UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 001-14901
----------
CONSOL Energy Inc.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0337383
------------------ ----------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Delaware Avenue, Suite 567, Wilmington, Delaware 19801-1622
---------------------------------------------------------------
(Address or principal executive offices)
(Zip Code)
(412) 831-4000
------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of February 1, 2000, there were 79,306,760 shares of Common Stock, $.01 par
value, outstanding.
1
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income for the three months
ended December 31, 1999 and 1998 and the six months
ended December 31, 1999 and 1998................................ 3
Condensed Consolidated Balance Sheets at December 31,
1999 and June 30, 1999........................................ 4
Condensed Consolidated Statements of Stockholders'
Equity for the six months ended December 31, 1999............... 6
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 1999 and 1998..................... 7
Notes to Condensed Consolidated Financial Statements............. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................ 23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 23
ITEM 5. OTHER INFORMATION.............................................. 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 24
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ -----------------
Sales - Outside $ 537,109 $ 590,387 $ 1,082,278 $ 1,111,196
Sales - Related Parties - 24,980 43 50,749
Other Income 11,172 17,112 22,352 28,074
----------------- ----------------- ------------------ -----------------
Total Revenue 548,281 632,479 1,104,673 1,190,019
Cost of Goods Sold and Other
Operating Charges 378,062 436,849 795,254 846,965
Selling, General and Administrative
Expense 14,948 14,439 29,105 27,389
Depreciation, Depletion and
Amortization 64,244 63,009 125,334 121,023
Interest Expense 12,536 15,642 25,374 25,357
Taxes Other Than Income 46,082 53,186 86,672 98,588
----------------- ----------------- ------------------ -----------------
Total Costs 515,872 583,125 1,061,739 1,119,322
----------------- ----------------- ------------------ -----------------
Earnings Before Income Taxes 32,409 49,354 42,934 70,697
Income Taxes (Benefit) (Note 3) (4,097) (586) (4,299) 2,397
----------------- ----------------- ------------------ -----------------
Net Income $ 36,506 $ 49,940 $ 47,233 $ 68,300
================= ================= ================== =================
Earnings Per Share $ 0.46 $ 0.65 $ 0.59 $ 0.74
================= ================= ================== =================
Weighted Average Number of
Common Shares Outstanding 79,901,818 77,122,672 80,076,268 92,964,693
================= ================= ================== =================
Dividends Per Share $ 0.28 $ 0.86 $ 0.56 $ 0.86
================= ================= ================== =================
The accompanying notes are an integral part of these financial statements.
3
CONSOL ENERGY INC. AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollars in thousands, except per share data)
(Unaudited)
DECEMBER 31, JUNE 30,
1999 1999
---------------------- ----------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 13,602 $ 23,559
Accounts and Notes Receivable:
Trade 245,148 241,054
Related Parties 57 743
Other Receivables 27,464 21,030
Inventories (Note 4) 161,851 206,995
Recoverable Income Taxes 5,656 -
Deferred Income Taxes 93,530 94,575
Prepaid Expenses 28,963 34,692
---------------------- ----------------------
Total Current Assets 576,271 622,648
Property, Plant and Equipment:
Property, Plant and Equipment 4,903,729 4,863,138
Less - Accumulated Depreciation,
Depletion and Amortization 2,294,526 2,188,872
---------------------- ----------------------
Total Property, Plant and
Equipment - Net 2,609,203 2,674,266
Other Assets:
Deferred Income Taxes 279,243 267,304
Advance Mining Royalties 113,410 117,808
Other 167,026 193,000
---------------------- ----------------------
Total Other Assets 559,679 578,112
---------------------- ----------------------
Total Assets $ 3,745,153 $ 3,875,026
====================== ======================
The accompanying notes are an integral part of these financial statements.
4
CONSOL ENERGY INC. AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollars in thousands, except per share data)
(Unaudited)
DECEMBER 31, JUNE 30,
1999 1999
----------------------- -----------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 166,725 $ 194,592
Short-Term Notes Payable 272,265 345,525
Current Portion of Long-Term Debt 7,284 13,752
Accrued Income Taxes - 2,393
Other Accrued Liabilities 343,181 327,813
----------------------- -----------------------
Total Current Liabilities 789,455 884,075
Long-Term Debt:
Long-Term Debt 287,155 294,311
Capital Lease Obligations 16,314 18,432
----------------------- -----------------------
Total Long-Term Debt 303,469 312,743
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,141,154 1,177,639
Pneumoconiosis Benefits 440,730 473,459
Mine Closing 278,672 278,452
Workers' Compensation 254,371 242,888
Reclamation 12,662 14,397
Other 275,833 236,648
----------------------- -----------------------
Total Deferred Credits and Other Liabilities 2,403,422 2,423,483
Stockholders' Equity:
Common Stock, $.01 par value;
500,000,000 Shares Authorized; 80,267,558 Issued
and 79,554,660 Outstanding at December 31, 1999,
80,267,558 Issued and Outstanding at June 30, 1999 803 803
Preferred Stock, 15,000,000 Shares Authorized;
None Issued and Outstanding - -
Capital in Excess of Par Value 642,947 642,947
Retained Earnings Deficit (385,765) (388,063)
Other Comprehensive Loss (1,163) (962)
Common Stock in Treasury, at Cost - 712,898 Shares (8,015) -
----------------------- -----------------------
Total Stockholders' Equity 248,807 254,725
----------------------- -----------------------
Total Liabilities and Stockholders' Equity $ 3,745,153 $ 3,875,026
======================= =======================
The accompanying notes are an integral part of these financial statements.
5
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(Dollars in thousands, except per share data)
Other Total
Capital in Compre- Stock-
Common Excess of Retained hensive Treasury holders'
Stock Par Value Earnings Loss Stock Equity
------------- ------------- -------------- -------------- -------------- --------------
Balance - June 30, 1999 $ 803 $ 642,947 $ (388,063)$ (962)$ - $ 254,725
------------- ------------- -------------- -------------- -------------- --------------
(Unaudited):
Net Income - - 47,233 - - 47,233
Unrealized Loss on Securities
(net of $127 tax) - - - (201) - (201)
------------- ------------- -------------- -------------- -------------- --------------
Comprehensive Income - - 47,233 (201) - 47,032
Dividends ($.56 per share) - - (44,873) - - (44,873)
Treasury Stock Purchased
(734,200 shares) - - - - (8,302) (8,302)
Treasury Stock Issued
(21,302 shares) - - (62) - 287 225
------------- ------------- -------------- -------------- -------------- --------------
Balance - December 31, 1999 $ 803 $ 642,947 $ (385,765)$ (1,163)$ (8,015)$ 248,807
============= ============= ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
6
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Dollars in thousands)
Six Months Ended December 31,
------------------------------------------
1999 1998
----------------- -----------------
Operating Activities:
Net Income $ 47,233 $ 68,300
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 125,334 121,023
Gain on the Sale of Assets (5,097) (5,835)
Amortization of Advance Mining Royalties 6,795 9,349
Deferred Income Taxes (10,767) (25,093)
Changes in Operating Assets:
Accounts and Notes Receivable (9,842) 27,596
Inventories 45,144 9,438
Prepaid Expenses 5,729 1,472
Changes in Other Assets 26,078 21,945
Changes in Operating Liabilities:
Accounts Payable (27,867) 25,345
Other Operating Liabilities 7,319 (10,309)
Changes in Other Liabilities (19,836) (19,302)
Other 2,135 12,321
----------------- -----------------
145,125 167,950
----------------- -----------------
Net Cash Provided by Operating Activities 192,358 236,250
Investing Activities:
Capital Expenditures (64,033) (135,568)
Additions to Advance Mining Royalties (2,681) (2,230)
Acquisition of R & P Coal Co. - Net of Cash Acquired - (100,408)
Proceeds from Sales of Assets 7,697 4,720
Change in Marketable Securities - Net - 147,960
----------------- -----------------
Net Cash Used in Investing Activities (59,017) (85,526)
Financing Activities:
(Payments on) Proceeds from Commercial Paper (74,651) 500,386
Payments on Miscellaneous Borrowings (15,472) (60,471)
Dividends Paid (44,873) (80,000)
Acquisition of Company Shares (8,302) (500,000)
----------------- -----------------
Net Cash Used in Financing Activities (143,298) (140,085)
----------------- -----------------
Net (Decrease) Increase in Cash and Cash Equivalents (9,957) 10,639
Cash and Cash Equivalents at Beginning of Period 23,559 20,646
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 13,602 $ 31,285
================= =================
The accompanying notes are an integral part of these financial statements.
7
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
DECEMBER 31, 1999
-----------------
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended December 31,
1999 and the six-month period ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the future periods.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all the footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes for the transitional period ended June 30, 1999 included in CONSOL
Energy Inc.'s (CONSOL Energy) Form 10-K, as filed on September 28, 1999.
CONSOL Energy changed its fiscal year from a year ending December 31 to a year
ending June 30. CONSOL Energy had a transitional period ending June 30, 1999.
CONSOL Energy's first full fiscal year ending June 30 started July 1, 1999 and
ends June 30, 2000. CONSOL Energy has made this change in order to align its
fiscal year with that of RWE AG, which beneficially owns through subsidiaries
approximately 73% of the outstanding common stock of CONSOL Energy.
NOTE 2 - ACQUISITION:
- --------------------
On September 22, 1998, CONSOL Energy purchased 100% of the outstanding stock of
the Rochester and Pittsburgh Coal Company (R&P) for $100,408 (net of $49,275
cash acquired). The acquisition has been accounted for as a purchase and,
accordingly, the operating results of R&P have been included in CONSOL Energy's
consolidated financial statements since the date of acquisition. Pro forma
revenues for CONSOL Energy, giving effect to the acquisition of R&P as if it had
occurred on July 1, 1998, were $1,271,225 for the six months ended December 31,
1998. The pro forma effect on net income of CONSOL Energy was not material.
8
NOTE 3 - INCOME TAXES:
- ----------------------
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:
For the Three For the Six
Months Ended Months Ended
December 31, December 31,
1999 1998 1999 1998
------------- ----------- ---------- -----------
Statutory U. S. federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
Excess tax depletion (20.0) (22.3) (20.0) (22.1)
Tax settlements (26.9) - (20.3) -
Adjustment of prior year's taxes (2.2) (5.0) (6.2) (3.4)
Non-conventional fuel tax credit - (0.6) - (0.8)
Net effect of state tax 1.7 3.8 1.7 3.2
Net effect of foreign tax 0.7 (0.1) 0.7 0.3
Charitable contributions of property at
fair value - (10.0) - (7.0)
Other (0.9) (2.0) (0.9) (1.8)
------------- ----------- ---------- -----------
Effective Income Tax Rate (12.6) % (1.2) % (10.0) % 3.4 %
============= =========== ========== ===========
The provision for income taxes is adjusted at the time the returns are filed.
These adjustments decreased income tax expense by $1,712 for the three months
ended December 31, 1999 and $3,654 for the six months ended December 31, 1999.
These adjustments decreased income tax expense by $3,927 in the three months and
six months ended December 31, 1998.
In the three months and six months ended December 31, 1999, CONSOL Energy
received a $7,861 federal income tax benefit from a final agreement resolving
disputed federal income tax items for the years 1992-1994.
NOTE 4 - INVENTORIES:
- --------------------
The components of inventories consist of the following:
December 31, June 30,
1999 1999
---------------------- ----------------------
Coal $ 85,463 $ 127,019
Merchandise for resale 34,869 36,614
Supplies 41,519 43,362
---------------------- ----------------------
Total Inventories $ 161,851 $ 206,995
====================== ======================
9
NOTE 5 - CONTINGENT LIABILITIES:
- -------------------------------
CONSOL Energy is subject to various lawsuits and claims with respect to such
matters as personal injury, damage to property, governmental regulations
including environmental remediation, and other actions arising out of the normal
course of business. The costs of mine closing and reclamation are accrued over
the productive life of the mine. In addition, CONSOL Energy has accrued $3,275
in other liabilities for remediation of a waste disposal site. In the opinion
of management, the ultimate liabilities resulting from such lawsuits and claims
will not materially affect CONSOL Energy.
On June 22, 1999, an underground fire was discovered in the old workings of the
idled Loveridge Mine and CONSOL Energy sealed the mine to extinguish the fire.
Mine reserves and equipment are not believed to be impaired.
A public utility filed suit against CONSOL Energy alleging breach of a long-term
coal supply contract based upon CONSOL Energy's refusal to agree to reductions
in the price for coal under the contract's "gross inequities" clause. Damages
claimed, including interest, are approximately $190,000. On August 31, 1998,
CONSOL Energy was awarded a summary judgment dismissing the claims against it.
The public utility appealed the court's order dismissing the suit. On August
27, 1999, the United States Court of Appeals for the Eighth Circuit affirmed the
judgment of the district court. The appeal period has expired and the ruling of
the Eighth Circuit is final. CONSOL Energy had not accrued any liability
associated with this action.
CONSOL Energy received, from a group of public utilities, two notices of intent
to submit certain price disputes to arbitration pursuant to a 1987 coal sales
contract. The notices claim that the utilities have been overcharged by
approximately $50,000 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.
10
NOTE 6 - SEGMENT INFORMATION:
- ----------------------------
Industry segment results for the three months ended December 31, 1999:
Industrial
Supplies & Consoli-
Coal Equipment Elimination dated
----------------- ----------------- ----------------- ------------------
Sales - outside $ 502,572 $ 34,537 $ - $ 537,109
Sales - related companies - - - -
Intersegment transfers - 17,313 (17,313) -
----------------- ----------------- ----------------- ------------------
Total Sales $ 502,572 $ 51,850 $ (17,313) $ 537,109
================= ================= ================= ==================
Earnings before income taxes $ 34,247 $ (1,838) $ 32,409
Income taxes (benefit) (3,375) (722) (4,097)
----------------- ----------------- ------------------
Net Income (Loss) $ 37,622 $ (1,116) $ 36,506
================= ================= ==================
Segment assets $ 3,687,399 $ 57,754 $ 3,745,153
================= ================= ==================
Depreciation, depletion
and amortization $ 63,982 $ 262 $ 64,244
================= ================= ==================
Additions to property, plant
and equipment $ 40,462 $ 128 $ 40,590
================= ================= ==================
Industry segment results for the three months ended December 31, 1998:
Industrial
Supplies & Consoli-
Coal Equipment Elimination dated
----------------- ----------------- ----------------- ------------------
Sales - outside $ 569,525 $ 20,862 $ - $ 590,387
Sales - related companies 5,764 19,216 - 24,980
Intersegment transfers - 20,693 (20,693) -
----------------- ----------------- ----------------- ------------------
Total Sales $ 575,289 $ 60,771 $ (20,693) $ 615,367
================= ================= ================= ==================
Earnings before income taxes $ 47,432 $ 1,922 $ 49,354
Income taxes (benefit) (1,260) 674 (586)
----------------- ----------------- ------------------
Net Income $ 48,692 $ 1,248 $ 49,940
================= ================= ==================
Segment assets $ 3,802,961 $ 60,429 $ 3,863,390
================= ================= ==================
Depreciation, depletion
and amortization $ 62,766 $ 243 $ 63,009
================= ================= ==================
Additions to property, plant
and equipment $ 65,829 $ 375 $ 66,204
================= ================= ==================
11
Industry segment results for the six months ended December 31, 1999:
Industrial
Supplies & Consoli-
Coal Equipment Elimination dated
-------------------- ----------------- ----------------- ---------------------
Sales - outside $ 1,011,845 $ 70,433 $ - $ 1,082,278
Sales - related companies 43 - - 43
Intersegment transfers - 34,259 (34,259) -
-------------------- ----------------- ----------------- ---------------------
Total Sales $ 1,011,888 $ 104,692 $ (34,259) $ 1,082,321
==================== ================= ================= =====================
Earnings before income taxes $ 45,414 $ (2,480) $ 42,934
Income taxes (benefit) (3,235) (1,064) (4,299)
-------------------- ----------------- ---------------------
Net Income (Loss) $ 48,649 $ (1,416) $ 47,233
==================== ================= =====================
Segment assets $ 3,687,399 $ 57,754 $ 3,745,153
==================== ================= =====================
Depreciation, depletion
and amortization $ 124,816 $ 518 $ 125,334
==================== ================= =====================
Additions to property, plant
and equipment $ 64,560 $ 254 $ 64,814
==================== ================= =====================
Industry segment results for the six months ended December 31, 1998:
Industrial
Supplies & Consoli-
Coal Equipment Elimination dated
-------------------- ----------------- ----------------- -------------------
Sales - outside $ 1,066,795 $ 44,401 $ - $ 1,111,196
Sales - related companies 11,966 38,783 - 50,749
Intersegment transfers - 41,482 (41,482) -
-------------------- ----------------- ----------------- -------------------
Total Sales $ 1,078,761 $ 124,666 $ (41,482) $ 1,161,945
==================== ================= ================= ===================
Earnings before income taxes $ 68,897 $ 1,800 $ 70,697
Income taxes 1,744 653 2,397
-------------------- ----------------- -------------------
Net Income $ 67,153 $ 1,147 $ 68,300
==================== ================= ===================
Segment assets $ 3,802,961 $ 60,429 $ 3,863,390
==================== ================= ===================
Depreciation, depletion
and amortization $ 120,523 $ 500 $ 121,023
==================== ================= ===================
Additions to property, plant
and equipment $ 385,509 $ 626 $ 386,135 A
==================== ================= ===================
A Includes $248,879 acquired from Rochester and Pittsburgh Coal Company.
12
NOTE 7 - SUBSEQUENT EVENT:
- -------------------------
On January 21, 2000, CONSOL Energy agreed to purchase the stock of Buchanan
Production Company (BPC), MCNIC Oakwood Gathering Inc. (OGI), and an MCN
subsidiary that owns a 50% percent interest in Cardinal States Gathering Company
(CSGC) from MCN Energy Group Inc. for approximately $170,000, pending
governmental approvals. These companies own gas production and pipeline
properties in southwestern Virginia and currently produce 70 million cubic feet
per day of pipeline quality methane gas. BPC is estimated to hold approximately
275 billion cubic feet of proven coalbed methane gas reserves.
This transaction will be accounted for under the purchase method. Accordingly,
the purchase price will be allocated to the assets acquired and liabilities
assumed, based upon the fair values at the date of the acquisition. CONSOL
Energy's financial statements will include the results of the purchase from the
date of acquisition.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
CONSOL Energy coal sales for the quarter ended December 31, 1999 were 1.5%, or
0.3 million tons, lower than the 20.2 tons we had expected because of shortfalls
in available barge or rail transportation and because of mild weather conditions
in many of our market areas.
During the quarter, we reduced inventories of coal by about 0.3 million tons.
Since the beginning of our fiscal year on July 1, 1999, we have reduced
inventories 2.4 million tons. This reflects our efforts to reduce our
production of coal to levels consistent with current market demand.
Compared with the same period a year ago, revenue and net income are less
primarily because of the expiration of higher-priced contracts that we had for
coal sales and generally lower market prices for coal.
To offset lower prices, CONSOL Energy has implemented strategies to reduce
costs. We have imposed spending limits on our mining operations and deferred
capacity expansion projects, reducing planned capital expenditures.
CONSOL Energy has engaged an outside consultant to review administrative and
research staff functions. The purpose of the review is 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.
CONSOL Energy has also engaged an outside consultant 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.
It is anticipated that these studies will be completed before June 30, 2000.
Decisions to be made by management as the result of these studies could affect
future earnings. It is not currently possible to estimate the potential outcome
of these assessments or their impact on our financial position and results of
operations in any given quarter or year.
During the quarter just ended, we completed the permanent closing of the
Keystone and Helvetia mining complexes. These two complexes consisted of five
small underground mines and a surface mine ran by a contractor. In the
aggregate, the two complexes had an annual production capacity of about 3.8
million tons. Coal from the two complexes was sold to two electric generating
stations. Contracts have been renegotiated with both customers to allow
approximately the same coal volumes to be supplied from other CONSOL Energy
mines.
14
Results of Operations
Second Quarter 1999/2000 Compared with Second Quarter 1998/1999
Net Income
CONSOL Energy's net income for the three months ended December 31, 1999 (the
1999 period) was $37 million compared with $50 million for the three months
ended December 31, 1998 (the 1998 period). The decrease of $13 million
primarily was due to reduced coal prices and reduced sales volumes, offset by a
decrease in income tax provisions.
Revenue
Sales decreased 12.7% to $537 million for the 1999 period from $615 million for
the 1998 period.
Revenues from the sale of Produced Coal decreased $64 million, or 12.2% to $463
million in the 1999 period from $527 million in the 1998 period. Sales volumes
of Produced Coal were 18.9 million tons in the 1999 period, a decrease of 1.3
million tons or 6.4% from the 1998 period. This was primarily due to the mild
weather at the beginning of the quarter, and limited rail and barge
availability. Average sales price per ton of produced coal sold decreased 6.2%
to $24.46 per ton for the 1999 period from $26.07 per for the 1998 period. The
decline in average sale prices was primarily due to higher-priced contract
expirations and weaker spot prices compared to the same period last year.
Revenues from the sale of Purchased Coal decreased by $11 million, or 28.4% to
$28 million in the 1999 period from $39 million in the 1998 period. Sales
volumes were 1.0 million tons in the 1999 period, a decrease of 0.1 million tons
or 10.8% from the 1998 period. Average sales price per ton decreased 19.8% to
$27.27 per ton for the 1999 period from $33.98 for the 1998 period. The volume
and price declines were primarily due to lower sales at a Belgium subsidiary and
expiration of purchased coal contracts acquired with the Rochester & Pittsburgh
Coal Company acquisition in September 1998.
Industrial supply sales decreased $5 million, or 13.8% to $35 million in the
1999 period from $40 million in the 1998 period due to reduced volumes.
The reduction in related party sales reflect the recategorization of sales to E.
I. Du Pont de Nemours and Company (DuPont) from related party sales to outside
sales due to the purchase of CONSOL Energy's shares from DuPont Energy Company
(DuPont Energy) in November 1998.
Other income, which consists of interest income, gain on the disposition of
assets, service income, royalty income, rental income and miscellaneous income,
decreased 34.7% to $11 million in the 1999 period from $17 million in the 1998
period. The decrease of $6 million was primarily due to a decrease in the gain
on sale of assets, and a decrease in interest income resulting from a lower
level of investment in marketable securities.
15
Costs
Cost of goods sold and other operating charges decreased 13.5% to $378 million
in the 1999 period compared to $437 million in the 1998 period.
Cost of goods sold for Produced Coal was $293 million for the 1999 period, a
decrease of $12 million, or 4.1% from the 1998 period. This primarily reflects
a decrease due to reduced volumes.
Purchased Coal costs decreased 29.6% to $27 million in the 1999 period compared
to $38 million in the 1998 period. The $11 million decrease was due mainly to a
decrease of $4 million due to reduced volumes, and a decrease of $7 million due
to reduced cost per ton purchased.
Industrial supplies cost of goods sold decreased 9.2% to $53 million in the 1999
period from $58 million in the 1998 period. The $5 million decrease was due to
reduced sales.
Idle mine cost expense was $5 million in the 1999 period, compared to income of
$4 million in the 1998 period. The increase of $9 million was primarily due to
the Loveridge, Powhatan and Ohio #11 mines being idle in the 1999 period, and a
reversal of mine-closing liabilities related to a property disposition in the
1998 period.
Other cost of goods sold and other operating charges were $1.0 million in the
1999 period compared to $40.3 million in the 1998 period, a decrease of $39.3
million. Retiree medical charges declined $4.9 million, medical costs declined
$5.2 million, and claim accruals declined $4.1 million. In the 1998 period
these charges also included a $13.9 million property donation.
Selling, general and administrative expenses increased 3.5% to $15 million in
the 1999 period compared to $14 million in the 1998 period. The increase of $1
million was primarily due to increased professional service fees related to the
review of the administrative staff functions and the information systems.
Depreciation, depletion and amortization expense increased 2.0% to $64 million
in the 1999 period compared to $63 million in the 1998 period. The increase of
$1 million was primarily due to depreciation expense related to assets placed in
service after the 1998 period.
Interest expense decreased 19.9% to $13 million for the 1999 period compared to
$16 million for the 1998 period. The decrease of $3 million was due primarily
to lower average debt levels outstanding during the 1999 period compared to the
1998 period. Higher debt levels in the 1998 period resulted from the issuance
of commercial paper to finance the purchase of CONSOL Energy's common stock from
DuPont Energy in November 1998. Lower debt levels in the 1999 period resulted
from the use of the Initial Public Offering proceeds to reduce debt.
16
Taxes other than income decreased 13.4% to $46 million for the 1999 period
compared to $53 million for the 1998 period. The decrease of $7 million was due
primarily to decreased black lung excise taxes due to overall lower production
tons and decreased West Virginia severance taxes due to lower production in that
state.
Income Taxes
Income taxes were a $4.1 million benefit in the 1999 period compared to a $0.6
million benefit in the 1998 period. The increased benefit was due primarily to
the recording of a $7.9 million benefit from a final agreement resolving
disputed federal income tax items for the years 1992-1994 and the recording of a
$1.7 million benefit resulting from filing various state tax returns for the
period January 1, 1998 through December 31, 1998 in the 1999 period.
Six Months Ended December 31, 1999 Compared with Six Months Ended December 31,
1998
Net Income
CONSOL Energy's net income for the six months ended December 31, 1999 (the YTD
1999 period) was $47 million compared with $68 million for the six months ended
December 31, 1998 (the YTD 1998 period). The decrease of $21 million primarily
was due to reduced coal prices offset in part by reduced provisions for income
taxes.
Revenue
Sales decreased 6.9% to $1,082 million for the YTD 1999 period from $1,162
million for the YTD 1998 period.
Revenues from the sale of Produced Coal decreased by $65 million, or 6.5% to
$933 million in the YTD 1999 period from $998 million in the YTD 1998 period.
Produced Coal sales volumes were 38.5 million tons in the YTD 1999 period,
approximately the same as the YTD 1998 period. Average sales prices decreased
6.6% to $24.22 per ton for the YTD 1999 period from $25.94 per ton for the YTD
1998 period. The decrease in average sales price was due primarily to higher-
priced contract expirations and weaker spot prices compared to the same period
last year.
Revenues from the sale of Purchased Coal decreased by $5 million, or 8.7% to $55
million in the YTD 1999 period from $60 million in the YTD 1998 period. Sales
volumes were 1.9 million tons in the YTD 1999 period, an increase of 7.3% for
the YTD 1999 period. The increase was due mainly to increased volumes added
with the September 22, 1998 acquisition of Rochester & Pittsburgh Coal Company
(R&P) in the first half of the YTD 1999 period, offset in part by reduced sales
at a Belgium subsidiary. Average sales prices decreased 14.9% to $29.23 per
ton for the YTD 1999 period from $34.35 for the YTD 1998 period due to an
overall decline in the export market.
17
Industrial supply sales decreased $13 million, or 15.3% to $70 million in the
YTD 1999 period from $83 million in the YTD 1998 period due to reduced sales
volumes.
The reduction in related party sales reflect the recategorization of sales to E.
I. Du Pont de Nemours and Company (DuPont) from related party sales to outside
sales due to the purchase of CONSOL Energy's shares from DuPont Energy Company
(DuPont Energy) in November 1998.
Other income, which consists of interest income, gain on the disposition of
assets, service income, royalty income, rental income and miscellaneous income,
decreased 20.4% to $22 million in the YTD 1999 period from $28 million in the
YTD 1998 period. The decrease of $6 million was primarily due to a decrease in
interest income resulting from a lower level of investment in marketable
securities and decreased gain on sales of assets.
Costs
Cost of goods sold and other operating charges decreased 6.1% to $795 million in
the YTD 1999 period compared to $847 million in the YTD 1998 period.
Industrial supplies cost of goods sold decreased 12.7% to $106 million in the
YTD 1999 period from $122 million in the YTD 1998 period. The $16 million
decrease was due to reduced sales.
Cost of goods sold for company produced coal was $614 million for the YTD 1999
period, a decrease of $5 million, or 0.8% from the YTD 1998 period. The
decrease was primarily due to decreased costs at mine operations.
Purchased coal costs decreased 9.9% to $54 million in the YTD 1999 period from
$60 million in the YTD 1998 period. The $6 million decrease was due mainly to a
decrease of $10 million because of reduced prices, and an increase of $4 million
due to increased volume.
Idle mine costs increased to $15 million in the YTD 1999 period from income of
$2 million in the YTD 1998 period. The increase of $17 million was primarily
due to the Loveridge, Powhatan and Ohio #11 mines being idle in the YTD 1999
period, and a reversal of mine-closing liabilities related to a property
disposition in the YTD 1998 period.
Other cost of goods sold and other charges were $5.8 million in the YTD 1999
period compared to $48.6 million in the YTD 1998 period, a decrease of $42.8
million. Retiree medical charges declined $6.7 million, medical costs declined
$5.6 million, and claim accruals declined $5.5 million. In the YTD 1998 period
these charges also included a $13.9 million property donation.
18
Selling, general and administrative expenses increased 6.3% to $29 million in
the YTD 1999 period compared to $27 million in the 1998 period. The increase of
$2 million was primarily due to increased professional service fees related to
the review of the administrative staff functions and the information systems.
Depreciation, depletion and amortization expense increased 3.6% to $125 million
in the YTD 1999 period compared to $121 million in the YTD 1998 period. The
increase of $4 million was primarily due to the increase in depreciation and
depletion related to the assets acquired with the R&P acquisition and the
additional depreciation expense related to assets placed in service after the
YTD 1998 period.
Interest expense remained stable at $25 million for the YTD 1999 and YTD 1998
periods. In November 1998, CONSOL Energy issued commercial paper to finance the
purchase of CONSOL Energy's common stock from DuPont Energy. The debt levels
have subsequently been reduced through the use of the initial public offering
proceeds as well as operating cash flow.
Taxes other than income decreased 12.1% to $87 million for the YTD 1999 period
compared to $99 million for the YTD 1998 period. The decrease of $12 million
was due primarily to decreased black lung excise taxes due to overall lower
production tons and decreased West Virginia severance taxes due to lower
production in that state. The decrease is also due to reduced property taxes
due to reduced assessments on closed operations.
Income Taxes
Income taxes were a $4.3 million benefit in the YTD 1999 period compared to a
$2.4 million expense in the YTD 1998 period. The benefit was due primarily to
the recording of a $7.9 million benefit from a final agreement resolving
disputed federal income tax items for the years 1992-1994 and the recording of a
$3.6 million benefit resulting from filing the federal and various state tax
returns for the period January 1, 1998 through December 31, 1998 in the YTD 1999
period. These benefits were offset by the tax expense on the 1999 taxable
earnings.
Liquidity and Capital Resources
CONSOL Energy generally has satisfied its working capital requirements and
funded its capital expenditures and debt-service obligations from cash generated
from operations. CONSOL Energy believes that cash generated from operations and
its borrowing capacity will be sufficient to meet its working capital
requirements, anticipated capital expenditures (other than major acquisitions),
scheduled debt payments and anticipated dividend payments. Nevertheless, the
ability of CONSOL Energy to satisfy its debt service obligations, to fund
planned capital expenditures or pay dividends will depend upon its future
operating performance, which will be affected by prevailing economic conditions
in the coal industry and financial, business and other factors, some of which
are beyond CONSOL Energy's control.
19
CONSOL Energy frequently evaluates potential acquisitions. In the past, CONSOL
Energy has funded acquisitions primarily with cash generated from operations,
but CONSOL Energy may consider a variety of other sources, depending on the size
of any transaction, including debt or equity financing. There can be no
assurance that such additional capital resources will be available to CONSOL
Energy on terms which CONSOL Energy finds acceptable, or at all.
Stockholders' Equity and Dividends
CONSOL Energy had stockholders' equity of $249 million at December 31, 1999 and
$255 million at June 30, 1999. A quarterly dividend was declared on July 20,
1999 of $0.28 per share of common stock for shareholders of record on August 4,
1999. This dividend was paid on September 2, 1999. A quarterly dividend of
$0.28 per share was declared on October 27, 1999, payable to shareholders of
record on November 8, 1999. This dividend was paid on November 22, 1999. A
quarterly dividend was declared on January 25, 2000 of $0.28 per share of common
stock for shareholders of record on February 10, 2000. This dividend is payable
on February 28, 2000. The Board of Directors currently intends to pay quarterly
dividends on the common stock. Current outstanding indebtedness of CONSOL
Energy does not restrict CONSOL Energy's ability to pay cash dividends.
CONSOL Energy Share Repurchases
Effective August 23, 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.
The timing of the purchases and the number of shares to be purchased are
dependent upon market conditions. As of December 31, 1999, CONSOL Energy had
repurchased in open market transactions on the New York Stock Exchange 434,200
shares at an average price of $12.31 per share. As of February 1, 2000, CONSOL
Energy had repurchased a total of 682,100 shares in open market transactions on
the New York Stock Exchange at the average price of $11.95 per share.
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 E. I. du Pont de Nemours and Company
(DuPont). As of November 30, 1999, DuPont had sold all of its 3,264,201 shares
of common stock of CONSOL Energy.
Cash Flows
Net cash provided by operating activities was $192 million in the six months
ended December 31,1999 (the YTD 1999 period) compared to $236 million in the six
months ended December 31, 1998 (the YTD 1998 period). The change in net cash
provided by operating activities reflects decreases in net income, liquidation
of inventories, and liquidation of accounts receivables and changes in operating
liabilities.
20
Net cash used in investing activities was $59 million in the YTD 1999 period
compared to $86 million in the YTD 1998 period. The change in net cash used in
investing activities reflects the purchase of R&P and the sale of marketable
securities in the YTD 1998 period. In addition, capital expenditures in the YTD
1999 period were $64 million compared with $136 million in the YTD 1998 period.
The reduction in capital expenditures was primarily due to deferring expansion
projects and curtailing capital expenditures as part of the cost reduction
efforts which have been implemented by CONSOL Energy. On January 21, 2000,
CONSOL Energy agreed to purchase the stock of Buchanan Production Company, MCNIC
Oakwood Gathering Inc., and an MCN subsidiary for approximately $170 million.
These companies own gas production and pipeline properties in southwestern
Virginia. The closing is contingent on the satisfaction of certain conditions
including obtaining clearance under the Hart-Scott-Rodino Antitrust Improvements
Act. The acquisition will be financed by the issuance of commercial paper.
Net cash used in financing activities was $143 million in the YTD 1999 period
compared with $140 million in the YTD 1998 period. The change in net cash used
in financing activities reflects the payments made on outstanding commercial
paper in the YTD 1999 period compared to the proceeds from issuance of
commercial paper in the YTD 1998 period. This increase use in cash was offset
in part by the expenditure to purchase shares of CONSOL's common stock from
DuPont Energy in the YTD 1998 period, as well as the scheduled retirement of a
long-term note in the YTD 1998 period. Also, a $45 million dividend was paid in
the YTD 1999 period compared to an $80 million paid in the YTD 1998 period. The
YTD 1999 period reflects CONSOL Energy's current policy of paying quarterly
dividends. The YTD 1998 period reflects an annual dividend payment for the
twelve months ended December 1998.
Debt
At December 31, 1999, CONSOL Energy had total long-term debt of $311 million,
including 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 6.50% per annum and mature in
2010 and 2011,
. an aggregate principal amount of $2 million of variable rate notes due at
various dates through 2001,
. $28 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 $21 million of capital leases.
At December 31, 1999, CONSOL Energy had an aggregate principal amount of $272
million of commercial paper outstanding which had maturities ranging up to 93
days with interest at varying rates ranging from 6.54% to 6.66% per annum.
21
Impact of Year 2000 Issue
CONSOL Energy experienced no significant system problems, internal or external,
related to year 2000 issues. Utility customers continued to purchase coal,
CONSOL Energy was able to access its bank accounts and receive payments,
transportation providers made timely coal shipments to customers. CONSOL
Energy's mines and processing plants continued to operate and no significant
coal mining or processing disruptions occurred related to the year 2000 issue.
Costs related to year 2000 readiness in the quarter ended December 31, 1999 were
immaterial. Based on experience to date, no significant problems are
anticipated to occur in the future related to this issue.
Forward-Looking Statements
CONSOL Energy is including the following cautionary statement in this Report on
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of CONSOL Energy. With the exception of
historical matters, the matters discussed in this Report on Form 10-Q are
forward-looking statements (as defined in Section 21E of the Exchange Act) that
involve risks and uncertainties that could cause actual results to differ
materially from projected results. In addition to other factors and matters
discussed elsewhere in this Report on Form 10-Q, 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 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 including geological conditions and mine accidents; weather-
related factors; results of litigation; the effects of government regulation;
the risk of work stoppages; the risk of transportation disruptions that could
impair CONSOL Energy's ability to sell coal and gas; management's ability to
correctly estimate and accrue for contingent liabilities; and CONSOL Energy's
ability to identify suitable acquisition candidates and to successfully finance,
consummate the acquisition of, and integrate these canidates as part of its
acquisition strategy.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONSOL Energy's interest expense is sensitive to changes in the general level of
interest rates in the United States. At December 31, 1999, CONSOL Energy had
outstanding $309 million aggregate principal amount of debt under fixed-rate
instruments and $274 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 December 31,
1999, CONSOL Energy had an aggregate of $272 million in commercial paper
outstanding. CONSOL Energy's commercial paper bore interest at an average rate
of 5.73% per annum during the six months ended December 31, 1999. A 100 basis-
point increase in the average rate for CONSOL Energy's commercial paper would
have decreased CONSOL Energy's net income for the six months ended December 31,
1999 by approximately $2 million.
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 did not engage in any interest rate, foreign currency exchange
rate or commodity price hedging transactions.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material litigation has been filed against CONSOL Energy during the three
months ended December 31, 1999, and other than noted, there have been no
material changes in legal proceedings previously disclosed by CONSOL Energy.
See Part I, Item 1. Financial Statements-Note 5.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 1999, CONSOL Energy held its first annual shareholder meeting
and two proposals were approved. The proposal to elect a board of directors and
the proposal to ratify the appointment of Ernst & Young LLP as the independent
accountants for the Fiscal Year July 1, 1999 through June 30, 2000 were approved
by a vote of the shareholders of CONSOL Energy.
23
ITEM 5. OTHER INFORMATION
Gas Acquisition
On January 21, 2000, CONSOL Energy agreed to purchase the stock of Buchanan
Production Company, MCNIC Oakwood Gathering Inc., and an MCN subsidiary for
approximately $170 million. These companies own southwestern Virginia gas
production and pipeline properties. The closing is contingent on the
satisfaction of certain conditions including obtaining clearance under the Hart-
Scott-Rodino Antitrust Improvements Act. The acquisition will be financed by
the issuance of commercial paper.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The following condensed consolidated financial statements of CONSOL Energy Inc.
and subsidiaries are included in this filing on the pages indicated:
Page
-----
Condensed Consolidated Statements of Income for the three months and six months ended
December 31, 1999 and December 31, 1998............................................... 3
Condensed Consolidated Balance Sheets at December 31, 1999 and June 30, 1999........... 4
Condensed Consolidated Statements of Stockholders' Equity for the six months ended
December 31, 1999..................................................................... 6
Condensed Consolidated Statements of Cash Flows for the six months ended December 31,
1999 and December 31, 1998............................................................ 7
Notes to Condensed Consolidated Financial Statements................................... 8
a (2) Financial Statement Schedules:
No financial statement schedules required to be presented by CONSOL Energy.
a (3) Exhibits filed as part of this Report:
The response to this portion of Item 6 is submitted as a separate part of
this report.
(b) (1) Reports on Form 8-K:
None
27 Financial Data Schedule, Exhibit 27.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOL ENERGY INC.
Date: February 14, 2000
By: /s/ R. Zimmermann
___________________________
R. Zimmermann,
Executive Vice President
Date: February 14, 2000
By: /s/ M. F. Nemser
________________________
M. F. Nemser
Vice President and Treasurer
(Chief Financial Officer)
Date: February 14, 2000
By: /s/ W. J. Lyons
___________________________
William J. Lyons,
Vice President and Controller
(Principal Financial and Accounting Officer)
25