost challenges of the current environment without losing the
ability to take advantage of opportunities to grow the business over the long
term. A workforce reduction of 214 employees was made through a Voluntary
Separation Incentive Program which provided enhanced medical, pension and
severance benefits upon separation from employment and an involuntary severance
program.
EMPLOYEE AND LABOR RELATIONS
At June 30, 2000, CONSOL Energy had a total of 6,426 employees, of whom
approximately 2,741 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 include 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 30% of U. S. miners are represented by the United Mine Workers of
America.
REGULATIONS
The coal mining and gas industries are 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 properties
after mining or gas operations are completed, the discharge of materials into
the environment, surface subsidence from underground mining and the effects of
mining and gas operations 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 or gas operations or its customers' ability to use coal or gas 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 and gas
operations. CONSOL Energy may be required to prepare and present to federal,
state or
15
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local authorities data pertaining to the effect or impact that any proposed
exploration for or production of coal or gas 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 $1.6 million for
the twelve months ended June 30, 2000, compared to $1 million and $5 million for
the twelve months ended December 31, 1998 and 1997. These costs are in addition
to reclamation costs. Compliance with these laws has substantially increased the
cost of coal mining and gas production, but is, in general, a cost common to all
domestic coal and gas 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, as
part of the Mine Health and Safety Act of 1969 and the Mine Safety and Health
Act of 1977, the Black Lung Benefits 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 system for protection of employee safety and health affecting
any segment of the industry. Most 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.
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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 Benefits Acts levy a tax on production of $1.10 per ton for
deep-mined coal and $.55 per ton for surface-mined coal, but the tax is not to
exceed 4.4% of the sales price.
In addition, the Black Lung Benefits 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,
. 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, in addition to
incorporating the above changes which Congress previously chose not to enact,
would establish a presumption in favor of a claimant's treating physician and
limit a coal operator's ability to introduce medical
17
<PAGE>
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. CONSOL Energy and the National Mining Association, an
industry trade association, have played an active role in challenging these
regulations, and will continue to do so. Currently, these regulations have been
submitted by the Department of Labor to the Office of Management and Budgets for
fiscal review. It is anticipated the regulations will be published in late
calendar year 2000.
Worker's Compensation
CONSOL Energy is required to compensate employees for work-related
injuries. Several states in which CONSOL Energy operates consider changes in
worker's 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.
Environmental Laws
CONSOL Energy is subject to various federal environmental laws, including
. the Surface Mining Control and Reclamation Act of 1977,
. the Clean Air Act,
. the Clean Water Act,
. the Comprehensive Environmental Response, Compensation and
Liability Act, and
. the Resource Conservation Recovery Act, as well as state laws
of similar scope in each state, in which CONSOL Energy operates.
These environmental laws require permitting and/or approval of many aspects
of coal mining and gas 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.
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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
most 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 all 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 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. All states 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 discharges where necessary, over the estimated
useful mining life of the property and for current mine disturbances 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 $318 million at June 30,
2000. The amount that was included as an operating expense for the twelve months
ended June 30, 2000 was $20 million and the related cash expense for such
liability in the twelve months ended June 30, 2000 was $25 million.
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.
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Clean Air Act
The federal Clean Air Act and similar state laws, which regulate emissions
into the air, affect coal mining, gas 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. Phase II, which took effect
January 1, 2000, 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 emissions 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 ozone. The
Environmental Protection Agency has 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.
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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 Convention On Global Climate Change
The United States and more than 160 other nations are signatories to the
1992 Framework Convention on Global Climate Change which is intended to limit or
capture emissions of greenhouse gases, such as carbon dioxide. In 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 and gas 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 public health, welfare or the environment. Under
the Comprehensive Environmental Response, Compensation and Liability Act, joint
and several liabilities 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.
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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 and
gas operations by imposing requirements for the treatment, storage and
disposal of hazardous wastes.
Federal Coal Leasing Amendments Act
Although CONSOL Energy currently does not have active 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.
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 4.5 billion tons of proved and probable
reserves at June 30, 2000. 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
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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 (53%),
central Appalachia (11%), the midwestern United States (21%) and in the western
United States and in Canada (15%).
The following table summarizes CONSOL Energy's reserves as of June 30,
2000. For unassigned reserves, CONSOL Energy assumes approximately 60% recovery
for reserves that can be mined using longwall mining, approximately 50% recovery
for reserves that will be mined using other underground methods and
approximately 90% recovery for surface mines.
CONSOL Energy Recoverable Coal Reserves
By Producing Region and Product (000 tons) as of 6/30/00
<TABLE>
<CAPTION>
*1.20 lbs. SO2/MMBtu 1.20-2.50 lbs. SO2/MMBtu 2.50 lbs. SO2/MMBtu
--------------------- ------------------------ -------------------
Low Med. High Low Med. High Low Med. High
Product Btu Btu Btu Btu Btu Btu Btu Btu Btu Total %
------- --- --- --- --- --- --- --- --- --- ----- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northern
Appalachia:
Metallurgical:
High Vol A Bituminous - - - - - 200,840 - - - 200,840 4.5
High Vol A Bituminous - 49,359 - - 10,038 55,528 49,640 134,707 1,871,549 2,170,821 48.7
Med Vol Bituminous - - - - - - - - - - 0.0
Low Vol Bituminous - - - - - 15,911 - - - 15,911 0.4
------ ------- ------- ------ ------- ------- ------- ------- --------- --------- ----
Region Total - 49,359 - - 10,038 272,279 49,640 134,707 1,871,549 2,387,572 53.5
Central Appalachia:
Metallurgical:
High Vol A Bituminous 5,832 - 18,645 - - 2,103 - - - 26,580 0.6
Med Vol Bituminous - 3,855 81,833 - 2,417 8,315 - - - 96,420 2.2
Low Vol Bituminous - - 175,208 - - 8,208 - - - 183,416 4.1
Steam:
High Vol A. Bituminous 33,002 27,347 4,006 28,667 33,009 49,751 - 430 15,417 191,629 4.3
------ ------- ------- ------ ------- ------- ------- ------- --------- --------- ----
Region Total 38,834 31,202 279,692 28,667 35,426 68,377 - 430 15,417 498,045 11.2
------ ------- ------- ------ ------- ------- ------- ------- --------- --------- ----
Midwest - Illinois
Basin
Steam:
High Vol B Bituminous - - - - 69,611 58,994 56,963 427,840 34,437 647,845 14.5
High Vol C Bituminous - - - - 185,445 - 91,987 - - 277,432 6.2
------ ------- ------- ------ ------- ------- ------- ------- --------- --------- ----
Region Total - - - - 255,056 58,994 148,950 427,840 34,437 925,277 20.7
------ ------- ------- ------ ------- ------- ------- ------- --------- --------- ----
N. Powder River
Basin
Steam:
Subbituminous B - - 248,609 - - 4,126 - - - 252,735 5.7
Subbituminous C - 193,017 - - - - - - - 193,017 4.3
------ ------- ------- ------ ------- ------- ------- ------- --------- --------- ----
Region Total - 193,017 248,609 - - 4,126 - - - 445,752 10.0
</TABLE>
* = less than and equal to
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CONSOL Energy Recoverable Coal Reserves
By Producing Region and Product (000 tons) as of 6/30/00
<TABLE>
<CAPTION>
*1.20 lbs. SO2/MMBtu 1.20-2.50 lbs. SO2/MMBtu 2.50 lbs. SO2/MMBtu
--------------------- ------------------------ -------------------
Low Med. High Low Med. High Low Med. High
Product Btu Btu Btu Btu Btu Btu Btu Btu Btu Total %
------- --- --- --- --- --- --- --- --- --- ----- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Colorado-Danforth
Hills Field
Steam:
High Vol C Bituminous 12,456 - - - - - - - - 12,456 0.3
------- ------- ------- ------ ------- ------- ------- ------- --------- --------- -----
Region Total 12,456 - - - - - - - - 12,456 0.3
Utah - Emery Field
Steam:
High Vol B Bituminous - - 14,600 - 13,952 - - - - 28,552 0.6
------- ------- ------- ------ ------- ------- ------- ------- --------- --------- -----
Region Total - - 14,600 - 13,952 - - - - 28,552 0.6
Alberta, Canada -
Mountains Region
Metallurgical:
Med Vol Bituminous 102,407 34,225 26,575 - - - - - - 163,207 3.7
------- ------- ------- ------ ------- ------- ------- ------- --------- --------- -----
Region Total 102,407 34,225 26,575 - - - - - - 163,207 3.7
Sub-Total
Metallurgical
High Vol A Bituminous 5,832 - 18,645 - - 202,943 - - - 227,420 5.1
Med Vol Bituminous 102,407 38,080 108,408 - 2,417 8,315 - - - 259,627 5.8
Low Vol Bituminous - - 175,208 - - 8,208 - - - 183,416 4.1
------- ------- ------- ------ ------- ------- ------- ------- --------- --------- -----
Total Metallurgical 108,239 38,080 302,261 - 2,417 219,466 - - - 670,463 15.0
Sub-Total Steam
High Vol A Bituminous 33,002 76,706 4,006 28,667 43,047 105,279 49,640 135,137 1,886,966 2,362,450 53.0
High Vol B Bituminous - - 14,600 - 83,563 58,994 56,963 427,840 34,437 676,397 15.2
High Vol C Bituminous 12,456 - - - 185,445 - 91,987 - - 289,888 6.5
Med Vol Bituminous - - - - - - - - - - 0.0
Low Vol Bituminous - - - - - 15,911 - - - 15,911 0.4
Subbituminous B - - 248,609 - - 4,126 - - - 252,735 5.7
Subbituminous C - 193,017 - - - - - - - 193,017 4.3
------- ------- ------- ------ ------- ------- ------- ------- --------- --------- -----
Total Steam 45,458 269,723 267,215 28,667 312,055 184,310 198,590 562,977 1,921,403 3,790,398 85.0
Total Company 153,697 307,803 569,476 28,667 314,472 403,776 198,590 562,977 1,921,403 4,460,861 100.0
======= ======= ======= ====== ======= ======= ======= ======= ========= ========= =====
Percent of Total 3.4% 6.9% 12.8% 0.6% 7.0% 9.1% 4.5% 12.6% 43.1% 100.0%
==== ==== ===== ==== ==== ==== ==== ===== ===== ======
</TABLE>
* = means less than and equal to
The above table categorizes the relative Btu values (low, medium and high)
for each coal producing region as shown below.
In Btus per lb.
<TABLE>
<CAPTION>
Region Low Medium High
------ --- ------ ----
<S> <C> <C> <C>
Northern and Central Appalachia and Canada............... *12,500 12,500---13,000 **13,000
Midwest.................................................. *11,600 11,600---12,000 **12,000
Powder River Basin....................................... * 8,400 8,400--- 8,800 ** 8,800
Western Colorado and Southern Utah....................... *11,000 11,000---12,000 **12,000
</TABLE>
* means less than
** means greater than
24
<PAGE>
Reserve estimates are based on geological data assembled and analyzed
by a qualified staff of geologists and 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.
GAS RESERVES
CONSOL Energy's gas reserves are either owned in fee or leased. See
Note 29 of Notes to Consolidated Financial Statements for further information on
CONSOL Energy's gas reserves.
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.
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.
Certain excise taxes paid on export sales of coal have been determined
to be unconstitutional. CONSOL Energy has filed claims with the Internal Revenue
Service (IRS)
25
<PAGE>
seeking refunds for these excise taxes that were paid during the period 1994
through 1999. The government has filed a petition in the United States Supreme
Court seeking a determination of the appropriate statute of limitations. The IRS
has initiated an audit of CONSOL Energy's refund claims. However, because of the
inherent uncertainties in the litigation and audit resolution processes, no
assurance can be made as to the final outcome and timing of this situation.
Accordingly, CONSOL Energy has not recognized any amount for the possible
collection of these claims.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
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 is traded on the New York Stock Exchange
(ticker symbol CNX). The approximate number of record holders of CONSOL Energy's
stock at June 30, 2000 was 4,600.
The table below sets forth the high and low stock prices and dividends
since the date of CONSOL Energy's initial public offering.
Sales Price Cash
------------------------------ Dividend
Quarter Ended High Low Declared
-------------- -------------- ------------- --------
June 30, 1999 $16.0000 $10.8750 -
September 30, 1999 14.5625 10.6250 $.28
December 31, 1999 14.7500 9.6250 .28
March 31, 2000 12.6250 9.9375 .28
June 30, 2000 17.1250 9.9375 .28
CONSOL Energy paid dividends to its stockholders of $80 million in the
year ended December 31, 1998. 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.
The Board of Directors currently intends to pay quarterly dividends on
the common stock. The declaration and payment of dividends by CONSOL Energy is
subject to the discretion of the Board of Directors, and no assurance can be
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 that the Board of Directors deems relevant.
26
<PAGE>
Item 6. Selected Financial Data.
Statement of Income Data
In thousands
<TABLE>
<CAPTION>
Six
Months
Twelve Months Ended Ended
June 30, June 30, Twelve Months Ended December 31,
-------------------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
----------- ------------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (Unaudited)
Sales (1) $ 2,094,850 $ 2,243,867 $ 1,081,922 $ 2,295,430 $ 2,285,197 $ 2,336,014 $ 2,269,211
Other Income 64,359 56,635 28,560 54,562 64,441 60,940 45,024
----------- ------------- ----------- ------------ ------------ ------------ ------------
Total Revenue 2,159,209 2,300,502 1,110,482 2,349,992 2,349,638 2,396,954 2,314,235
Costs
Cost of goods sold and
other operating charges 1,503,154 1,639,275 792,597 1,594,523 1,592,413 1,687,836 1,600,271
Selling, general and
administrative expense 57,992 55,419 27,740 55,128 55,429 53,354 53,537
Depreciation, depletion
amortization 249,877 242,260 121,237 238,584 233,304 235,159 253,113
Interest expense 55,289 55,860 30,504 48,138 45,876 44,510 53,915
Taxes other than income 174,272 196,831 98,244 201,137 188,940 187,396 200,605
Restructuring Costs 12,078 - - - - - -
----------- ------------ ----------- ------------ ------------ ------------ ------------
Total Costs 2,052,662 2,189,645 1,070,322 2,137,510 2,115,962 2,208,255 2,161,441
----------- ------------ ----------- ------------ ------------ ------------ ------------
Earnings before income
taxes 106,547 110,857 40,160 212,482 233,676 188,699 152,794
Income taxes (benefits) (493) 2,518 121 37,845 49,887 35,970 22,744
----------- ------------ ----------- ------------ ------------ ------------ ------------
Net income $ 107,040 $ 108,339 $ 40,039 $ 174,637 $ 183,789 $ 152,729 $ 130,050
=========== ============ =========== ============ ============ ============ ============
Basic and dilutive
Earnings per share (2) $ 1.35 $ 1.37 $ 0.62 $ 1.73 $ 1.69 $ 1.40 $ 1.20
Weighted average =========== ============ =========== ============ ============ ============ ============
number of common
shares outstanding 79,499,576 78,990,497 64,784,685 100,820,599 108,806,714 108,806,714 108,806,714
=========== ============ =========== ============ ============ ============ ============
</TABLE>
Balance Sheet Data
In thousands
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- -----------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Working capital
(deficiency) $ (375,074) $ (261,427) $ (602,428) $ 77,313 $ 358,030 $ 277,678
Total assets 3,866,311 3,875,026 3,863,390 3,548,011 3,857,508 3,871,978
Short-term debt 464,310 345,525 551,719 55,051 46,378 78,166
Long-term debt
(including current
portion) 307,362 326,495 430,888 397,257 449,170 442,385
Total deferred credits
and other liabilities 2,358,725 2,423,483 2,433,899 2,262,702 2,315,397 2,325,262
Stockholders' equity
(deficit) 254,179 254,725 (103,221) 302,765 578,976 506,247
</TABLE>
27
<PAGE>
Other Operating Data
<TABLE>
<CAPTION>
Six Months
Twelve Months Ended Ended
June 30, June 30, Twelve Months Ended December 31,
----------------------- -------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
----------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tons sold (in
thousands)(3) 78,714 78,786 38,553 77,729 75,170 77,000 72,741
Tons produced (in
thousands) 73,073 76,425 38,244 75,769 72,505 71,411 71,324
Productivity (tons per
manday) 44.23 39.70 39.86 40.11 38.46 34.57 31.22
Average production cost
($ per ton produced) $ 20.00 $ 21.26 $ 21.47 $ 20.99 $ 21.05 $ 21.87 $ 22.31
Average sales price of
tons produced ($ per
ton produced) $ 23.66 $ 25.51 $ 25.12 $ 26.41 $ 26.49 $ 26.29 $ 26.61
Coal reserves (tons in
millions) (4) 4,461 4,705 4,705 4,755 4,776 5,063 5,072
Number of mining
complexes (at
period end) 22 24 24 25 24 26 26
Number of employees
(at period end) 6,426 7,658 7,658 8,578 7,711 8,206 8,743
</TABLE>
Other Financial Data
In thousands
<TABLE>
<CAPTION>
Six Months
Twelve Months Ended Ended
June 30, June 30, Twelve Months Ended December 31,
----------------------------- -----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Expenditures $ 142,598 $ 240,667 $ 105,099 $ 254,515 $ 200,617 $ 169,367 $ 179,022
EBIT (5) 156,165 159,107 68,438 250,089 256,934 212,708 188,715
EBITDA (5) 406,042 401,367 189,675 488,673 490,238 447,867 441,828
Net cash provided by
operating activities 295,028 321,245 84,995 395,313 427,913 372,582 298,290
Net cash provided by
(used in) investing
activities (299,554) (186,316) (100,790) (235,918) 52,243 (251,236) (160,856)
Net cash provided by
(used in) financing
activities (10,852) (132,016) 8,069 (146,898) (501,354) (119,254) (140,805)
</TABLE>
(1) See Note 26 of Notes to Consolidated Financial Statements for sales by
operating segment (pp. 70 and 71 of this document).
(2) Basic earnings per share is computed using weighted average shares
outstanding. Differences in the weighted average number of shares
outstanding for purposes of computing diluted earnings per share are due to
the inclusion of the dilutive effect of employee and non-employee director
stock options granted, totaling 1,750 shares for the twelve months ended
June 30, 2000. The difference in the weighted average number of shares
outstanding for the twelve months ended June 30, 2000 for the calculation
of basic and diluted earnings per share was not material and resulted in no
difference between basic and diluted
28
<PAGE>
earnings per share. There were no dilutive employee and non-employee
director stock options for any of the other periods presented.
(3) Includes sales of coal produced by CONSOL Energy and purchased from third
parties. CONSOL Energy sold 3.5 million tons in the twelve months ended
June 30, 2000, 3.9 million tons in the twelve months ended June 30, 1999,
2.2 million tons in the six months ended June 30, 1999, 3.2 million tons in
1998, 3.1 million tons in 1997, 3.2 million tons in 1996, and 2.7 million
tons in 1995 of coal that was purchased from third parties.
(4) Represents proved and probable reserves at period end.
(5) 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
CONSOL Energy's net income was essentially unchanged for the twelve
months ended June 30, 2000 and the twelve months ended June 30, 1999. However,
results in the coal and gas operations during the fiscal year ended June 30,
2000 showed improvement as the year progressed.
Coal segment results have the greatest impact on CONSOL Energy's net
income. The average realized price per ton of coal produced has declined for
several years. The decline in averaged realized prices during the fiscal year
ended June 30, 2000, was due, in part, to the general industry-wide decline in
coal prices during calendar year 1999. This decline was driven by mild winter
weather in the eastern U. S. (which reduced demand for electricity), and poor
market conditions for export coal, particularly in the Pacific Rim which
resulted in high coal inventory levels at both power plants and at coal mines.
In addition, CONSOL Energy had approximately 16 million tons of coal sold under
contracts that expired by the end of calendar year 1999 which resulted in a
decline in average realized prices because these contracts provided for higher
prices than the prevailing market price. As a result of the confluence of these
factors, net income for the first half of our fiscal year did not compare
favorably with the results from the same period a year earlier.
During the fiscal year, CONSOL Energy closed its Helvetia and Keystone
mining complexes. These complexes consisted of smaller mines with higher costs
and lower productivity than other company mines. CONSOL Energy shifted
production and sales from the closed operations to its more efficient longwall
mines.
29
<PAGE>
The improvement in coal operations can best be seen in CONSOL Energy's
productivity as measured in produced tons per manday. In the year 1995, CONSOL
Energy produced 31.22 tons for each manday. In the year 1999, productivity was
39.70 tons per manday. In the fiscal year ended June 30, 2000, productivity
jumped to 44.23 tons per manday. In the quarter ending June 30, 2000,
productivity had risen to 47.00 tons per manday.
The effect of the cost reduction action that was taken has been to
lower the cost of producing a ton of coal. In the twelve months ended June 30,
1999, it cost $21.26 to produce a ton of coal. In the just-ended year, the
average cost was $20.00.
On June 22, 1999, an underground fire was discovered at the idled
Loveridge Mine. The mine was sealed and inert gases were injected to reduce
oxygen levels and put out the fire. The mine has been idled for all of the
fiscal year ended June 30, 2000. Monitoring of the mine atmosphere indicated
that the fire was extinguished, and on July 24, 2000, safety crews reentered to
ventilate and secure the mine. If conditions are favorable, the longwall will be
restarted to mine the remainder of the coal in the current panel. The longwall
will then be moved to the surface, refurbished and redeployed to another mine.
Loveridge Mine will then be idled unless the market is able to accommodate its
production.
CONSOL Energy engaged an outside consultant to review administrative
and research staff functions. The purpose of the review was to assess the need
for and to assist in a restructuring of those functions to enable CONSOL Energy
to respond to the cost challenges of the current environment without losing the
ability to take advantage of opportunities to grow the business over the longer
term. As a result of the review of administrative and research services, CONSOL
Energy implemented changes in its organizational structure. CONSOL Energy
reorganized its operating groups, reducing the number from seven to four, saving
administrative costs in the process. A workforce reduction of 214 employees
resulted from the Voluntary Separation Incentive Program, which provided
enhanced medical, pension and severance benefits upon separation from employment
and an involuntary severance program. CONSOL Energy took charges against income
of $12.1 million for these reductions and for other costs associated with the
restructuring. CONSOL Energy continues to review its business processes and the
information technology supporting those processes. The purpose of the study is
to assess the need to supplement or replace core business systems and to provide
cost-effective strategic software direction to meet future core business needs.
CONSOL Energy significantly expanded its natural gas production this
year with the purchase in February 2000 of production and gas gathering assets
from MCN Energy Inc. The timing proved fortuitous, as natural gas prices began
to increase significantly. As a result of the MCN acquisition, the average
daily production rate was 90 million cubic feet per day at the end of the fiscal
year ended June 30, 2000. For the fiscal year ended June 30, 2000, CONSOL Energy
produced 16.0 billion cubic feet (Bcf) and sold it for $3.06 per million Btus,
where a million Btus nearly equals 1,000 cubic feet. This compares with prior
year production of 5.6 billion cubic feet sold at only an average price of $2.07
per million Btus.
30
<PAGE>
CONSOL Energy announced on September 20, 2000 that it expects results
for its first quarter ending September 30, 2000 to be lower than the current
consensus estimate of analysts. Net Income for the quarter is estimated to be
between $0.05 and $0.10 per share, or $4.0 to $8.0 million.
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 was the year
that started July 1, 1999 and ended June 30, 2000. CONSOL Energy undertook 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.
Twelve Months Ended June 30, 2000 compared with
Twelve Months Ended June 30, 1999 (unaudited)
Net Income
CONSOL Energy's net income for the twelve months ended June 30, 2000
(the 2000 period) was $107 million compared with $108 million for the twelve
months ended June 30, 1999 (the 1999 period). The decrease of $1 million, or
1.2% primarily was due to reduced coal sales revenues and the addition of
restructuring costs, partially offset by lower costs of goods sold.
Revenue
Sales decreased $149 million, or 6.6% to $2,095 million for the 2000
period from $2,244 million for the 1999 period.
Revenues from the sale of Produced Coal decreased $140 million, or 7.3%
to $1,786 million in the 2000 period from $1,926 million in the 1999 period.
Average sales price per ton of Produced Coal sold decreased 7.7% to $23.66 per
ton for the 2000 period from $25.51 per ton for the 1999 period. The decline in
average sales price was primarily due to expirations of higher-priced contracts
during the 2000 period and weaker spot prices compared to the 1999 period. Sales
volumes of Produced Coal for the 2000 period were 75.2 million tons compared to
74.9 million tons for the 1999 period.
Revenues from the sale of Purchased Coal decreased $15 million, or
12.6% to $103 million in the 2000 period from $118 million in the 1999 period.
The decrease primarily was due to lower volumes and prices related to export
coal sales.
Sales of Industrial Supplies decreased $20 million, or 12.8% to $141
million in the 2000 period from $161 million in the 1999 period due to reduced
volumes.
These decreases were partially offset by the increase in revenues from
the sale of coalbed methane gas and from gathering fees. Revenues from gas sales
increased $28 million to $48 million in the 2000 period from $20 million in the
1999 period. The increase
31
<PAGE>
was primarily due to higher volumes as a result of the acquisition of Buchanan
Production Company ("BPC") and MCNIC Oakwood Gathering Inc. ("OGI") on February
25, 2000. The increase was also due to an increase in the average price per
MMBTU sold. The average price per MMBTU was $3.06 for the 2000 period compared
to $2.07 for the 1999 period.
Other income, which consists of interest income, gain on the
disposition of assets, service income, royalty income, rental income, equity in
earnings of affiliates and miscellaneous income, increased $7 million to $64
million in the 2000 period from $57 million in the 1999 period. The increase was
primarily due to an increase in gain on sale of assets, partially offset by $2
million income recognized in the 1999 period for a one-time refund of harbor
maintenance fees.
Costs
Cost of goods sold and other operating charges decreased $136 million,
or 8.3% to $1,503 million in the 2000 period compared to $1,639 million in the
1999 period.
Cost of goods sold for Produced Coal was $1,134 million for the 2000
period, a decrease of $68 million, or 5.7% from the 1999 period. This primarily
reflects a decrease due to a reduction in cost per produced ton. The reductions
in production costs are primarily due to the decrease in supplies, maintenance
and labor costs. Tons per manday have increased 11.4% to 44.2 in the 2000 period
compared to 39.7 in the 1999 period reflecting improved efficiencies at the
operating locations, the closing of the Keystone and Helvetia complexes, and the
transfer of production to more efficient mines.
Purchased Coal costs decreased 14.0% to $100 million in the 2000 period
compared to $116 million in the 1999 period. The $16 million decrease was due
mainly to reduced volumes related to export sales.
Miscellaneous cost of goods sold and other operating charges decreased
62% to $39 million in the 2000 period from $101 million in the 1999 period. The
decrease of $62 million was primarily related to a $16 million decrease in
actuarial adjustments in the 2000 period, a $4 million decrease in claim
accruals, and a $2 million decrease in salary vacation accruals due to workforce
reductions incurred in the 2000 period. The decrease was also due to a $14
million property donation and a $5 million accrual for the Loveridge Mine fire
in the 1999 period.
Industrial Supplies cost of goods sold decreased 6.9% to $145 million
in the 2000 period from $155 million in the 1999 period. The $10 million
decrease was due to reduced sales.
These decreases in Cost of Goods Sold and Other Charges were offset, in
part, by increased closed and idle property expense. Closed and idle property
expense increased 25.6% to $49 million in the 2000 period compared to $39
million in the 1999 period. The $10 million increase was primarily due to an $8
million increase due to the Loveridge, Powhatan and Ohio #11 mines being closed
or idled for the full 2000 period compared to being idle only part of the 1999
period and a $5 million increase was due to the reversal
32
<PAGE>
of mine-closing liabilities related to a property disposition in the 1999
period. These increases in expense were partially offset due to Robinson Run
#95, Humphrey #138 and V.P. #8 reopening in the 2000 period after being idled
for part of the 1999 period.
Gas costs increased 47.0% to $22 million in the 2000 period from $15
million in the 1999 period. The $7 million increase was primarily due to higher
volumes of sales following the acquisition of BPC and OGI.
Coal property holding costs increased 46.9% to $13 million in the 2000
period from $9 million in the 1999 period. The $4 million increase was primarily
due to leasehold surrenders.
Selling, general and administrative expenses increased 4.6% to $58
million in the 2000 period compared to $55 million in the 1999 period. The
increase of $3 million was primarily due to increased fees for professional
consulting services and general professional services, offset partially by a
decrease in labor costs due to the Voluntary Separation Incentive Program and an
involuntary severance program.
Depreciation, depletion and amortization expense increased 3.1% to $250
million in the 2000 period compared to $242 million in the 1999 period. The
increase of $8 million was primarily due to the depreciation expense related to
assets placed in service, mainly the Bailey Preparation Plant expansion and the
purchase of a new longwall, after the 1999 period. The increased depreciation
expense was partially offset by reduced depreciation and depletion expense from
the scheduled closing of the Powhatan Mine due to economically depleted reserves
and V.P. #3 and Ohio #11 being idled for the full 2000 period.
Interest expense decreased 1.0% to $55 million for the 2000 period
compared to $56 million for the 1999 period. The decrease of $1 million was due
primarily to $78 million lower average debt levels outstanding during the 2000
period compared to the 1999 period, partially offset by a 0.6% increase in
average interest rates on commercial paper in the 2000 period. Higher debt
levels in the 1999 period resulted from the issuance of commercial paper to
finance the purchase of CONSOL Energy's common stock from DuPont Energy Company
("DuPont Energy") in November 1998. Lower debt levels in the 2000 period
resulted from the use of the Initial Public Offering proceeds to reduce debt and
the repayment of $100 million of long-term debt as scheduled in January 1999.
These reductions in debt were partially offset by an increase in the debt
outstanding from the issuance of commercial paper in February 2000, which was
used to finance the acquisition of BPC, OGI, and a MCN subsidiary that owns a
50% interest in CSGC.
Taxes other than income decreased 11.5% to $174 million for the 2000
period compared to $197 million for the 1999 period. The decrease of $23 million
was due primarily to decreased West Virginia severance taxes due to lower
production and sales prices in that state, decreased black lung excise taxes due
to overall lower production tons and overall lower sales prices, and reduced
payroll taxes primarily due to decreased labor costs.
33
<PAGE>
Restructuring charges were $12 million in the 2000 period. These
charges represent costs related to the implementation of reductions in
administrative and research staff. These reductions were the result of the
detailed review which has been conducted within CONSOL Energy throughout the
second and third quarter of the fiscal year. The purpose of the review was to
assess the need for and to assist in a restructuring of the staff functions to
enable CONSOL Energy to respond to the cost challenges of the current
environment without losing the ability to take advantage of opportunities to
grow the business over the longer term. Restructuring charges primarily
represent severance costs related to layoffs and professional consulting
services.
Income Taxes
Income taxes were a $0.5 million benefit in the 2000 period compared to
a $3 million expense in the 1999 period. The tax benefit in the 2000 period was
due primarily to the recording of a $8 million benefit from a final agreement
resolving disputed federal income tax items for the years 1992-1994, the
recording of a $4 million benefit resulting from filing the federal and various
state tax returns for the period January 1, 1998 through December 31, 1998 in
the 2000 period, and the recording of a $1 million benefit resulting from
filing the federal and various state tax returns for the period January 1,
1999 through June 30, 1999 in the 2000 period. Also, the reduced tax expense
is due to a lower effective tax rate in the 2000 period due mainly to lower
pre-tax income, with minimal effect on percentage depletion benefits, and
additional Section 29 gas tax benefits related to the recent acquisition of
BPC, OGI and a MCN subsidiary that owns a 50% interest in CSGC.
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
(1999 transition 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 transition 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 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.
34
<PAGE>
Revenue
Sales decreased 4.6% to $1,082 million for the 1999 transition 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 DuPont from related party sales to outside
sales due to the purchase of shares of the company from 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 transition
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 transition 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 transition 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 transition 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 was $5 million. The mine was sealed to
deplete oxygen underground and concrete plugs were injected through drill holes
to isolate the area where the fire occurred. The mine atmosphere was being
monitored daily and readings indicate the fire has been extinguished. 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 transition period compared to $27 million in the 1998
period.
35
<PAGE>
Depreciation, depletion and amortization increased 3.1% to $121 million
in the 1999 transition 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 transition period.
Interest expense increased 33.9% in the 1999 transition 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
transition 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
transition 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 transition
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 transition
period and changes in percentage depletion deductions for various operations.
The effective tax rate for the 1999 transition 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.
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.
36
<PAGE>
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 CONSOL Energy was 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 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.
37
<PAGE>
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $295 million in the
twelve months ended June 30, 2000 (the 2000 period) compared to $321 million in
the twelve months ended June 30, 1999 (the 1999 period). The change in net cash
provided by operating activities reflects increases in deferred income taxes,
accounts receivable, liquidation of inventories, and a decrease of prepaid
expenses and changes in operating and other liabilities.
Net cash used in investing activities was $300 million in the 2000
period compared to $186 million in the 1999 period. The change in cash used in
investing activities reflects the purchase of BPC, OGI, and an MCN subsidiary
that owns a 50% interest in CSGC from MCN Energy Group Inc. in the 2000 period
compared to the purchase of R&P and the sale of marketable securities in the
1999 period. In addition, capital expenditures in the 2000 period were $143
million compared with $241 million in the 1999 period. The reduction in capital
expenditures was part of the cost reduction efforts which have been implemented
by CONSOL Energy.
Net cash used in financing activities was $11 million in the 2000
period compared to $132 million in the 1999 period. The change in net cash used
in financing activities reflects the reduced proceeds from commercial paper in
the 2000 period compared to the 1999 period. This decrease was offset in part by
the expenditure to purchase shares of CONSOL Energy's Common Stock from DuPont
Energy in the 1999 period, as well as the scheduled retirement of a long-term
note in the 1999 period. The 1999 period reflects the proceeds, net of expenses,
from the Initial Public Offering as well. Also, dividends aggregating $89
million were paid in the 2000 period compared to a $103 million paid in the 1999
period. The 2000 period dividends reflect CONSOL Energy's current policy of
paying quarterly dividends.
Capital Expenditures
Capital expenditures were $143 million in the 2000 period and $241
million in the 1999 period. CONSOL Energy made such expenditures for replacement
of mining equipment, the expansion of mining capacity and projects to improve
the efficiency of mining 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 $209 million during the fiscal year ended June 30, 2001 and
approximately $161 million during the fiscal year ended June 30, 2002. Capital
expenditures for pollution abatement and reclamation are projected to be $9
million for the fiscal year ended June 30, 2001. Expenditures for pollution
abatement and reclamation are projected to be immaterial for the fiscal year
ended June 30, 2002.
38
<PAGE>
Debt
At June 30, 2000, CONSOL Energy had total long-term debt of $307 million,
including the current portion of long-term debt of $7 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,
. $29 million in advance royalty commitments,
. An aggregate principal amount of $1 million of notes maturing at various
dates through 2031, and
. An aggregate principal amount of $18 million of capital leases.
At June 30, 2000, CONSOL Energy had an aggregate principal amount of
$464 million of commercial paper outstanding which had maturities ranging up to
101 days and bore interest at rates ranging from 6.44% to 7.29% 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 $550 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, 2000 and at June 30, 1999.
Stockholders' Equity and Dividends
CONSOL Energy had stockholders' equity of $254 million at June 30,
2000, and $255 million at June 30, 1999. CONSOL Energy paid ordinary cash
dividends of $89 million during the 2000 period and $103 million during the 1999
period. The Board of Directors declared a dividend on July 27, 2000 of $0.28 per
share of common stock for shareholders of record on August 11, 2000, payable on
September 1, 2000. The Board of Directors currently intends to pay quarterly
dividends on the common stock. The 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
39
<PAGE>
outstanding indebtedness of CONSOL Energy does not restrict CONSOL Energy's
ability to pay cash dividends.
In August 1999, CONSOL Energy announced that it would begin a share
repurchase program of up to 1,000,000 shares of CONSOL Energy's common stock. In
March 2000, CONSOL Energy completed the repurchase of 1,000,000 shares of CONSOL
Energy's common stock at an average price of $11.90.
In March 2000, CONSOL Energy announced that it would begin another
share repurchase program of up to 1,000,000 shares of CONSOL Energy's common
stock. The stock repurchase will be used in connection with benefit plan
administration. The timing of the purchases and the number of shares to be
purchased are dependent upon market conditions. As of June 30, 2000, CONSOL
Energy had repurchased 412,600 shares at an average price of $10.92 in this new
share repurchase program.
On November 30, 1999, CONSOL Energy purchased 300,000 shares of its
common stock for $2.9 million, or $9.75 per share, as part of a larger private
transaction. The shares had been beneficially owned by DuPont Energy. As of
November 30, 1999, DuPont Energy had sold all of its 3,264,201 shares of common
stock of CONSOL Energy.
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 2000 or 1999 periods.
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, 2000, CONSOL Energy
had outstanding $287.9 million aggregate principal amount of debt under fixed-
rate instruments and $465.4 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,
2000, CONSOL Energy had an aggregate of $464.3 million in commercial paper
outstanding. CONSOL Energy's commercial paper bore interest at an average rate
of 6.04% during the twelve months ended June 30, 2000. A 100 basis-point
increase in the average rate for CONSOL Energy's commercial paper would have
decreased CONSOL Energy's 2000 net income by approximately $1.6 million. The
fair value of CONSOL Energy's financial instruments is set forth in Note 24 of
the Notes to Consolidated Financial Statements.
40
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................ 42
Consolidated Statements of Income for the Year Ended June 30, 2000,
Six Months Ended June 30, 1999 and the Years Ended December 31, 1998
and 1997.................................................................. 43
Consolidated Balance Sheets at June 30, 2000, June 30, 1999 and December
31, 1998.................................................................. 44
Consolidated Statements of Stockholders' Equity for the Twelve Months
Ended June 30, 2000, Six Months Ended June 30, 1999 and the Years Ended
December 31, 1998 and 1997................................................ 46
Consolidated Statements of Cash Flows for the Twelve Months Ended June 30,
2000, Six Months Ended June 30, 1999 and the Years Ended December 31,
1998 and 1997............................................................. 47
Notes to Consolidated Financial Statements................................ 48
41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
CONSOL Energy Inc.
We have audited the consolidated balance sheets of CONSOL Energy Inc. and
subsidiaries (CONSOL Energy) as of June 30, 2000, June 30, 1999 and December 31,
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years ended June 30, 2000, December 31, 1998 and
1997 and for the six months ended June 30, 1999. 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 auditing standards generally accepted
in the United States. 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, 2000, June 30, 1999 and December 31, 1998, and the
consolidated results of their operations and their cash flows for the years
ended June 30, 2000, December 31, 1998 and 1997 and for the six months ended
June 30, 1999, in conformity with accounting principles generally accepted in
the United States.
Pittsburgh, Pennsylvania
July 19, 2000
42
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended For the Year Ended December 31,
-------------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- --------------------------------
<S> <C> <C> <C> <C>
Sales - Outside $ 2,091,596 $ 1,076,528 $ 2,190,753 $ 2,146,936
Sales - Related Parties (Note 3) 3,254 5,394 104,677 138,261
Other Income (Note 4) 64,359 28,560 54,562 64,441
------------- ------------- -------------- --------------
Total Revenue 2,159,209 1,110,482 2,349,992 2,349,638
Costs of Goods Sold and Other
Operating Charges 1,503,154 792,597 1,594,523 1,592,413
Selling, General and
Administrative Expenses 57,992 27,740 55,128 55,429
Depreciation, Depletion
and Amortization 249,877 121,237 238,584 233,304
Interest Expense (Note 5) 55,289 30,504 48,138 45,876
Taxes Other Than Income (Note 6) 174,272 98,244 201,137 188,940
Restructuring Costs (Note 7) 12,078 - - -
------------- ------------- -------------- --------------
Total Costs 2,052,662 1,070,322 2,137,510 2,115,962
Earnings Before Income Taxes 106,547 40,160 212,482 233,676
Income Taxes (Benefits) (Note 8) (493) 121 37,845 49,887
------------- ------------- -------------- --------------
Net Income $ 107,040 $ 40,039 $ 174,637 $ 183,789
============= ============= ============== ==============
Basic and Dilutive
Earnings Per Share (Note 1) $ 1.35 $ .62 $ 1.73 $ 1.69
============= ============= ============== ==============
Weighted Average Number of
Common Shares Outstanding 79,499,576 64,784,685 100,820,599 108,806,714
============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 8,181 $ 23,559 $ 31,285
Accounts and Notes Receivable:
Trade 262,943 241,054 261,215
Related Parties (Note 3) - 743 1,358
Other Receivables 24,849 21,030 26,760
Inventories (Note 9) 156,853 206,995 170,574
Recoverable Income Taxes 7,813 - -
Deferred Income Taxes (Note 8) 93,464 94,575 96,412
Prepaid Expenses 23,625 34,692 27,585
------------- ------------- -------------
Total Current Assets 577,728 622,648 615,189
Property, Plant and Equipment (Note 10):
Property, Plant and Equipment 4,852,017 4,863,138 4,843,147
Less - Accumulated Depreciation, Depletion
and Amortization 2,277,573 2,188,872 2,157,023
------------- ------------- -------------
Total Property, Plant and Equipment - Net 2,574,444 2,674,266 2,686,124
Other Assets:
Deferred Income Taxes (Note 8) 291,178 267,304 245,964
Advance Mining Royalties 107,980 117,808 119,160
Investment in Affiliates 177,272 1,979 1,532
Other 137,709 191,021 195,421
------------- ------------- -------------
Total Other Assets 714,139 578,112 562,077
------------- ------------- -------------
Total Assets $ 3,866,311 $ 3,875,026 $ 3,863,390
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable $ 143,313 $ 194,592 $ 211,835
Accounts Payable - Related Parties (Note 3) 502 - -
Short-Term Notes Payable (Note 11) 464,310 345,525 551,719
Current Portion of Long-Term Debt and
Capital Lease Obligations 6,757 13,752 115,793
Accrued Income Taxes - 2,393 11,260
Other Accrued Liabilities (Note 12) 337,920 327,813 327,010
------------- ------------- -------------
Total Current Liabilities 952,802 884,075 1,217,617
Long-Term Debt:
Long-Term Debt (Note 13) 286,098 294,311 294,375
Capital Lease Obligations (Note 14) 14,507 18,432 20,720
------------- ------------- -------------
Total Long-Term Debt 300,605 312,743 315,095
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than
Pensions (Note 15) 1,118,021 1,177,639 1,174,964
Pneumoconiosis Benefits (Note 16) 426,402 473,459 483,423
Mine Closing 280,370 278,452 277,026
Workers' Compensation 253,534 242,888 238,849
Reclamation 11,808 14,397 12,859
Other 268,590 236,648 246,778
------------- ------------- -------------
Total Deferred Credits and Other Liabilities 2,358,725 2,423,483 2,433,899
Stockholders' Equity (Deficit):
Common Stock, $.01 Par Value; 500,000,000
Shares Authorized; 80,267,558 Issued and
78,577,274 Outstanding at June 30, 2000,
80,267,558 Issued and Outstanding at
June 30, 1999 and 57,667,558 Issued
and Outstanding at December 31, 1998 803 803 577
Capital in Excess of Par Value 642,947 642,947 302,427
Retained Earnings Deficit (370,152) (388,063) (405,602)
Other Comprehensive Loss (Note 19) (322) (962) (623)
Common Stock in Treasury,
at cost - 1,690,284 Shares (19,097) - -
------------- ------------- -------------
Total Stockholders' Equity (Deficit) 254,179 254,725 (103,221)
------------- ------------- -------------
Total Liabilities and Stockholders' Equity $ 3,866,311 $ 3,875,026 $ 3,863,390
============= ============= =============
</TABLE>
45
<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 Treasury Equity
Stock Par Value Deficit Loss Stock (Deficit)
------- ----------- ---------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 $224 tax) - - - (353) - (353)
------ ---------- --------- ------ -------- ---------
Comprehensive Income - - 174,637 (623) - 174,014
Repurchase and Retire-
ment of Common Stock (511) (499,489) - - - (500,000)
Dividends ($.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
Net Income - - 107,040 - - 107,040
Unrealized Loss on
Securities
(Net of $250 tax) - - - (393) - (393)
Minimum Pension Liability
(Net of $10 tax) - - - 16 - 16
Realized Loss on
Securities
(Net of $649 tax) - - - 1,017 - 1,017
------ ---------- --------- ------ -------- ---------
Comprehensive Income - - 107,040 640 - 107,680
Dividends ($1.12 per Share) - - (89,067) - - (89,067)
Treasury Stock Purch-
ased (1,712,600 Shares) - - - - (19,396) (19,396)
Treasury Stock Issued
(22,316 Shares) - - (62) - 299 237
------ ---------- --------- ------ -------- ---------
Balance at June 30, 2000 $ 803 $ 642,947 $(370,152) $ (322) $(19,097) $ 254,179
====== ========== ========= ====== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
For the For the Six For the Year
Year Ended Months Ended Ended December 31,
----------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 107,040 $ 40,039 $ 174,637 $ 183,789
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 249,877 121,237 238,584 233,304
Gain on Sale of Assets (26,538) (6,171) (7,690) (13,134)
Amortization of Advance Mining Royalties 16,444 6,063 16,920 14,617
Deferred Income Taxes (23,172) (19,285) (26,375) (16,024)
Equity in Earnings of Affiliates (1,969) - - -
Changes in Operating Assets:
Accounts and Notes Receivable (25,825) 26,613 33,296 19,185
Inventories 50,142 (36,421) (15,687) (8,997)
Prepaid Expenses 5,747 (7,107) (7,542) (2,699)
Changes in Other Assets 50,725 (2,237) 23,576 4,892
Changes in Operating Liabilities:
Accounts Payable (46,081) (17,057) (23,804) 18,920
Other Operating Liabilities (533) (7,991) (12,283) 42,864
Changes in Other Liabilities (66,266) (9,810) (9,812) (47,415)
Other 5,437 (2,878) 11,493 (1,389)
------------ ------------ ----------- -----------
187,988 44,956 220,676 244,124
------------ ------------ ----------- -----------
Net Cash Provided by Operating Activities 295,028 84,995 395,313 427,913
Cash Flows from Investing Activities:
Capital Expenditures (142,598) (105,099) (254,515) (200,617)
Additions to Advance Mining Royalties (6,048) (3,645) (5,833) (6,119)
Proceeds from Sales of Assets 14,897 7,954 10,009 19,535
Acquisitions - Net of Cash Acquired (Note 2) (163,506) - (100,408) -
Investment in Affiliates (2,299) - - -
Changes in Marketable Securities - Net - - 114,829 239,444
------------ ------------ ----------- -----------
Net Cash (Used in) Provided by Investing Activities (299,554) (100,790) (235,918) 52,243
Cash Flows from Financing Activities:
Proceeds from (Payments on) Short-Term Borrowings 117,331 (204,780) 494,448 8,711
Payments on Long-Term Notes - (100,000) (55,133) (44,000)
Payments on Miscellaneous Borrowings (19,732) (5,397) (6,213) (6,065)
Sale of Common Stock under Public
Offering, Net of Expenses - 340,746 - -
Repurchase and Retirement of Common Stock - - (500,000) -
Dividends Paid (89,055) (22,500) (80,000) (460,000)
Acquisition of Company Shares (19,396) - - -
------------ ------------ ----------- -----------
Net Cash (Used in) Provided by Financing Activities (10,852) 8,069 (146,898) (501,354)
------------ ------------ ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (15,378) (7,726) 12,497 (21,198)
Cash and Cash Equivalents at Beginning of Period 23,559 31,285 18,788 39,986
------------ ------------ ----------- -----------
Cash and Cash Equivalents at End of Period $ 8,181 $ 23,559 $ 31,285 $ 18,788
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 2000
-------------
(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 was the six months ended June 30,
1999. CONSOL Energy's first full fiscal year ended June 30 is the year that
started July 1, 1999 and ended 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 74% of the common stock of CONSOL Energy.
BASIS OF CONSOLIDATION:
----------------------
The consolidated financial statements include the accounts of majority-owned
subsidiaries. Investments owned 20% to 50% are accounted for under the equity
method. Investments in non-corporate joint ventures are accounted for under the
equity method. 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. 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 original maturities of three months or
less. 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, 2000, June 30, 1999 and December 31, 1998 are classified as available-
for-sale securities under the provisions of Statement of Financial Accounting
Standards No. 115.
48
<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.
The cost of coal inventories is determined by the first-in, first-out (FIFO)
method. Coal inventory costs include labor, supplies, equipment costs, operating
overhead and other related costs. The cost of merchandise for resale is
determined by the last-in, first-out (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.
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.
Gas well activity is accounted for under the successful efforts method of
accounting. Costs of property acquisitions, successful exploratory wells,
development wells and related support equipment and facilities are capitalized.
The costs of producing properties are amortized using the unit-of-production
method over estimated recoverable gas reserves.
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.
49
<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 AND GAS WELL 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.
The estimated costs of dismantlement and removal of gas related facilities are
accrued over the properties' productive lives using the units-of-production
method. Accrued dismantlement and removal of gas related facility 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:
-------------------
Sales are recognized when title passes to the customers. For domestic coal
sales, this generally occurs when coal is loaded at mine or offsite storage
locations. For export coal sales, this generally occurs when coal is loaded onto
marine vessels at terminal locations. For gas sales, this occurs at the
contractual point of delivery. For industrial supplies and equipment sales, this
occurs when the products are shipped.
50
<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". CONSOL Energy continues to measure compensation expense for its
stock-based compensation plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees".
EARNINGS PER COMMON SHARE:
-------------------------
Basic earnings per share are computed using weighted average number of shares
outstanding. Differences in the weighted average number of shares outstanding
for purposes of computing diluted earnings per share are due to the inclusion of
the dilutive effect of employee and non-employee director stock options granted,
totaling 1,750 shares for the twelve months ended June 30, 2000. The difference
in the weighted average number of shares outstanding for the twelve months ended
June 30, 2000 for the calculation of basic and diluted earnings per share was
not material and resulted in no difference between basic and diluted earnings
per share. There were no dilutive employee and non-employee director stock
options for any of the other periods presented. Options to purchase 800,000 and
784,000 shares of common stock at $16.00 per share were outstanding in the
twelve months ended June 30, 2000 and the six months ended June 30, 1999. These
options were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares and therefore, the effect would be anti-dilutive.
RECLASSIFICATIONS:
-----------------
Certain reclassifications of prior years' data have been made to conform to 2000
classifications.
NOTE 2 - ACQUISITIONS:
---------------------
On February 25, 2000, CONSOL Energy acquired the stock of Buchanan Production
Company (BPC), MCNIC Oakwood Gathering Inc. (OGI) and a MCN subsidiary that owns
50% interest in Cardinal States Gathering Company (CSGC) from MCN Energy Group
Inc. for $163,506. These companies own gas production and pipeline properties in
southwestern Virginia and currently produce approximately 70 million cubic feet
per day of pipeline quality methane gas. BPC is estimated to control
approximately 275 billion cubic feet of proven coalbed methane gas reserves.
The acquisition has been accounted for under the purchase method. Accordingly,
the purchase price has been allocated to the assets acquired and liabilities
assumed, based upon the fair values at the date of the acquisition. The
acquisition included a 50% interest in CSGC, in which CONSOL Energy previously
owned a 25% interest. CONSOL Energy accounts for its 75% interest in CSGC under
the equity method, as control is shared with the minority ownership. CONSOL
Energy's financial statements include the results of the companies acquired on a
consolidated basis from the date of the acquisition.
Pro forma revenues, assuming the acquisition of these companies had occurred on
January 1, 1998, would be $2,392,218 for the year ended December 31, 1998;
$1,131,708 for the six months ended June 30, 1999 and $2,197,632 for the year
ended June 30, 2000. Pro forma net income and 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 on January 1, 1998. 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 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.
51
<PAGE>
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.
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 74%. 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 ceased to be
classified as related party due to the change in ownership percentages. Such
sales were as follows:
<TABLE>
<CAPTION>
For the For the Six For the Year
Year Ended Months Ended Ended December 31,
----------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Coal sales $ 3,254 $ 5,394 $ 21,678 $ 39,406
Industrial supplies and
equipment sales - - 82,999 98,855
------------ ----------- ----------- -----------
Total Sales - Related Parties $ 3,254 $ 5,394 $ 104,677 $ 138,261
============ =========== =========== ===========
</TABLE>
CONSOL Energy and Rheinbraun entered into an agreement to investigate possible
investments in which they may jointly participate. Under this agreement,
expenses are to be shared equally. For the twelve months ended June 30, 2000,
CONSOL Energy expended $821 related to this agreement. To date, no investments
have been made pursuant to this agreement.
Also, a subsidiary of Rheinbraun periodically provides insurance brokerage
services to CONSOL Energy without fee. For the twelve months ended June 30,
2000, CONSOL Energy has expensed $510 and deferred $240 for insurance brokered
through this subsidiary of Rheinbraun.
52
<PAGE>
NOTE 4 - OTHER INCOME:
---------------------
<TABLE>
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
----------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Gain on disposition of assets $ 26,538 $ 6,171 $ 7,690 $ 13,134
Royalty income 14,793 8,378 14,209 13,338
Service income 6,732 4,059 5,180 5,702
Interest income 5,671 2,226 10,531 22,618
Rental income 4,000 1,577 5,336 5,165
Equity in earnings of affiliates 1,969 - - -
Loss on disposition of security (1,666) - - -
Proceeds from relinquishment
of mining rights - - 5,250 -
Other 6,322 6,149 6,366 4,484
------------ ----------- ----------- -----------
Total Other Income $ 64,359 $ 28,560 $ 54,562 $ 64,441
============ =========== =========== ===========
NOTE 5 - INTEREST EXPENSE:
-------------------------
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
-----------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on debt $ 45,373 $ 26,094 $ 38,590 $ 32,021
Interest accretion on present valued
perpetual care obligations 5,805 2,896 6,823 6,425
Interest on other payables 5,656 2,772 6,017 9,246
Interest capitalized (1,545) (1,258) (3,292) (1,816)
----------- ----------- ----------- -----------
Total Interest Expense $ 55,289 $ 30,504 $ 48,138 $ 45,876
=========== =========== =========== ===========
NOTE 6 - TAXES OTHER THAN INCOME:
--------------------------------
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
----------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Production taxes $ 112,200 $ 61,271 $ 132,187 $ 121,969
Payroll taxes 35,584 22,048 37,745 37,346
Property taxes 23,480 13,430 27,377 27,786
Other 3,008 1,495 3,828 1,839
----------- ----------- ----------- -----------
Total Taxes Other Than Income $ 174,272 $ 98,244 $ 201,137 $ 188,940
=========== =========== =========== ===========
</TABLE>
53
<PAGE>
NOTE 7 - RESTRUCTURING COSTS:
----------------------------
In the year ended June 30, 2000, CONSOL Energy reviewed the administrative and
research staff functions and implemented a workforce reduction program. The
purpose of the review was to assess the need for and to assist in a
restructuring of those functions to enable CONSOL Energy to respond to the cost
challenges of the current environment without losing the ability to take
advantage of opportunities to grow the business over the long term. Costs
related to this restructuring primarily relate to severance and employee benefit
costs in conjunction with the workforce reduction of 214 employees and
consulting fees. Workforce reductions were made through a Voluntary Separation
Incentive Program (VSIP), which provided enhanced medical, pension and severance
benefits upon separation from employment and an involuntary severance program.
CONSOL Energy recorded a pre-tax restructuring charge of $12,078 based on
estimates of the cost of the workforce reduction programs, including special
termination benefits related to pension and other postretirement benefit plans.
Approximately 94% of the benefits under the programs have been paid or have been
transferred as obligations of CONSOL Energy's pension and postretirement other
than pension plans as of June 30, 2000. The remaining obligation related to the
restructuring is recorded as Other Accrued Liabilities.
Components of restructuring costs are as follows:
<TABLE>
<CAPTION>
Employee
Termination Consulting
Benefits Fees Total
-------------- -------------- ----------
<S> <C> <C> <C>
Quarter Ended:
December 31, 1999 $ 1,039 $ 628 $ 1,667
March 31, 2000 8,253 1,356 9,609
June 30, 2000 435 440 875
Change in estimates (73) - (73)
------------ ------------ ------------
Total Restructuring Costs 9,654 2,424 12,078
Cash payments (5,060) (2,424) (7,484)
Transfer obligation to
employee benefit plan (3,912) - (3,912)
------------ ------------ ------------
Restructuring Liability at June 30, 2000 $ 682 $ - $ 682
============ ============ ============
</TABLE>
54
<PAGE>
NOTE 8 - INCOME TAXES:
---------------------
Income taxes (benefits) provided on earnings consisted of:
<TABLE>
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
-------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Current:
U.S. federal $ 18,815 $ 15,013 $ 52,084 $ 52,015
U.S. state 2,466 2,664 7,958 6,677
Non-U.S. 1,398 1,729 4,178 7,219
----------- ----------- ----------- -----------
22,679 19,406 64,220 65,911
Deferred:
U.S. federal (21,311) (16,987) (23,267) (14,001)
U.S. state (437) (2,884) (4,109) (2,413)
Non-U.S. (1,424) 586 1,001 390
----------- ----------- ----------- -----------
(23,172) (19,285) (26,375) (16,024)
----------- ----------- ----------- -----------
Total Income Taxes (Benefits) $ (493) $ 121 $ 37,845 $ 49,887
=========== =========== =========== ===========
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------ -------------- --------------
<S> <C> <C> <C>
Deferred Tax Assets:
Postretirement benefits other than pensions $ 473,210 $ 486,973 $ 484,037
Pneumoconiosis benefits 170,014 189,086 191,567
Workers' compensation 113,802 97,199 95,441
Mine closing 95,193 105,244 105,149
Alternative minimum tax 78,382 63,813 62,811
Reclamation 10,299 12,566 12,005
Net operating loss 7,544 8,653 8,653
Other 138,685 135,873 137,726
----------- ----------- -----------
Total Deferred Tax Assets 1,087,129 1,099,407 1,097,389
Deferred Tax Liabilities:
Property, plant and equipment (604,623) (655,899) (675,189)
Advance mining royalties (35,289) (34,591) (35,118)
Other (62,575) (47,038) (44,706)
----------- ----------- -----------
Total Deferred Tax Liabilities (702,487) (737,528) (755,013)
----------- ----------- -----------
Net Deferred Tax Asset $ 384,642 $ 361,879 $ 342,376
=========== =========== ===========
</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, 2000 also due to the acquisition of R&P, CONSOL Energy has net
operating loss carry-forwards for federal income tax purposes of $19,290 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.
55
<PAGE>
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 For the Six For the Year Ended
Year Ended Months Ended December 31,
-------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% 35.0%
Excess tax depletion (25.2) (33.5) (17.4) (13.8)
Tax settlements (7.4) - - -
Nonconventional fuel tax credit (1.4) (1.9) (0.8) (1.2)
Net effect of state tax 1.2 (0.6) 1.2 1.2
Net effect of foreign tax (0.8) 1.9 1.0 1.3
Other (1.9) (0.6) (1.2) (1.2)
----- ----- ----- -----
Effective Income Tax Rate (0.5)% 0.3% 17.8% 21.3%
======= ===== ===== =====
</TABLE>
In the year ended June 30, 2000, CONSOL Energy received a $7,861 federal income
tax benefit from a final agreement resolving disputed federal income tax items
for the years 1992 to 1994.
Foreign income (loss) before taxes totaled $(3,123) for the year ended June 30,
2000, $3,964 for the six months ended June 30, 1999, $11,165 and $13,832 for the
twelve months ended December 31, 1998 and 1997, respectively.
NOTE 9 - INVENTORIES:
--------------------
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Coal $ 82,835 $ 127,019 $ 91,886
Merchandise for resale 33,488 36,614 37,209
Supplies 40,530 43,362 41,479
------------ ------------ ------------
Total Inventories $ 156,853 $ 206,995 $ 170,574
============ ============ ============
</TABLE>
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 $5,632 at June 30, 2000, $5,110 at June 30, 1999 and $5,254 at December 31,
1998.
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT:
---------------------------------------
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------- -------------- -------------
<S> <C> <C> <C>
Coal and surface lands $ 1,417,454 $ 1,431,385 $ 1,442,394
Plant and equipment 2,836,400 2,830,768 2,807,274
Mine development and airshafts 598,163 600,985 593,479
------------ ------------ ------------
4,852,017 4,863,138 4,843,147
Less - Accumulated depreciation,
depletion and amortization 2,277,573 2,188,872 2,157,023
------------ ------------ ------------
Net Property, Plant and Equipment $ 2,574,444 $ 2,674,266 $ 2,686,124
============ ============ ============
</TABLE>
Plant and equipment includes gross assets under capital lease of $19,627 at June
30, 2000, June 30, 1999 and December 31, 1998. Accumulated amortization for
capital leases was $6,795 at June 30, 2000, $3,013 at June 30, 1999 and $993 at
December 31, 1998.
56
<PAGE>
NOTE 11 - SHORT-TERM NOTES PAYABLE:
----------------------------------
CONSOL Energy has commercial paper notes outstanding of $464,310, $345,525 and
$551,719 (net of discount of $2,589, $460 and $1,441) at June 30, 2000, June 30,
1999 and December 31, 1998. The weighted average interest rate of the commercial
paper notes outstanding was 6.97, 5.26 and 6.10 percent, with an average
maturity of 28, 9 and 16 days at June 30, 2000, June 30, 1999 and December 31,
1998.
CONSOL Energy has a $550,000 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 $550,000. 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, 2000, June 30, 1999 and December 31, 1998.
NOTE 12 - OTHER ACCRUED LIABILITIES:
-----------------------------------
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------ --------------- ------------
<S> <C> <C> <C>
Accrued payroll and benefits $ 42,507 $ 50,050 $ 51,733
Accrued other taxes 40,143 36,313 37,370
Subsidence 18,069 16,392 14,454
Accrued royalties 12,811 6,846 10,791
Accrued interest 2,765 3,036 7,598
Loveridge fire loss 1,155 5,417 -
Other 56,985 45,024 41,661
Current portion of long-term liabilities:
Postretirement benefits other than pensions 74,352 74,219 69,346
Workers' compensation 47,200 41,900 41,420
Mine closing 19,056 17,954 19,644
Pneumoconiosis benefits 10,652 12,621 9,039
Reclamation 7,131 12,947 19,453
Salary retirement 500 500 500
Other 4,594 4,594 4,001
------------- ------------- -------------
Total Other Accrued Liabilities $ 337,920 $ 327,813 $ 327,010
============= ============= =============
</TABLE>
57
<PAGE>
NOTE 13 - LONG-TERM DEBT:
------------------------
Long-term debt is as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
---- ---- ----
<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% 44,816 44,797 44,788
Notes due 1999 at 7.88% - - 100,000
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 1,132 14,118 14,972
Advance royalty commitments 28,714 28,146 27,057
Other long-term notes maturing at
various dates through 2031 547 2,742 5,438
---------- ---------- ----------
289,074 303,668 406,120
Less amounts due in one year 2,976 9,357 111,745
---------- ---------- ----------
Total Long-Term Debt $ 286,098 $ 294,311 $ 294,375
========== ========== ==========
</TABLE>
The variable rate notes, advance royalty commitments and the other long-term
notes had an average interest rate of approximately 7.3% at June 30, 2000, 7.1%
at June 30, 1999 and 7.2% at December 31, 1998. The bonds and notes are carried
net of debt discount, which is being amortized by the interest method over the
life of the issue.
Annual undiscounted maturities on long-term debt during the next five years are
as follows:
Year ended
June 30, Amount
-------- ------
2001 $ 2,976
2002 $ 68,623
2003 $ 2,429
2004 $ 47,121
2005 $ 1,971
58
<PAGE>
NOTE 14 - 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, 2000,
are as follows:
Capital Operating
Leases Leases
------- ---------
2001 $ 4,966 $ 6,649
2002 4,817 4,721
2003 4,790 3,593
2004 4,683 1,468
2005 2,012 1,430
Remainder 166 10,068
--------- ---------
Total minimum lease payments 21,434 $ 27,929
=========
Less imputed interest (7.05% - 7.50%) 3,146
---------
Present value of minimum lease payment 18,288
Less amounts due in one year 3,781
---------
Total Long-Term Capital Lease Obligation $ 14,507
=========
Rental expense under operating leases was $16,993 for the twelve months ended
June 30, 2000, $9,865 for the six months ended June 30, 1999, $17,912 for the
twelve months ended December 31, 1998 and $17,274 for the twelve months ended
December 31, 1997.
NOTE 15 - 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.
The reconciliation of changes in benefit obligation, plan assets and funded
status of these plans at June 30, 2000, June 30, 1999 and at December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------ ----------------------------------------
June 30, June 30, December 31, June 30, June 30, December 31,
2000 1999 1998 2000 1999 1998
--------- ---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of Benefit Obligation:
Benefit obligation at
beginning of year $ 309,697 $ 301,813 $ 227,671 $ 1,258,332 $ 1,312,596 $ 955,151
Service cost 13,585 7,468 13,054 6,782 4,429 7,486
Interest cost 20,555 9,759 16,738 87,278 42,096 79,615
Actuarial (gain) loss (29,084) 3,601 31,686 (127,707) (65,268) 242,494
Contract renegotiation 2,575 - - 74,344 - -
Acquisition - - 42,908 - - 92,609
Benefits paid (54,161) (12,944) (30,244) (81,414) (35,521) (64,759)
Effect of special termination
benefits (VSIP) 1,978 - - 1,934 - -
--------- ---------- ------------ ----------- ----------- ------------
Benefit obligation at end of year $ 265,145 $ 309,697 $ 301,813 $ 1,219,549 $ 1,258,332 $ 1,312,596
========== ========== ============ =========== =========== ============
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------ ---------------------------------------------
June 30, June 30, December 31, June 30, June 30, December 31,
2000 1999 1998 2000 1999 1998
--------- ---------- ------------ ----------- ----------- ------------
Reconciliation of Fair Value of Plan Assets:
<S> <C> <C> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $ 293,796 $ 294,211 $ 173,287 $ 7,502 $ 8,136 $ -
Actual return on plan assets 26,755 12,168 37,837 13,699 352 626
Contract renegotiation - - - 114,617 - -
Company contributions 6,120 361 10,296 99,524 34,535 64,759
Acquisition - - 103,035 - - 7,510
Benefits and other payments (54,208) (12,944) (30,244) (81,414) (35,521) (64,759)
--------- ---------- ------------ ----------- ----------- -------------
Fair value of plan assets
at end of year $ 272,463 $ 293,796 $ 294,211 $ 153,928 $ 7,502 $ 8,136
========= ========== ============ =========== =========== ============
Funded Status:
Status of Plan (underfunded) $ 7,318 $ (15,901) $ (7,602) $(1,065,621) $(1,250,830) $ (1,304,460)
Unrecognized prior
service cost (credit) 1,549 1,900 2,076 (17,450) (26,281) (30,697)
Unrecognized net actuarial
loss (gain) 7,329 42,422 40,382 (109,302) 25,253 90,847
Contributions made after
measurement date 32 - - - - -
--------- ---------- ------------ ----------- ----------- ------------
Prepaid (accrued) benefit cost $ 16,228 $ 28,421 $ 34,856 $(1,192,373) $(1,251,858) $ (1,244,310)
========= ========== ============ =========== =========== ============
Amounts Recognized in
Balance Sheets consist of:
Prepaid benefit cost $ 16,923 $ 29,247 $ 35,433 $ - $ - $ -
Accrued benefit liability (169) (274) - (1,192,373) (1,251,858) (1,244,310)
Accumulated other
comprehensive loss (526) (552) (577) - - -
--------- ---------- ------------ ----------- ----------- ------------
Net amount recognized $ 16,228 $ 28,421 $ 34,856 $(1,192,373) $(1,251,858) $ (1,244,310)
========= ========== ============ =========== =========== ============
Pension Benefits Other Benefits
------------------------------------------ ---------------------------------------------
June 30, June 30, December 31, June 30, June 30, December 31,
2000 1999 1998 2000 1999 1998
--------- ---------- ------------ ----------- ----------- ------------
Weighted average assumptions:
Discount rate 7.75% 7.00% 6.75% 7.75% 7.00% 6.75%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.48% 4.43% 4.43% - - -
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for the twelve months ended June 30,
2000, gradually decreasing to 4.5% in 2004, and remaining level thereafter.
60
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------------- ----------------------------------------------
For the For the For the For the
Year Six Months For the Year Six Months For the
Ended Ended Year Ended Ended Ended Year Ended
June 30, June 30, December 31, June 30, June 30, December 31,
----------------------- --------------------
2000 1999 1998 1997 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Components of Net
Periodic Benefit Cost:
Service cost $ 13,585 $ 7,468 $ 13,054 $ 12,657 $ 6,782 $ 4,429 $ 7,486 $ 9,884
Interest cost 20,555 9,759 16,738 15,107 87,278 42,096 79,615 65,968
Expected return
on plan assets (23,807) (10,832) (17,822) (13,239) (6,211) (306) (181) -
Amortization of prior
service cost (credit) 352 176 351 1,270 (8,831) (4,416) (8,831) (8,831)
Recognized net
actuarial loss (gain) 3,132 1,345 1,040 2,759 (641) 280 567 (6,445)
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Benefit cost $ 13,817 $ 7,916 $ 13,361 $ 18,554 $ 78,377 $ 42,083 $ 78,656 $ 60,576
========== ========== ========== ========== ========== ========== ========== ========
</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 $847, $847 and $646, respectively, as of June 30,
2000, $881, $881 and $607, respectively, as of June 30, 1999 and $903, $903 and
$568, respectively, as of December 31, 1998.
In November 1999, a long-term coal sales contract was renegotiated from a cost-
plus agreement to a fixed-price agreement. This renegotiation included CONSOL
Energy assuming employee long-term liabilities and related funding which were
previously the liabilities of the customer. These actuarially calculated
liabilities and related assets were recorded at the renegotiation of the
contract.
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 $ 4,957 $ (14,687)
Effect on accumulated postretirement
benefit obligation $ 57,901 $ (192,181)
61
<PAGE>
NOTE 16 - COAL WORKERS' PNEUMOCONIOSIS (CWP):
--------------------------------------------
CONSOL Energy is responsible under the Federal Coal Mine Health and Safety Act
of 1969, as amended, for medical and disability benefits to employees and their
dependents resulting from occurrences of coal workers' pneumoconiosis disease.
CONSOL Energy is also responsible under various state statutes for
pneumoconiosis benefits. CONSOL Energy provides for these claims through a self-
insurance program.
The calculation of the actuarial present value of the estimated pneumoconiosis
obligation is based on an annual actuarial study by independent actuaries. The
calculation is based on assumptions regarding disability incidence, medical
costs, mortality, death benefits, dependents and interest rates. These
assumptions are derived from actual company experience and creditable outside
sources.
Pneumoconiosis expense is calculated using the service cost method. Actuarial
gains or losses are amortized over the remaining service period of active miners
(approximately 14 years). The discount rate used to calculate the estimated
present value of the future obligations was 7.75% at June 30, 2000, 7.00% at
June 30, 1999 and 6.75% at December 31, 1998.
The reconciliation of changes in benefit obligation, plan assets and funded
status of the CWP plan at June 30, 2000, at June 30, 1999 and at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Benefit Obligation:
Benefit obligation at beginning of year $ 198,795 $ 194,109 $ 196,258
Service cost 4,763 2,388 4,009
Interest cost 13,760 6,439 14,201
Actuarial gain (42,845) (333) (23,284)
Contract renegotiation 14,669 - -
Acquisition - - 11,393
Benefits paid (8,310) (3,808) (8,468)
------------ ------------ ------------
Benefit obligation at end of year $ 180,832 $ 198,795 $ 194,109
============ ============ ============
Reconciliation of Fair Value of Plan Assets:
Fair value of plan assets
at beginning of year $ 20,082 $ 20,801 $ -
Actual (loss) return on plan assets (1,974) (719) 2,710
Contract renegotiation 42,053 - -
Acquisition - - 18,091
Company contributions 10,311 5,215 10,791
Benefit payments (8,310) (3,808) (8,468)
Legal and administrative costs (2,001) (1,407) (2,323)
------------ ------------ ------------
Fair value of plan assets at end of year $ 60,161 $ 20,082 $ 20,801
============ ============ ============
Funded Status:
Status of plan (underfunded) $ (120,671) $ (178,713) $ (173,308)
Unrecognized prior service cost (8,949) (9,677) (10,041)
Unrecognized net actuarial gain (307,434) (297,690) (309,113)
------------ ------------ ------------
Accrued benefit cost $ (437,054) $ (486,080) $ (492,462)
============ ============ ============
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended For the Year Ended
June 30, June 30, December 31,
-----------------------------
2000 1999 1998 1997
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Components of Net Periodic Cost:
Service cost $ 4,763 $ 2,388 $ 4,009 $ 4,734
Interest cost 13,760 6,439 14,201 16,075
Legal and administrative costs 2,001 1,407 2,324 2,394
Expected return on plan assets (4,066) (813) (1,487) -
Amortization of prior service cost (728) (364) (728) -
Recognized net actuarial (gain) (27,061) (10,402) (20,566) (18,756)
--------------- -------------- ------------- -------------
Benefit cost (credit) $ (11,331) $ (1,345) $ (2,247) $ 4,447
=============== ============== ============= =============
</TABLE>
NOTE 17 - 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 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 $436 for the twelve months ended June
30, 2000, $273 for the six months ended June 30, 1999, $3,395 for the twelve
months ended December 31, 1998 and $5,831 for the twelve months ended December
31, 1997. 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 $29,235 for the twelve months
ended June 30, 2000, $9,370 for the six months ended June 30, 1999, $28,428 for
the twelve months ended December 31, 1998 and $32,980 for the twelve months
ended December 31, 1997.
The 1992 Benefit Fund provides medical and death benefits to orphan UMWA-
represented members eligible for retirement on February 1, 1993, and who
actually retired between July 20, 1992 and September 30, 1994. Amounts charged
to expense for the 1992 Benefit Fund were $1,289 for the twelve months ended
June 30, 2000, $126 for the six months ended June 30, 1999, $5,649 for the
twelve months ended December 31, 1998 and $5,564 for the twelve months ended
December 31, 1997.
63
<PAGE>
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 $834
for the twelve months ended June 30, 2000, $520 for the six months ended June
30, 1999, $999 for the twelve months ended December 31, 1998 and $779 for the
twelve months ended December 31, 1997.
At June 30, 2000, approximately 43% 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 $10,998 for the twelve months ended June 30, 2000,
$5,841 for the six months ended June 30, 1999, $11,343 for the twelve months
ended December 31, 1998 and $11,372 for the twelve months ended December 31,
1997.
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 $25,477 at June 30, 2000, $27,854 at June 30,
1999 and $25,391 at December 31, 1998. The expense was determined using a
discount rate of 7.00% for the twelve months ended June 30, 2000, 6.75% for the
six months ended June 30, 1999, and 7.25% for the twelve months ended December
31, 1998 and 1997. Amounts charged to expense were $4,954 for the twelve months
ended June 30, 2000, $2,464 for the six months ended June 30, 1999, $7,557 for
the twelve months ended December 31, 1998 and $8,449 for the twelve months ended
December 31, 1997.
NOTE 18 - STOCK-BASED COMPENSATION:
----------------------------------
CONSOL Energy adopted the CONSOL Energy Inc. Equity Incentive Plan on April 7,
1999. The plan provides for grants of incentive stock options to key employees
and to non-employee directors. 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. No award of incentive
stock options may be granted under the plan after the tenth anniversary of the
effective date.
CONSOL Energy accounts for its stock options granted to employees and non-
employee directors 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 charge to net income and earnings per share would be
diminimus for the twelve months ended June 30, 2000 and the six months ended
June 30, 1999. Under Statement of Financial Accounting Standards No. 123, the
fair value of each option granted is estimated on the day of the grant using the
Black-Scholes option-pricing model. The weighted average assumptions used were:
June 30, 2000 June 30, 1999
------------- -------------
Expected dividend yield 7% 7%
Expected volatility 38% 45%
Risk-free interest rate 6% 6%
Expected life 3.98 years 5.00 years
64
<PAGE>
Stock options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted Average
Weighted Average Fair Value of
Shares Exercise Price Options Granted
--------------------- ------------------- ----------------------
<S> <C> <C> <C>
Initial grant 784,000 $ 16.00 $ 4.03
---------------- --------------- ===============
Balance at June 30, 1999 784,000 $ 16.00 $ 4.03
===============
Granted 80,000 $ 12.41 $ 2.56
===============
Exercised - -
Forfeited - -
---------------- ---------------
Balance at June 30, 2000 864,000 $ 15.67 $ 3.26
================ =============== ===============
</TABLE>
Characteristics of outstanding stock options at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
Options Options
----------------------------------------- ----------------
Remaining
Exercise Price Shares Life (Years) Shares
-------------- ----------------- ------------------- ----------------
<S> <C> <C> <C>
$ 16.00 784,000 8.8 196,000
$ 16.00 16,000 10.0 -
$ 11.56 60,000 10.0 -
$ 10.88 4,000 10.0 -
</TABLE>
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 employee stock options will
vest 25% per year, beginning one year after the grant date. There are 844,000
stock options granted under this plan. Non-employee director stock options will
vest 33% per year, beginning one year after the grant date. There are 20,000
stock options granted under this plan. 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.
The Chairman of the Board of CONSOL Energy is also entitled to receive annual
shares of common stock having a fair market value of $225 per grant per year.
Under this agreement, $225 and $125 of expense was recognized for stock issued
in the twelve months ended June 30, 2000 and the six months ended June 30, 1999.
65
<PAGE>
NOTE 19 - 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 charge (354) 15 (339)
--------- --------- --------
Balance at June 30, 1999 (624) (338) (962)
Current period charge (393) 16 (377)
Realized loss on securities 1,017 - 1,017
--------- --------- --------
Balance at June 30, 2000 $ - $ (322) $ (322)
========= ========= ========
</TABLE>
NOTE 20 - 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 $8,046 for the twelve months ended June 30, 2000,
$4,382 for the six months ended June 30, 1999, $9,222 for the twelve months
ended December 31, 1998 and $9,484 for the twelve months ended December 31,
1997.
NOTE 21 - SUPPLEMENTAL CASH FLOW INFORMATION:
--------------------------------------------
<TABLE>
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
------------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized) $ 45,428 $ 30,291 $ 41,119 $ 33,031
Income taxes paid $ 34,430 $ 26,942 $ 63,216 $ 55,554
Non-cash investing and financing activities:
Business acquired (Note 2):
Fair value of assets acquired $ 168,010 - $ 438,699 -
Liabilities assumed $ 4,504 - $ 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) -
Note received from property sales $ 20,207 - $ - -
</TABLE>
66
<PAGE>
NOTE 22 - 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, 2000, June 30, 1999 and December 31,
1998, accounts receivable from utilities were $130,168, $134,581 and $150,755,
respectively, and from steel and coke producers were $47,729, $42,998 and
$52,538, 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.
Coal sales (including spot sales) to CONSOL Energy's largest customer, Allegheny
Energy, were $293,178 for the twelve months ended June 30, 2000, $155,991 for
the six months ended June 30, 1999, $354,333 for the twelve months ended
December 31, 1998, and $357,605 for the twelve months ended December 31, 1997.
Accounts receivable from Allegheny Energy were $24,202 as of June 30, 2000,
$43,250 as of June 30, 1999 and $32,246 as of December 31, 1998.
NOTE 23 - MARKETABLE SECURITIES:
-------------------------------
At June 30, 2000, Marketable Securities, which were previously classified as
available-for-sale, were used to fund post-employment benefits. Accordingly, the
assets are shown as a reduction of Post-Employment Benefits Other than Pensions
on the balance sheet and unrealized losses were recognized in the year ended
June 30, 2000. There were no other marketable securities as of June 30, 2000.
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
=========== ===========
</TABLE>
67
<PAGE>
The following is a summary of available-for-sale securities at December 31,
1998:
<TABLE>
<CAPTION>
Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ -----------
<S> <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 $2,500 for the
twelve months ended June 30, 2000, $3,860 for the six months ended June 30, 1999
and $6,209 for the twelve months ended December 31, 1998. Gross realized gains
and losses on those sales were not significant.
NOTE 24 - 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 are 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>
June 30, 2000 June 30, 1999 December 31, 1998
-------------------------- -------------------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- ----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 8,181 $ 8,181 $ 23,559 $ 23,559 $ 31,285 $ 31,285
Marketable securities
included in Other Assets $ - $ - $ 48,579 $ 48,579 $ 48,235 $ 48,235
Short-term notes payable $(464,310) $(464,310) $(345,525) $(345,525) $(551,719) $(551,719)
Long-term debt $(289,074) $(277,733) $(303,668) $(301,149) $(406,120) $(427,546)
</TABLE>
68
<PAGE>
NOTE 25 - 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 the financial position, results of operations
or cash flows of CONSOL Energy.
Certain excise taxes paid on export sales of coal have been determined to be
unconstitutional. CONSOL Energy has filed claims with the Internal Revenue
Service (IRS) seeking refunds for these excise taxes that were paid during the
period 1994 through 1999. The government has filed a petition in the United
States Supreme Court seeking a determination of the appropriate statute of
limitations. The IRS has initiated an audit of CONSOL Energy's refund claims.
However, because of the inherent uncertainties in the litigation and audit
resolution processes, no assurance can be made as to the final outcome and
timing of this situation. Accordingly, CONSOL Energy has not recognized any
amount for the possible collection of these claims.
On June 22, 1999, an underground fire was discovered at the idled Loveridge
Mine. The mine was sealed and inert gases were injected to reduce oxygen levels
and put out the fire. Monitoring of the mine atmosphere indicated that the fire
was extinguished, and on July 24, 2000, safety crews reentered to ventilate and
secure the mine. If conditions are favorable, the longwall will be restarted to
mine the remainder of the current panel. The longwall will then be moved to the
surface, refurbished and redeployed to another mine. Loveridge mine will then be
idled unless the market is able to accommodate its production.
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.
NOTE 26 - SEGMENT INFORMATION:
-----------------------------
As a result of CONSOL Energy's gas acquisition described in Note 2, CONSOL
Energy elected to change the reporting of its business segments as of June 30,
2000 and restate its prior years' presentation to conform to this revised
segment reporting. One of CONSOL Energy's core businesses, gas operations,
formerly reported as part of the Coal segment, has been designated as a separate
business segment. Two of the non-core business activities, transportation and
farming, have been grouped with corporate headquarters activity and included in
the Other segment.
CONSOL Energy reports its operations through three reportable segments: Coal,
Industrial Supplies and Equipment and Gas. Management has determined these
reportable segments based on how resources are allocated and operational
decisions are made. These reportable segments are business units that offer
different types of products and services.
The principal business of the Coal segment is mining, preparation and marketing
of steam coal, sold primarily to electric utilities, and metallurgical coal,
sold to steel and coke producers. The Industrial Supplies and Equipment segment
markets industrial supplies and equipment through Fairmont Supply Company. The
Gas segment's principal function is to produce pipeline quality methane gas for
sale primarily to gas wholesalers.
69
<PAGE>
CONSOL Energy evaluates performance and allocates resources based on operating
income or loss. In computing operating income or loss, none of the following
have been added or deducted: unallocated corporate expenses, non-operating
interest expense, interest income and income taxes.
Industry segment results for the twelve months ended June 30, 2000 are:
<TABLE>
<CAPTION>
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
---------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales - outside $1,886,358 $140,581 $ 48,198 $ 16,459 $ - $2,091,596
Sales - related companies 3,254 - - - - 3,254
Intersegment transfers - 71,466 831 16,693 (88,990) -
---------- -------- -------- -------- -------- ----------
Total Sales $1,889,612 $212,047 49,029 $ 33,152 $(88,990) $2,094,850
========== ======== ======== ======== ======== ==========
Pretax Operating
Income (Loss) $ 143,576 $ (4,484) $ 23,321/(A)/ $ (52) $ 162,361
========== ======== ======== ======== ==========
Identifiable assets $2,969,779 $ 40,026 $320,840 $135,030 $3,465,675/(B)/
========== ======== ======== ======== ==========
Depreciation, depletion
and amortization $ 232,505 $ 1,083 $ 5,299 $ 10,990 $ 249,877
========== ======== ======== ======== ==========
Additions to property, plant
and equipment $ 126,417 $ 380 $128,287/(C)/ $ 3,666 $ 258,750
========== ======== ======== ======== ==========
</TABLE>
(A) Includes equity in net income of unconsolidated affiliates of $1,969.
(B) Includes investments in unconsolidated equity affiliates of $769, $483,
$175,220, and $800 for Coal, Industrial Supplies & Equipment, Gas and All
Other, respectively.
(C) Includes $114,248 acquired from MCN Energy Group Inc. CONSOL Energy's
proportionate share of net additions to property, plant and equipment
relating to gas producing activities of unconsolidated equity affiliates is
$5,773.
Industry segment results for the six months ended June 30, 1999 are:
<TABLE>
<CAPTION>
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
---------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales - outside $ 980,387 $ 76,451 $ 11,091 $ 8,599 $ - $1,076,528
Sales - related companies 5,394 - - - - 5,394
Intersegment transfers - 42,195 - 6,039 (48,234) -
---------- -------- -------- -------- -------- ----------
Total Sales $ 985,781 $118,646 $ 11,091 $ 14,638 $(48,234) $1,081,922
========== ======== ======== ======== ======== ==========
Pretax Operating
Income (Loss) $ 79,148 $ 1,994 $ 1,026 $(12,012) $ 70,156
========== ======== ======== ======== ==========
Identifiable assets $3,185,544 $ 44,415 $111,711 $124,254 $3,465,924/(D)/
========== ======== ======== ======== ==========
Depreciation, depletion
and amortization $ 112,231 $ 324 $ 2,223 $ 6,459 $ 121,237
========== ======== ======== ======== ==========
Additions to property, plant
and equipment $ 102,326 $ 591 $ 8,002 $ 684 $ 111,603
========== ======== ======== ======== ==========
</TABLE>
(D) Includes investments in unconsolidated equity affiliates of $769, $410, and
$800 for Coal, Industrial Supplies & Equipment and All Other, respectively.
70
<PAGE>
Industry segment results for the twelve months ended December 31, 1998 are:
<TABLE>
<CAPTION>
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales - outside $ 2,057,015 $ 92,182 $ 23,367 $ 18,189 $ - $ 2,190,753
Sales - related companies 21,678 82,999 - - - 104,677
Intersegment transfers - 83,818 - 10,295 (94,113) -
------------- ------------- ------------- ------------- ------------- -------------
Total Sales $ 2,078,693 $ 258,999 $ 23,367 $ 28,484 $ (94,113) $ 2,295,430
============= ============= ============= ============= ============= =============
Pretax Operating
Income (Loss) $ 290,433 $ 4,312 $ 3,316 $ (38,435) $ 259,626
============= ============= ============= ============= =============
Identifiable assets $ 3,187,594 $ 44,765 $ 106,296 $ 127,409 $ 3,466,064/(E)/
============= ============= ============= ============= =============
Depreciation, depletion
and amortization $ 221,028 $ 1,031 $ 4,834 $ 11,691 $ 238,584
============= ============= ============= ============= =============
Additions to property, plant
and equipment $ 471,158/(F)/ $ 1,020 $ 31,105 $ 3,403 $ 506,686
============= ============= ============= ============= =============
</TABLE>
(E) Includes investments in unconsolidated equity affiliates of $769 and
$800 for Coal and All Other, respectively.
(F) Includes $248,879 acquired from Rochester and Pittsburgh Coal Company.
Industry segment results for the twelve months ended December 31, 1997 are:
<TABLE>
<CAPTION>
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales - outside $ 1,983,317 $ 117,841 $ 26,637 $ 19,141 $ - $ 2,146,936
Sales - related companies 39,406 98,855 - - - 138,261
Intersegment transfers - 77,714 - 11,491 (89,205) -
------------- ------------- ------------- ------------- ------------- -------------
Total Sales $ 2,022,723 $ 294,410 $ 26,637 $ 30,632 $ (89,205) $ 2,285,197
============= ============= ============= ============= ============= =============
Pretax Operating
Income (Loss) $ 262,300 $ 5,491 $ 8,792 $ (7,900) $ 268,683
============= ============= ============= ============= =============
Identifiable assets $ 2,853,373 $ 50,795 $ 74,285 $ 140,644 $ 3,119,097/(G)/
============= ============= ============= ============= =============
Depreciation, depletion
and amortization $ 216,011 $ 1,079 $ 3,356 $ 12,858 $ 233,304
============= ============= ============= ============= =============
Additions to property, plant
and equipment $ 179,454 $ 526 $ 13,620 $ 8,833 $ 202,433
============= ============= ============= ============= =============
</TABLE>
(G) Includes investments in unconsolidated equity affiliates of $768 and
$800 for Coal and All Other, respectively.
71
<PAGE>
Reconciliation of Segment Information to Consolidated Amounts:
Operating Profit:
<TABLE>
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
-------------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total segment pretax operating income $ 162,361 $ 70,156 $ 259,626 $ 268,683
Interest expense, net (55,814) (29,996) (47,144) (35,007)
------------- ------------- ------------- -------------
Earnings before Income Taxes $ 106,547 $ 40,160 $ 212,482 $ 233,676
============= ============= ============= =============
Total Assets:
June 30, December 31,
------------------------------ -------------------------------
2000 1999 1998 1997
------------- ------------- ------------- -------------
Total assets for reportable segments $ 3,465,675 $ 3,465,924 $ 3,466,064 $ 3,119,097
Cash and investments 8,181 47,223 54,950 133,617
Deferred tax asset 384,642 361,879 342,376 295,297
Recoverable income taxes 7,813 - - -
------------- ------------- ------------- -------------
Total Consolidated Assets $ 3,866,311 $ 3,875,026 $ 3,863,390 $ 3,548,011
============= ============= ============= =============
</TABLE>
Enterprise-Wide Disclosures:
CONSOL Energy's Revenues by geographical location are:
<TABLE>
<CAPTION>
For the For the Six For the Year Ended
Year Ended Months Ended December 31,
-------------------------------
June 30, 2000 June 30, 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States $ 1,874,656 $ 936,815 $ 1,954,821 $ 1,941,625
Europe 132,752 86,827 217,302 204,398
Asia 46,625 26,722 58,937 80,636
Canada 51,702 40,532 48,496 56,890
South America 29,989 9,281 36,454 40,311
Middle East 12,629 5,346 23,022 17,207
Africa 10,856 4,959 10,960 8,571
------------- ------------- ------------- -------------
Total Revenues $ 2,159,209 $ 1,110,482 $ 2,349,992 $ 2,349,638
============= ============= ============= =============
</TABLE>
CONSOL Energy's Property, Plant and Equipment by geographical location are:
<TABLE>
<CAPTION>
June 30, December 31,
-----------------------------------------------------------------
2000 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States $ 2,562,856 $ 2,659,429 $ 2,670,266 $ 2,422,860
Canada 11,478 14,717 15,746 16,107
Belgium 110 120 112 123
------------- ------------- ------------- -------------
Total Property, Plant and Equipment $ 2,574,444 $ 2,674,266 $ 2,686,124 $ 2,439,090
============= ============= ============= =============
</TABLE>
72
<PAGE>
NOTE 27 - 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.
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 28 - SUPPLEMENTAL COAL DATA (UNAUDITED):
--------------------------------------------
<TABLE>
<CAPTION>
(Millions of tons)
-------------------------------------------------------------
For the For the Six
Year Ended Months Ended For the Year Ended
June 30, June 30, December 31,
--------------------------
2000 1999 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Proved and probable coal reserves
at beginning of period 4,705 4,755 4,776 5,063
Purchased reserves 3 4 148 10
Reserves sold in place (66) (11) (29) (31)
Production (73) (38) (76) (73)
Revisions and other changes (108) (5) (64) (193)
------ ------ ----- -----
Proved and Probable Coal Reserves
at end of period * 4,461 4,705 4,755 4,776
===== ===== ===== =====
</TABLE>
* Proved and probable coal reserves are the equivalent of "demonstrated
reserves" under the coal resource classification system of the U.S.
Geological Survey. Generally, these reserves would be commercially minable
at year-end prices and cost levels, using current technology and mining
practices.
The coal reserves are located in nearly every major coal-producing region in
North America. At June 30, 2000, 780 million tons were assigned to mines either
in production or under development. The proved and probable reserves at June 30,
2000 include 3,791 million tons of steam coal, of which approximately 15 percent
has a sulfur content equivalent to less than 1.2 pounds sulfur dioxide per
million British thermal unit (Btu), and an additional 14 percent has a sulfur
content equivalent to between 1.2 and 2.5 pounds sulfur dioxide per million Btu.
The reserves also include 670 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.
73
<PAGE>
NOTE 29 - SUPPLEMENTAL GAS DATA (UNAUDITED):
-------------------------------------------
The following information was prepared in accordance with Statement of Financial
Accounting Standards No. 69, "Disclosures About Oil and Gas Producing
Activities" and related accounting rules.
Capitalized Costs:
-----------------
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Proved properties $ 118,143 $ 117,496 $ 109,449
Accumulated depreciation,
depletion and amortization 2,155 30,587 28,330
------------- ------------- -------------
Net Capitalized Costs $ 115,988 $ 86,909 $ 81,119
============= ============= =============
Proportionate Share of Gas
Producing Net Property, Plant
and Equipment of Unconsolidated
Equity Affiliates $ 97,818 $ - $ -
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Results of Operations:
---------------------
For the For the Six
Year Ended Months Ended For the Year Ended
June 30, June 30, December 31,
------------------------------
2000 1999 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total Revenues $ 52,455 $ 11,773 $ 24,354 $ 28,137
Production costs 23,835 8,524 16,204 15,989
Depreciation, depletion
and amortization 5,299 2,223 4,834 3,356
------------- ------------- ------------- -------------
Total Operating Costs 29,134 10,747 21,038 19,345
------------- ------------- ------------- -------------
Pretax Operating Income 23,321 1,026 3,316 8,792
Income taxes 8,222 (367) (224) 548
------------- ------------- ------------- -------------
Results of Operations, excluding
Corporate and Interest Costs $ 15,099 $ 1,393 $ 3,540 $ 8,244
============= ============= ============= =============
</TABLE>
74
<PAGE>
Reserve Quantity:
----------------
<TABLE>
<CAPTION>
(Millions of cubic feet (MMcf))
-----------------------------------------------------------------
For the For the Six
Year Ended Months Ended For the Year Ended
June 30, June 30, December 31,
------------------------------
2000 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped gas
reserves at beginning of period * 408,633 411,326 400,746 363,554
Purchased reserves 249,017 - 26,677 49,438
Production (13,790) (2,693) (5,333) (5,600)
Revisions and other changes 9,601 - (10,764) (6,646)
------------- ------------- ------------- -------------
Proved developed and undeveloped gas
reserves at end of period * 653,461 408,633 411,326 400,746
============= ============= ============= =============
Proportional interest in reserves of
investees accounted for by the equity
method (included in proved developed
and undeveloped gas reserves) 371,742 - - -
============= ============= ============= =============
Proved developed reserves
At beginning of period 63,655 66,348 40,196 35,875
============= ============= ============= =============
At end of period 156,354 63,655 66,348 40,196
============= ============= ============= =============
Proved developed reserves in equity
affiliates included in proved
developed reserves
At beginning of period - - - -
============= ============= ============= =============
At end of period 90,399 - - -
============= ============= ============= =============
</TABLE>
* Proved developed and undeveloped gas reserves are defined by the Society of
Petroleum Engineers and the World Petroleum Congresses. Generally, these
reserves would be commercially recovered under current economic conditions,
operating methods and government regulations.
All CONSOL Energy gas reserves are located in the state of Virginia.
Standardized Measure of Discounted Future Net Cash Flows:
--------------------------------------------------------
The following information has been prepared in accordance with the provisions of
Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities". This statement requires the standardized measure of
discounted future net cash flows to be based on year-end sales prices, costs and
statutory income tax rates and a 10 percent annual discount rate. Because prices
used in the calculation are as of the end of the period, the standardized
measure could vary significantly from year to year based on the market
conditions at that specific date.
The projections should not be viewed as realistic estimates of future cash
flows, nor should the "standardized measure" be interpreted as representing
current value to CONSOL Energy. Material revisions to estimates of proved
reserves may occur in the future; development and production of the reserves may
not occur in the periods assumed; actual prices realized are expected to vary
significantly from those used; and actual costs may vary. CONSOL Energy's
investment and operating decisions are not based on the information presented,
but on a wide range of reserve estimates that include probable as well as proved
reserves, and on different price and cost assumptions.
75
<PAGE>
The standardized measure is intended to provide a better means for comparing the
value of CONSOL Energy's proved reserves at a given time with those of other gas
producing companies than is provided by a comparison of raw proved reserve
quantities.
<TABLE>
<CAPTION>
At June 30, At June 30, At December 31, At December 31
2000 1999 1998 1997
------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Future Cash Flows:
Revenues $ 3,238,988 $1,004,900 $1,063,687 $ 970,484
Production costs (1,365,925) (612,237) (634,995) (687,536)
Development costs (242,733) (101,050) (101,088) (80,489)
Income tax expense (479,504) (96,595) (105,457) (69,610)
----------- ---------- ----------- ---------
Future Net Cash Flows 1,150,826 195,018 222,147 132,849
Discounted at present value
at a 10% annual rate (656,245) (131,678) (150,647) (83,654)
----------- ---------- ---------- ---------
Total Standardized Measure of
Discounted Net Cash Flows $ 494,581 $ 63,340 $ 71,500 $ 49,195
=========== ========== ========== =========
Standardized Measure of
Discounted Net Cash Flows for
Equity Affiliates included in above $ 177,068 $ - $ - $ -
=========== ========== ========== =========
</TABLE>
The following are the principal sources of change in the standardized measure of
discounted future net cash flows during:
<TABLE>
<CAPTION>
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 63,340 $ 71,500 $ 49,195 $ 123,428
Net changes in sales prices
and production costs 829,319 (39,009) (83,054) (612,565)
Net change due to revisions
in quantity estimates 726,338 2,216 226,466 287,365
Development costs incurred,
previously estimated (4,545) (6,064) (19,506) (2,061)
Changes in estimated
future development costs (141,683) 38 (20,599) 4,517
Net change in future
income taxes (382,909) 8,862 (35,847) 83,412
Accretion of discount and other (595,279) 25,797 (45,155) 165,099
---------- ---------- ---------- ---------
Total Discounted Cash Flow
at End of Period $ 494,581 $ 63,340 $ 71,500 $ 49,195
========== ========== ========== =========
</TABLE>
NOTE 30 - QUARTERLY INFORMATION (UNAUDITED):
-------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Sales $ 545,212 $ 537,109 $ 511,016 $ 501,513
=========== =========== =========== ===========
Cost of goods sold and other
operating charges $ 417,192 $ 376,395 $ 370,617 $ 338,950
=========== =========== =========== ===========
Net income $ 10,727 $ 36,506 $ 22,970 $ 36,837
=========== =========== =========== ===========
Earnings per share $ .13 $ .46 $ .29 $ .47
=========== =========== =========== ===========
Weighted average
shares outstanding 80,250,718 79,901,818 79,217,730 78,615,363
=========== =========== ========== ===========
</TABLE>
76
<PAGE>
<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
=========== ===========
Weighted 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
=============== =============== =============== ===============
Weighted average
shares outstanding 108,806,714 108,806,714 108,806,714 77,678,532
=============== =============== =============== ===============
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------------- --------------- ---------------- -----------------
<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
=============== =============== =============== ===============
Weighted average
shares outstanding 108,806,714 108,806,714 108,806,714 108,806,714
=============== =============== =============== ===============
</TABLE>
77
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information requested by Item 401 of Regulations S-K is
incorporated herein by reference to the Definitive Proxy Statement.
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.
78
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
EXHIBIT INDEX
<TABLE>
<CAPTION>
(a)(1) Financial Statements: Page
----
<S> <C> <C>
The following consolidated financial statements of CONSOL
Energy Inc. and subsidiaries are included in this filing on
the pages indicated:
Report of Independent Auditors................................ 42
Consolidated Statements of Income for the Twelve Months Ended
June 30, 2000, Six Months Ended June 30, 1999 and for the
Years Ended December 31, 1998 and 1997........................ 43
Consolidated Balance Sheets at June 30, 2000, June 30, 1999
and December 31, 1998......................................... 44
Consolidated Statements of Shareholders' Equity (Deficit) for
Twelve Months Ended June 30, 2000, Six Months Ended June 30,
1999 and for the Years Ended December 31, 1998 and 1997........ 46
Consolidated Statements of Cash Flows for the
Twelve Months Ended June 30, 2000, Six Months
Ended June 30, 1999, and for the Years
Ended December 31, 1998 and 1997............................... 47
Notes to Consolidated Financial Statements..................... 48
(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.
</TABLE>
79
<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, incorporated by reference to
Exhibit 3.2 to Amendment No. 2.
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 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
80
<PAGE>
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.
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.
81
<PAGE>
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 shareholders 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.
82
<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, 2000.
CONSOL ENERGY INC.
(Registrant)
By: /s/ J. Brett Harvey
-------------------------
J. Brett Harvey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed as of the 28th day of September, 2000, by the following
persons on behalf of the Registrant in the capacities indicated:
Chairman of the Board
/s/ J. L. Whitmire
----------------------------
J. L. Whitmire
President and Chief Executive Officer Executive Vice President and Director:
and Director:
/s/ J. Brett Harvey /s/ R. Zimmerman
------------------------------- ----------------------------------
J. Brett Harvey R. Zimmermann
(Principal Executive Officer) (Principal Financial Officer)
Directors: Vice President and Controller:
/s/ P. W. Baxter /s/ W. J. Lyons
------------------------------- -----------------------------------
P. W. Baxter W. J. Lyons
(Principal Accounting Officer)
/s/ B. Bonekamp
-------------------------------
B. Bonekamp
/s/ B. J. Breloer
-------------------------------
B. J. Breloer
/s/ U. Weber
-------------------------------
U. Weber
83
