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 September 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: 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 October 31, 2000, there were 78,579,081 shares of Common Stock, $.01 par
value, outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Consolidated Statements of Income for the three months
ended September 30, 2000 and September 30, 1999................ 3
Consolidated Balance Sheets at September 30, 2000
and June 30, 2000.............................................. 4
Consolidated Statements of Stockholders' Equity for the three
months ended September 30, 2000................................ 6
Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 and September 30, 1999................ 7
Notes to 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.............................................. 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 21
ITEM 5. OTHER INFORMATION.............................................. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(Dollars in thousands, except per share data)
For the Three Months
Ended September 30,
-----------------------------------------
2000 1999
----------------- -----------------
Sales - Outside $ 489,204 $ 545,169
Sales - Related Parties 2,056 43
Other Income 13,097 11,180
----------------- -----------------
Total Revenue 504,357 556,392
Cost of Goods Sold and Other
Operating Charges 370,231 417,192
Selling, General and Administrative Expense 16,516 14,157
Depreciation, Depletion and Amortization 60,127 61,090
Interest Expense 15,264 12,838
Taxes Other Than Income 37,668 40,590
----------------- -----------------
Total Costs 499,806 545,867
----------------- -----------------
Earnings Before Income Taxes 4,551 10,525
Income Taxes (Benefits) (Note 5) 455 (202)
----------------- -----------------
Net Income $ 4,096 $ 10,727
================= =================
Basic and Dilutive Earnings Per Share $ 0.05 $ 0.13
================= =================
Weighted Average Number of
Common Shares Outstanding 78,577,553 80,250,718
================= =================
Dividends Per Share $ 0.28 $ 0.28
================= =================
The accompanying notes are an integral part of these financial statements.
3
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
-----------------------------------
(Dollars in thousands, except per share data)
(Unaudited)
SEPTEMBER 30, JUNE 30,
2000 2000
--------------------- ----------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 10,653 $ 8,181
Accounts and Notes Receivable:
Trade 224,247 262,943
Related Parties 1,102
Other Receivables 17,472 24,849
Inventories (Note 6) 120,768 156,853
Recoverable Income Taxes 8,482 7,813
Deferred Income Taxes 93,492 93,464
Prepaid Expenses 25,485 23,625
--------------------- ----------------------
Total Current Assets 501,701 577,728
Property, Plant and Equipment:
Property, Plant and Equipment 4,871,930 4,852,017
Less - Accumulated Depreciation,
Depletion and Amortization 2,300,344 2,277,573
--------------------- ----------------------
Total Property, Plant and
Equipment - Net 2,571,586 2,574,444
Other Assets:
Deferred Income Taxes 291,732 291,178
Advance Mining Royalties 106,623 107,980
Investment in Affiliates 177,097 177,272
Other 129,903 137,709
--------------------- ----------------------
Total Other Assets 705,355 714,139
--------------------- ----------------------
Total Assets $ 3,778,642 $ 3,866,311
===================== ======================
The accompanying notes are an integral part of these financial statements.
4
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands, except per share data)
(Unaudited)
SEPTEMBER 30, JUNE 30,
2000 2000
-------------------- --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 137,776 $ 143,313
Accounts Payable - Related Parties 502
Short-Term Notes Payable 411,587 464,310
Current Portion of Long-Term Debt 6,701 6,757
Other Accrued Liabilities 334,101 337,920
-------------------- --------------------
Total Current Liabilities 890,165 952,802
Long-Term Debt:
Long-Term Debt 286,089 286,098
Capital Lease Obligations 13,549 14,507
-------------------- --------------------
Total Long-Term Debt 299,638 300,605
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,108,401 1,118,021
Pneumoconiosis Benefits 433,061 426,402
Mine Closing 279,770 280,370
Workers' Compensation 259,651 253,534
Reclamation 4,597 11,808
Other 267,056 268,590
-------------------- --------------------
Total Deferred Credits and Other Liabilities 2,352,536 2,358,725
Stockholders' Equity:
Common Stock, $.01 par value;
500,000,000 Shares Authorized; 80,267,558 Issued
and 78,579,081 Outstanding at September 30, 2000,
80,267,558 Issued and 78,577,274 Outstanding at
June 30, 2000 803 803
Preferred Stock, 15,000,000 Shares Authorized;
None Issued and Outstanding
Capital in Excess of Par Value 642,957 642,947
Retained Earnings Deficit (388,058) (370,152)
Other Comprehensive Loss (322) (322)
Common Stock in Treasury, at Cost - 1,688,477 Shares
at September 30, 2000, 1,690,284 Shares at June 30, 2000 (19,077) (19,097)
-------------------- --------------------
Total Stockholders' Equity 236,303 254,179
-------------------- --------------------
Total Liabilities and Stockholders' Equity $ 3,778,642 $ 3,866,311
==================== ====================
The accompanying notes are an integral part of these financial statements.
5
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(Dollars in thousands, except per share data)
Other Total
Capital in Retained Compre- Stock-
Common Excess of Earnings hensive Treasury holders'
Stock Par Value (Deficit) Loss Stock Equity
------------ -------------- --------------- ------------ ------------ -------------
Balance at
June 30, 2000 $ 803 $ 642,947 $ (370,152) $ (322) $ (19,097) $ 254,179
(Unaudited)
Net Income 4,096 4,096
Treasury Stock Issued
(1,807 shares) 10 20 30
Dividends ($.28 per share) (22,002) (22,002)
------------ -------------- --------------- ------------ ------------ -------------
Balance at
September 30, 2000 $ 803 $ 642,957 $ (388,058) $ (322) $ (19,077) $ 236,303
============ ============== =============== ============ ============ =============
The accompanying notes are an integral part of these financial statements.
6
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(Dollars in thousands)
For the Three Months
Ended September 30,
----------------------------------
2000 1999
--------------- ---------------
Operating Activities:
Net Income $ 4,096 $ 10,727
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 60,127 61,090
Gain on the Sale of Assets (1,151) (2,331)
Amortization of Advance Mining Royalties 2,672 3,388
Deferred Income Taxes (582) (1,226)
Equity in Earnings of Affiliates (3,579)
Changes in Operating Assets:
Accounts and Notes Receivable 44,469 (27,196)
Inventories 36,085 37,242
Prepaid Expenses (1,860) 321
Changes in Other Assets 7,806 6,109
Changes in Operating Liabilities:
Accounts Payable (5,537) (2,007)
Other Operating Liabilities (4,488) (2,966)
Changes in Other Liabilities (6,189) 7,627
Other (1,178) 300
----------- -----------
126,595 80,351
----------- -----------
Net Cash Provided by Operating Activities 130,691 91,078
----------- -----------
Investing Activities:
Capital Expenditures (58,011) (23,694)
Additions to Advance Mining Royalties (1,333) (1,571)
Investment in Equity Affiliates 3,754
Proceeds from Sales of Assets 2,507 3,024
----------- -----------
Net Cash Used in Investing Activities (53,083) (22,241)
----------- -----------
Financing Activities:
Payments on Commercial Paper (52,150) (44,552)
Payments on Miscellaneous Borrowings (1,014) (2,201)
Dividends Paid (21,996) (22,475)
Purchase of Treasury Stock (1,656)
Issuance of Treasury Stock 24
----------- -----------
Net Cash Used in Financing Activities (75,136) (70,884)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 2,472 (2,047)
Cash and Cash Equivalents at Beginning of Period 8,181 23,559
----------- -----------
Cash and Cash Equivalents at End of Period $ 10,653 $ 21,512
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2000
------------------
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
future periods.
The balance sheet at June 30, 2000 has been derived from the audited financial
statements at that date but does not include all the footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes for the year ended June 30, 2000 included in CONSOL Energy Inc.'s
(CONSOL Energy) Form 10-K, as filed on September 27, 2000.
NOTE 2 - EARNINGS PER SHARE:
- ----------------------------
Basic earnings per share are computed using the 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 103,898 and 152 shares for the three months ended
September 30, 2000 and 1999, respectively. The difference in the weighted
average number of shares outstanding for the three months ended September 30,
2000 and 1999 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.
8
NOTE 3 - ACQUISITION:
- --------------------
On February 25, 2000, CONSOL Energy purchased 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
for $163,506. The acquisition has been accounted for as a purchase and,
accordingly, the operating results of BPC, OGI and CSGC 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 BPC,
OGI and CSGC as if it had occurred on July 1, 1999, were $570,635 for the three
months ended September 30, 1999. The pro forma net income and earnings per share
of CONSOL Energy, after giving effect to certain purchase accounting
adjustments, would not materially change for this period.
NOTE 4 - RESTRUCTURING COSTS:
- -----------------------------
Beginning in the second quarter of the year ended June 30, 2000, CONSOL Energy
commenced a restructuring of its administrative staff and research staff
functions. The purpose of the restructuring was to align these 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 are the result of increased consulting fees and severance and employee
benefit costs in conjunction with the workforce reduction of 214 employees.
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. At June 30,
2000, approximately 94% of the benefits under the programs had been paid or had
been transferred as obligations of CONSOL Energy's pension and postretirement
other than pension plans. The remaining restructuring obligation is for employee
termination benefits and is recorded as Other Accrued Liabilities. Cash payments
for the three months ended September 30, 2000 were $135. There were no other
adjustments made to the restructuring liability in the three months ended
September 30, 2000. The remaining restructuring liability at September 30, 2000
is $546.
9
NOTE 5 - INCOME TAXES:
- ----------------------
The following is the 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 Months
Ended September 30,
--------------------
2000 1999
-------- --------
Statutory U.S. federal income tax rate 35.0% 35.0%
Excess tax depletion (21.7) (20.0)
Adjustment of prior year's taxes (18.4)
Non-conventional fuel tax credit (4.7)
Net effect of state tax 1.1 1.7
Net effect of foreign tax 0.6 0.7
Other (0.3) (0.9)
------ ------
Effective Income Tax Rate 10.0% (1.9)%
====== ======
The provision for income taxes is adjusted at the time the returns are filed.
These adjustments decreased income tax expense by $1,942 for the three months
ended September 30, 1999. There was no prior year tax adjustment recorded in
the three months ended September 30, 2000.
NOTE 6 - INVENTORIES:
- --------------------
The components of inventories consist of the following:
September 30, June 30,
2000 2000
------------- --------
Coal $ 49,768 $ 82,835
Merchandise for resale 31,057 33,488
Supplies 39,943 40,530
------------- --------
Total Inventories $ 120,768 $156,853
============= ========
10
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------
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 $50,000 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 submitted their positions to an arbitrator.
Management believes that the probable resolution will not materially affect the
financial position, results of operations or cash flows of CONSOL Energy.
Accordingly, no liability has been accrued associated with this proceeding.
11
NOTE 8 - SEGMENT INFORMATION:
----------------------------
Industry segment results for the three months ended September 30, 2000:
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
------------- ------------- ------------ ------------- ------------ ------------
Sales - outside $ 430,736 $ 32,637 $ 22,437 $ 3,394 $ $ 489,204
Sales - related companies 2,056 2,056
Intersegment transfers 18,440 613 3,673 (22,726)
------------- ------------- ------------ ------------- ------------ ------------
Total Sales $ 432,792 $ 51,077 $ 23,050 $ 7,067 $ (22,726) $ 491,260
============= ============= ============ ============= ============ ============
Pretax Operating
Income (Loss) $ 5,151 $ 178 $ 16,367 $ (1,808) $ 19,888 (A)
============= ============= ============ ============= ============
Segment assets $ 2,901,273 $ 37,169 $ 306,228 $ 129,392 $3,374,062 (B)
============= ============= ============ ============= ============
Depreciation, depletion and
amortization $ 55,699 $ 264 $ 2,014 $ 2,150 $ 60,127
============= ============= ============ ============= ============
Additions to property, plant
and equipment $ 49,748 $ $ 5,418 $ 3,587 $ 58,753
============= ============= ============ ============= ============
(A) Includes equity in net income of unconsolidated equity affiliates of
$14, $3,552 and $13 for Industrial Supplies & Equipment, Gas and All Other,
respectively.
(B) Includes investments in unconsolidated equity affiliates of $769, $496,
$175,018 and $814 for Coal, Industrial Supplies & Equipment, Gas and All
Other, respectively.
Industry segment results for the three months ended September 30, 1999:
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
------------- ------------- ------------ ------------- ------------ ------------
Sales - outside $ 497,465 $ 35,896 $ 7,298 $ 4,510 $ $ 545,169
Sales - related companies 43 43
Intersegment transfers 16,946 3,681 (20,627)
------------- ------------- ------------ ------------- ------------ ----------
Total Sales $ 497,508 $ 52,842 $ 7,298 $ 8,191 $ (20,627) $ 545,212
============= ============= ============ ============= ============ ==========
Pretax Operating
Income (Loss) $ 25,849 $ (644) $ 1,724 $ (2,481) $ 24,448
============= ============= ============ ============= ==========
Segment assets $ 3,131,049 $ 42,492 $ 115,342 $ 120,335 $3,409,218 (C)
============= ============= ============ ============= ==========
Depreciation, depletion and
amortization $ 57,446 $ 257 $ 1,129 $ 2,258 $ 61,090
============= ============= ============ ============= ==========
Additions to property, plant
and equipment $ 20,549 $ 126 $ 3,199 $ 350 $ 24,224
============= ============= ============ ============= ==========
(C) Includes investments in unconsolidated equity affiliates of $769, $482
and $800 for Coal, Industrial Supplies & Equipment and All Other,
respectively.
12
Reconciliation of Segment Information to Consolidated Amounts:
Operating Profit:
For the Three Months
Ended September 30,
-----------------------------
2000 1999
---------- -----------
Total segment pretax operating income $ 19,888 $ 24,448
Interest expense, net (15,337) (13,923)
---------- -----------
Earnings Before Income Taxes $ 4,551 $ 10,525
========== ===========
Total Assets:
September 30,
------------------------------
2000 1999
----------- -----------
Total assets for reportable segments $ 3,374,062 $ 3,409,218
Cash and investments 10,874 45,118
Deferred tax asset 385,224 363,217
Recoverable income taxes 8,482 774
----------- -----------
Total Consolidated Assets $ 3,778,642 $ 3,818,327
=========== ===========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Total coal sales for the quarter ended September 30, 2000 were 18.4 million
tons, of which 17.7 million tons were produced by CONSOL Energy mines. This
compared with total coal sales of 20.5 million tons during the same period a
year ago, of which 19.6 million tons were produced from our mines. Despite a
favorable market for coal, we were unable to meet the demand for coal because of
shortfalls in production at several of our mines.
The average price per ton of company-produced coal fell 2.6 percent in the
quarter ended September 30, 2000 compared with the same quarter a year ago,
reflecting the impact of lower contract sales prices for several contracts that
were renegotiated at the end of the second quarter of the fiscal year ended June
30, 2000. However, the pricing environment for coal improved in the quarter
ended September 30, 2000 when compared with the quarter immediately preceding
it. Average prices received for company-produced coal during the quarter ended
September 30, 2000 improved $0.13 per ton, reflecting continued growth in the
demand for coal to generate electricity and a tightening of coal supplies in the
eastern United States.
Coal production for the quarter ended September 30, 2000 declined 1.6 million
tons compared with the first quarter of the previous fiscal year. Production
volumes of coal were lower primarily because of an unusually large number of
moves of longwall mining equipment during the quarter, and because of
persistent, adverse geologic conditions at Mine 84 in southwestern Pennsylvania.
As a result, the cost per ton of coal produced increased to $22.07 from $21.31
in the first quarter of the previous fiscal year. Despite these operating
problems, overall mine productivity for all CONSOL Energy mines averaged 41.51
tons per manday during the quarter ended September 30, 2000 compared with 40.96
tons per manday for the same period a year ago.
As a result of demand for coal and shortfalls in production during the quarter,
our coal inventories declined 1.7 million tons during the quarter, ending the
period at 2.3 million tons.
CONSOL Energy's coalbed methane gas segment increased sales and production
volumes substantially in the period-to-period comparison. Sales and production
of gas (including our share, based on our equity ownership, of the production of
unconsolidated affiliates) for the quarter ended September 30, 2000 were 8.3
billion cubic feet (Bcf) compared with 1.8 Bcf in the first quarter of the
previous fiscal year. This improvement in production reflects the acquisition in
February 2000 of additional coalbed methane production wells.
Averaged realized prices for gas were $3.93 per million Btu (MMBtu) (including
our share, based on our equity ownership, of the sales of unconsolidated
affiliates) in
14
the quarter ended September 30, 2000, versus $2.48 per MMBtu for the same period
a year ago. The improvement in prices reflects strong demand for gas, driven, in
part, by increased use of gas to generate electricity. CONSOL Energy has a
contract through October 31, 2000 to sell 38 million cubic feet of gas per day
at a price of $3.20/MMBtu. All other production will be sold under short-term
contracts with terms, typically, of 30 days.
CONSOL Energy continues to review its business processes and the information
technology supporting those processes. The purposes of the reviews are to assess
the need to supplement or replace core business systems and to provide cost-
effective strategic software alternatives to meet future core business needs.
Results of Operations
Three Months Ended September 30, 2000 Compared with Three Months
Ended September 30, 1999
Net Income
CONSOL Energy's net income for the three months ended September 30, 2000 (the
2000 period) was $4 million compared with $11 million for the three months ended
September 30, 1999 (the 1999 period). The decrease of $7 million primarily was
due to a decrease in coal sales volumes, partially offset by a related decrease
in cost of goods sold and other charges and increased gas sales volumes and
prices.
Revenue
Sales decreased $54 million, or 9.9% to $491 million for the 2000 period from
$545 million for the 1999 period.
Revenues from the sale of Produced Coal decreased $56 million, or 11.8% to $414
million in the 2000 period from $470 million in the 1999 period. Sales volumes
of Produced Coal were 17.7 million tons in the 2000 period, a decrease of 1.9
million tons or 9.5% from the 1999 period. This was primarily due to production
shortfalls. Average sales price per ton of Produced Coal sold decreased 2.6% to
$23.37 per ton for the 2000 period from $23.99 per ton for the 1999 period. The
decline in average sales price was primarily due to the renegotiation of several
higher-priced contracts.
Revenues from the sale of Purchased Coal decreased by $9 million, or 33.0% to
$19 million in the 2000 period from $28 million in the 1999 period. Sales
volumes were 0.6 million tons in the 2000 period, a 0.2 million ton or 27.5%
decrease from the 1999 period. Average sales price per ton of Purchased Coal
decreased 7.7% to $29.09 per ton for the 2000 period from $31.50 per ton for the
1999 period. The volume and price variances were primarily due to a renegotiated
contract which allows company-produced coal to be shipped in the 2000 period
instead of coal purchased from third parties which was required to be shipped in
the 1999 period. It also reflects, the
15
expiration of purchased coal contracts acquired with the Rochester & Pittsburgh
Coal Company acquisition and decreased export sales.
Industrial supply sales decreased $3 million, or 9.1% to $33 million in the 2000
period from $36 million in the 1999 period due to reduced sales volumes.
These decreases were partially offset by the increase in revenues from the sale
of coalbed methane gas and related gathering fees. Revenues from gas sales
increased $15 million to $22 million in the 2000 period from $7 million in the
1999 period. The increase was primarily due to higher sales 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
$3.72 for the 2000 period compared to $2.48 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 $2 million, or 17.1% to $13
million in the 2000 period from $11 million in the 1999 period. The increase was
primarily due to a $4 million increase in equity in earnings of affiliates
related to gas, offset in part by a $2 million decrease in royalty income.
Costs
Cost of Goods Sold and Other Operating Charges decreased 11.3% to $370 million
in the 2000 period compared to $417 million in the 1999 period.
Cost of goods sold for Produced Coal was $303 million in the 2000 period, a
decrease of $19 million, or 5.8% from the 1999 period. This is due primarily to
the 9.5% decrease in the volume of Produced Coal sold, offset in part by a 4.1%
increase in the cost per ton of Produced Coal. The increased cost per ton
produced is primarily due to persistent, adverse geologic conditions at Mine 84.
The mine has encountered a sandstone intrusion in the coal seam that has slowed
both longwall and continuous mining production. Cost per ton produced has also
increased due to seven longwall equipment moves during the quarter ended
September 30, 2000. A total of 36 production days were lost for longwall moves
in the 2000 period compared to 16 production days in the 1999 period. Longwall
moves occur when a block of coal, or panel, is completely mined. The equipment
is then moved to the next mining panel. Longwall moves typically take 3 to 5
days to complete, during which time the longwall mining system does not
mine coal.
Purchased Coal costs decreased 37.1% to $17 million in the 2000 period from $27
million in the 1999 period. The $10 million decrease was due mainly to a 27.5%
reduction in volumes of Purchased Coal sold.
16
Closed and idle mine costs decreased to $11 million in the 2000 period from $16
million in the 1999 period. The decrease of $5 million, or 32.1%, was primarily
due to higher costs in the 1999 period due to the initial idling costs of the
Powhatan #4 and Ohio #11 mines. The V.P. #8 and Humphrey #138 mines were also
idle in the 1999 period, but have been in operation during the 2000 period.
These decreases in costs were partially offset by increased costs at the idled
Loveridge Mine. The increased costs at this mine are related to re-entering 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 be idled again unless the market is able to accommodate its
production.
Industrial supplies cost of goods sold decreased 11.3% to $32 million in the
2000 period from $37 million in the 1999 period. The $5 million decrease was due
to reduced sales.
These decreases in Cost of Goods Sold and Other Charges were offset, in part, by
increased costs related to the gas operations. Gas costs increased 66.2% to $8
million in the 2000 period from $5 million in the 1999 period. The $3 million
increase was primarily due to higher volumes of sales due to the acquisition of
BPC and OGI on February 25, 2000.
Selling, general and administrative expenses increased 16.7% to $17 million in
the 2000 period compared to $14 million in the 1999 period. The increase of $3
million was primarily due to increased professional consulting fees associated
with the review of business processes and information technology systems
supporting those processes, offset in part by salary cost savings from the
Voluntary Separation Incentive Program implemented in the last half of fiscal
year ended June 30, 2000.
Depreciation, depletion and amortization expense remained stable at $60 million
in the 2000 period compared to $61 million in the 1999 period.
Interest expense increased 18.9% to $15 million for the 2000 period compared to
$13 million for the 1999 period. The increase of $2 million was due primarily to
higher average debt levels outstanding during the 2000 period compared to the
1999 period, along with an increase of 1.5% in average interest rates. Higher
debt levels resulted from the issuance of commercial paper to finance the
purchase of BPC, OGI and a MCN subsidiary that owns a 50% interest in Cardinal
States Gathering Company (CSGC) on February 25, 2000.
Taxes other than income decreased 7.2% to $38 million for the 2000 period
compared to $41 million for the 1999 period. The decrease of $3 million was due
primarily to reduced excise taxes in the 2000 period. As discussed in Note 7,
CONSOL Energy is no longer required to pay certain excise taxes on export coal
sales and, therefore, is no longer accruing for this expense. This decrease is
partially offset by increased
17
property tax expense due to adjustments made in the 1999 period to reduce over
accruals to reflect lower assessments on closed operations.
Income Taxes
Income taxes were $0.5 million in the 2000 period compared to a $0.2 million
benefit in the 1999 period. The increase in tax expense was due to the recording
of a $1.9 million benefit in the 1999 period resulting from filing the federal
tax return for the period January 1, 1998 through December 31, 1998, partially
offset by lower earnings before income taxes in the 2000 period.
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.
CONSOL Energy frequently evaluates potential acquisitions. CONSOL Energy has
funded acquisitions primarily with cash generated from operations and a variety
of other sources, depending on the size of the transaction, including primarily
debt financing. There can be no assurance that 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 $236 million at September 30, 2000 and
$241 million at September 30, 1999. A quarterly dividend of $0.28 per share was
declared on July 27, 2000, payable to shareholders of record on August 11, 2000.
This dividend was paid on September 1, 2000. A quarterly dividend of $0.28 per
share was declared on October 26, 2000, payable to shareholders of record on
November 10, 2000. This dividend will be paid on November 29, 2000. The Board of
Directors currently intends to pay quarterly dividends on the common stock.
In March 2000, CONSOL Energy announced that it would institute a share
repurchase program of up to 1,000,000 shares of CONSOL Energy's common stock.
The share 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
18
conditions. As of October 31, 2000, CONSOL Energy had repurchased 412,600 shares
at an average price of $10.92 in this share repurchase program.
Cash Flows
Net cash provided by operating activities was $131 million in the 2000 period
compared to $91 million in the 1999 period. The change in net cash provided by
operating activities reflects decreases in net income and other liabilities,
offset in part by decreases in accounts receivable.
Net cash used in investing activities was $53 million in the 2000 period
compared to $22 million in the 1999 period. The change in net cash used in
investing activities reflects the increase in capital expenditures in the 2000
period. Capital expenditures were $58 million in the 2000 period compared with
$24 million in the 1999 period. The increase in capital expenditures in the 2000
period was related to the acquisition of a longwall mining system for use at the
Bailey Mine.
Net cash used in financing activities was $75 million in the 2000 period
compared with $71 million in the 1999 period. The change in net cash used in
financing activities primarily reflects the additional payments made in the 2000
period to reduce the commercial paper balance compared to the payments made in
the 1999 period, offset in part by the purchase of treasury stock in the 1999
period.
Debt
At September 30, 2000, CONSOL Energy had total long-term debt of $306 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 fixed 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 $1 million of variable rate notes due
at various dates through 2001,
. $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 $16 million of capital leases.
At September 30, 2000, CONSOL Energy had an aggregate principal amount of $412
million of commercial paper outstanding that had maturities ranging up to 120
days with interest at varying rates ranging from 6.79% to 7.11%.
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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 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 and 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 other companies as part of its acquisition strategy.
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 September 30, 2000, CONSOL Energy had
outstanding $289 million aggregate principal amount of debt under fixed-rate
instruments and $413 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 September 30, 2000,
CONSOL Energy had an aggregate of $412 million in commercial paper outstanding.
CONSOL Energy's commercial paper bore interest at an average rate of 6.86% per
annum during the three months ended September 30, 2000. 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 three months ended September 30,
2000 by approximately $3 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.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material litigation has been filed against CONSOL Energy during the three
months ended September 30, 2000, 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 7.
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
None for the quarter ending September 30, 2000.
ITEM 5. OTHER INFORMATION
On October 25, 2000, CONSOL Energy held its 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 year July 1, 2000 through June 30, 2001 were approved by a
vote of the shareholders of CONSOL Energy.
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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
----
Consolidated Statements of Income for the three months ended
September 30, 2000 and September 30, 1999.................................. 3
Consolidated Balance Sheets at September 30, 2000 and June 30,
2000....................................................................... 4
Consolidated Statements of Stockholders' Equity for the three months
ended September 30, 2000................................................... 6
Consolidated Statements of Cash Flows for the three months ended
September 30, 2000 and September 30, 1999.................................. 7
Notes to 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.
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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: November 8, 2000
By:/s/ R. Zimmermann
-----------------------------------------
R. Zimmermann,
Executive Vice President
(Principal Financial Officer)
Date: November 8, 2000
By:/s/ W. J. Lyons
-----------------------------------------
William J. Lyons,
Vice President and Controller
(Principal Accounting Officer)
23