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 March 31, 2001
--------------
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)
1800 Washington Road, Pittsburgh, PA 15241-1421
-----------------------------------------------
(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 April 30, 2001, there were 78,639,728 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
March 31, 2001 and 2000 and the nine months ended
March 31, 2001 and 2000...................................... 3
Consolidated Balance Sheets at March 31, 2001
and June 30, 2000............................................ 4
Consolidated Statements of Stockholders' Equity for the nine
months ended March 31, 2001.................................. 6
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2001 and 2000................................ 7
Notes to Consolidated Financial Statements................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION................ 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................ 29
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 29
ITEM 5. OTHER INFORMATION........................................... 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 31
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)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- --------------------------------
2001 2000 2001 2000
-------------- --------------- -------------- --------------
Sales - Outside $ 568,814 $ 507,154 $ 1,560,734 $ 1,588,802
Sales - Related Parties 3,517 3,264 5,573 3,307
Other Income 18,371 26,454 55,525 48,806
-------------- --------------- -------------- --------------
Total Revenue 590,702 536,872 1,621,832 1,640,915
Cost of Goods Sold and Other
Operating Expenses 416,816 368,925 1,148,920 1,159,769
Selling, General and Administrative
Expense 14,287 14,790 47,668 46,008
Depreciation, Depletion and
Amortization 60,631 62,985 180,354 188,319
Interest Expense 14,662 14,583 45,468 39,957
Taxes Other Than Income 37,235 45,895 115,006 132,567
Export Sales Excise Tax Resolution (95,292) (95,292)
Restructuring Costs 9,609 11,276
-------------- --------------- -------------- --------------
Total Costs 448,339 516,787 1,442,124 1,577,896
-------------- --------------- -------------- --------------
Earnings Before Income Taxes 142,363 20,085 179,708 63,019
Income Taxes (Benefit) 41,563 (2,885) 45,405 (7,184)
-------------- --------------- -------------- --------------
Net Income $ 100,800 $ 22,970 $ 134,303 $ 70,203
============== =============== ============== ==============
Basic Earnings Per Share $ 1.28 $ 0.29 $ 1.71 $ 0.88
============== =============== ============== ==============
Dilutive Earnings Per Share $ 1.27 $ 0.29 $ 1.70 $ 0.88
============== =============== ============== ==============
Weighted Average Number of
Common Shares Outstanding:
Basic 78,616,575 79,217,730 78,594,837 79,792,170
============== =============== ============== ==============
Dilutive 79,201,793 79,218,134 78,866,423 79,793,470
============== =============== ============== ==============
Dividends Per Share $ 0.28 $ 0.28 $ 0.84 $ 0.84
============== =============== ============== ==============
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)
MARCH 31, JUNE 30,
2001 2000
---------------- ------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 15,295 $ 8,181
Accounts and Notes Receivable:
Trade 252,546 262,943
Related Parties 1,648
Other Receivables 119,863 24,849
Inventories 98,797 156,853
Recoverable Income Taxes 7,813
Deferred Income Taxes 92,502 93,464
Prepaid Expenses 30,602 23,625
---------------- ------------------
Total Current Assets 611,253 577,728
Property, Plant and Equipment:
Property, Plant and Equipment 4,938,903 4,852,017
Less - Accumulated Depreciation,
Depletion and Amortization 2,394,302 2,277,573
---------------- ------------------
Total Property, Plant and
Equipment - Net 2,544,601 2,574,444
Other Assets:
Deferred Income Taxes 282,997 291,178
Advance Mining Royalties 99,458 107,980
Investment in Affiliates 221,876 177,272
Other 128,567 137,709
---------------- ------------------
Total Other Assets 732,898 714,139
---------------- ------------------
Total Assets $ 3,888,752 $ 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)
MARCH 31, JUNE 30,
2001 2000
-------------------- -------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 130,879 $ 143,313
Accounts Payable - Related Parties 502
Short-Term Notes Payable 411,710 464,310
Current Portion of Long-Term Debt 29,632 6,757
Accrued Income Taxes 14,634
Other Accrued Liabilities 310,033 337,920
-------------------- -------------------
Total Current Liabilities 896,888 952,802
Long-Term Debt:
Long-Term Debt 263,114 286,098
Capital Lease Obligations 11,623 14,507
-------------------- -------------------
Total Long-Term Debt 274,737 300,605
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,164,728 1,118,021
Pneumoconiosis Benefits 431,871 426,402
Mine Closing 269,522 280,370
Workers' Compensation 259,692 253,534
Reclamation 15,945 11,808
Other 252,124 268,590
-------------------- -------------------
Total Deferred Credits and Other Liabilities 2,393,882 2,358,725
Stockholders' Equity:
Common Stock, $.01 par value;
500,000,000 Shares Authorized; 80,267,558 Issued
and 78,627,878 Outstanding at March 31, 2001,
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 643,160 642,947
Retained Earnings Deficit (301,871) (370,152)
Other Comprehensive Loss (322) (322)
Common Stock in Treasury, at Cost - 1,639,680
Shares at March 31, 2001, 1,690,284 Shares
at June 30, 2000 (18,525) (19,097)
-------------------- -------------------
Total Stockholders' Equity 323,245 254,179
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 3,888,752 $ 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 -
June 30, 2000 $ 803 $ 642,947 $ (370,152) $ (322) $ (19,097) $ 254,179
------------- -------------- ------------ ------------ ------------ -----------
(Unaudited):
Net Income 134,303 134,303
Dividends ($.84 per share) (66,022) (66,022)
Treasury Stock Issued
(50,604 shares) 213 572 785
------------- -------------- ------------ ------------ ------------ -----------
Balance -
March 31, 2001 $ 803 $ 643,160 $ (301,871) $ (322) $ (18,525) $ 323,245
============= ============== ============ ============ ============ ===========
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)
Nine Months Ended
March 31,
------------------------------
2001 2000
------------ --------------
Operating Activities:
Net Income $ 134,303 $ 70,203
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 180,354 188,319
Gain on the Sale of Assets (11,689) (21,236)
Amortization of Advance Mining Royalties 12,942 12,730
Deferred Income Taxes 9,143 (25,935)
Equity in Earnings of Affiliates (15,128) (245)
Changes in Operating Assets:
Accounts and Notes Receivable (85,767) (18,427)
Inventories 58,056 42,423
Prepaid Expenses (6,977) 4,596
Changes in Other Assets 17,153 10,352
Changes in Operating Liabilities:
Accounts Payable (12,434) (51,233)
Other Operating Liabilities (5,215) 26,941
Changes in Other Liabilities 35,157 (25,916)
Other 1,238 4,186
------------ --------------
176,833 146,555
------------ --------------
Net Cash Provided by Operating Activities 311,136 216,758
------------ --------------
Investing Activities:
Capital Expenditures (159,258) (92,703)
Additions to Advance Mining Royalties (4,330) (5,114)
Acquisition of MCN Energy Group Inc. (160,049)
Acquisition of Line Creek Mine Joint Venture (38,332)
Investment in Equity Affiliates 8,856 (104)
Proceeds from Sales of Assets 8,883 28,424
------------ --------------
Net Cash Used in Investing Activities (184,181) (229,546)
------------ --------------
Financing Activities:
(Payments on) Proceeds from Commercial Paper (51,271) 105,880
Payments on Miscellaneous Borrowings (3,108) (17,587)
Dividends Paid (65,995) (67,054)
Purchase of Treasury Stock (17,184)
Issuance of Treasury Stock 533
------------ --------------
Net Cash (Used in) Provided by Financing Activities (119,841) 4,055
------------ --------------
Net Increase (Decrease) in Cash and Cash Equivalents 7,114 (8,733)
Cash and Cash Equivalents at Beginning of Period 8,181 23,559
------------ --------------
Cash and Cash Equivalents at End of Period $ 15,295 $ 14,826
============ ==============
The accompanying notes are an integral part of these financial statements.
7
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
March 31, 2001
--------------
(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 and nine-month periods
ended March 31, 2001 are not necessarily indicative of the results that may be
expected for future periods.
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.
Certain reclassifications of prior years' data have been made to conform to the
nine months ended March 31, 2001 classifications.
NOTE 2 - ACQUISITION:
- --------------------
On December 31, 2000, CONSOL Energy purchased a 50 percent interest in the Line
Creek Mine, which is located 17 miles north of Sparwood, British Columbia, for
$38,332. Line Creek Mine produces bituminous metallurgical and steam coal for
delivery to customers in the Pacific Rim, South America, Europe, northeastern
United States and Canada. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of Line Creek Mine have been included in
CONSOL Energy's consolidated financial statements using the equity method of
accounting since the date of acquisition. 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.
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
a 50% interest in Cardinal States Gathering Company (CSGC) from MCN Energy Group
for approximately $160,000. The acquisition has been accounted for as a
purchase and, accordingly, the operating results of BPC and OGI have been
included in CONSOL Energy's consolidated financial statements since the date of
acquisition. The operating results of the 50% interest in CSGC have been
included in CONSOL Energy's consolidated financial statements using the equity
method of
8
accounting from the date of acquisition. Pro forma revenues for CONSOL Energy,
giving effect to the acquisition of BPC, OGI and the 50% interest in CSGC as if
it had occurred on July 1, 1999, were $545,280 and $1,680,566 for the three
months and nine months ended March 31, 2000. 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 3 - 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 and nine months ended March 31, 2001 were $90
and $518, respectively. There were no other adjustments made to the
restructuring liability in the nine months ended March 31, 2001. The remaining
restructuring liability at March 31, 2001 is $163.
9
NOTE 4 - 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 For the Nine
Months Ended Months Ended
March 31, March 31,
----------------------- --------------------------
2001 2000 2001 2000
-------- --------- ---------- ---------
Statutory U. S. federal income tax rate 35.0% 35.0% 35.0% 35.0%
Excess tax depletion (7.4) (41.0) (10.4) (26.7)
Tax settlements (13.8)
Adjustment of prior years' taxes (0.4) (4.4)
Nonconventional fuel tax credit (1.3) (7.9) (2.0) (2.5)
Net effect of state tax 2.8 (1.9) 2.4 0.5
Net effect of foreign tax 0.3 0.6 0.4 0.7
Other (0.2) 1.2 (0.1) (0.2)
-------- --------- ---------- ---------
Effective Income Tax Rate 29.2% (14.4)% 25.3% (11.4)%
======== ========= ========== =========
The provision for income taxes is adjusted at the time the returns are filed.
The provision for income taxes adjustment has not yet been determined for the
fiscal year ended June 30, 2000. These adjustments increased income tax expense
by $67 for the three months ended March 31, 2000 and decreased income tax
expense $3,587 for the nine months ended March 31, 2000.
NOTE 5 - INVENTORIES:
- --------------------
The components of inventories consist of the following:
March 31, June 30,
2001 2000
-------------------- --------------------
Coal $ 29,568 $ 82,835
Merchandise for resale 27,019 33,488
Supplies 42,210 40,530
-------------------- --------------------
Total Inventories $ 98,797 $ 156,853
==================== ====================
10
NOTE 6 - 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 recognized a
liability related to a waste disposal site and a $3,275 liability was accrued in
Other Liabilities. CONSOL Energy has paid $1,842 related to the remediation of
this waste disposal site, and accordingly reduced the liability to $1,433. 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 IRS has completed an audit of CONSOL Energy's
refund claims and confirmed the validity of the claims filed by CONSOL Energy.
Accordingly, CONSOL Energy has recognized $65,675 as Earnings Before Income
Taxes net of other charges related to the claims filed and $29,617 as interest
income in the quarter ended March 31, 2001.
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. In the quarter ended March 31, 2001, the longwall was
restarted to mine the remainder of the current panel. It is anticipated that
the longwall will then be moved to the surface, refurbished and redeployed to
another mine. The 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 submitted their positions to an arbitrator. On November
22, 2000 the final and binding arbitration decision was rendered. CONSOL Energy
paid $745. This amount was expensed and paid during the three months ended
December 31, 2000.
11
NOTE 7 - SEGMENT INFORMATION:
- ----------------------------
Industry segment results for the three months ended March 31, 2001:
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
--------------- -------------- -------------- --------------- --------------- --------------
Sales - outside $ 494,812 $ 30,773 $ 38,775 $ 4,454 $ $ 568,814
Sales - related parties 3,517 3,517
Intersegment transfers 21,788 1,122 4,835 (27,745)
--------------- -------------- -------------- --------------- --------------- --------------
Total Sales $ 498,329 $ 52,561 $ 39,897 $ 9,289 $ (27,745) $ 572,331
=============== ============== ============== =============== =============== ==============
Pretax Operating
Income (Loss) $ 98,055 $ 513 $ 36,403 $ (7,839) $ 127,132(A)
=============== ============== ============== =============== ==============
Segment assets $ 2,996,535 $ 33,004 $ 332,114 $ 135,984 $ 3,497,637(B)
=============== ============== ============== =============== ==============
Depreciation, depletion and
amortization $ 54,149 $ 588 $ 2,008 $ 3,886 $ 60,631
=============== ============== ============== =============== ==============
Additions to property, plant
and equipment $ 37,796 $ 409 $ 11,056 $ 3,479 $ 52,740
=============== ============== ============== =============== ==============
(A) Includes equity in earnings of unconsolidated affiliates of ($777), ($135),
$8,090, and ($1,034) for Coal, Industrial Supplies & Equipment, Gas, and
All Other, respectively. Also, included in Coal is $65,675 of income related
to the Export Sales Excise Tax resolution.
(B) Includes investments in unconsolidated equity affiliates of $37,532,
$183,504, and $804 for Coal, Gas and All Other, respectively. Also, included
in Coal segment is $98,571 of receivables related to the Export Sales Excise
Tax resolution.
12
Industry segment results for the three months ended March 31, 2000:
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
--------------- -------------- -------------- --------------- --------------- ----------------
Sales - outside $ 454,331 $ 36,312 $ 14,430 $ 2,081 $ $ 507,154
Sales - related parties 3,264 3,264
Intersegment transfers 18,674 4,703 (23,377)
--------------- -------------- -------------- --------------- --------------- --------------
Total Sales $ 457,595 $ 54,986 $ 14,430 $ 6,784 $ (23,377) $ 510,418
=============== ============== ============== =============== =============== ==============
Pretax Operating
Income (Loss) $ 30,773 $ (439) $ 4,395 $ (167) $ 34,562(C)
=============== ============== ============== =============== ==============
Segment assets $ 2,998,277 $ 42,190 $ 294,640 $ 134,162 $ 3,469,269(D)
=============== ============== ============== =============== ==============
Depreciation, depletion and
amortization $ 56,444 $ 269 $ 2,040 $ 4,232 $ 62,985
=============== ============== ============== =============== ==============
Additions to property, plant
and equipment $ 25,184 $ 85 $ 114,311 $ 103 $ 139,683(E)
=============== ============== ============== =============== ==============
(C) Includes equity in earnings of unconsolidated affiliates of $491 for Gas.
(D) Includes investments in unconsolidated equity affiliates of $732, $510,
$161,641, and $800 for Coal, Industrial Supplies & Equipment, Gas, and All
Other, respectively.
(E) Gas segment includes $110,519 acquired from MCN.
13
Industry segment results for the nine months ended March 31, 2001:
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
--------------- -------------- -------------- --------------- --------------- ---------------
Sales - outside $ 1,365,597 $ 94,698 $ 88,843 $ 11,596 $ $ 1,560,734
Sales - related parties 5,573 5,573
Intersegment transfers 57,426 2,822 12,856 (73,104)
-------------- -------------- -------------- --------------- --------------- --------------
Total Sales $ 1,371,170 $ 152,124 $ 91,665 $ 24,452 $ (73,104) $ 1,566,307
============== ============== ============== =============== =============== ===============
Pretax Operating
Income (Loss) $ 116,635 $ 284 $ 80,029 $ (1,793) $ 195,155(F)
=============== ============== =============== =============== ===============
Segment assets $ 2,996,535 $ 33,004 $ 332,114 $ 135,984 $ 3,497,637(G)
=============== ============== =============== =============== ===============
Depreciation, depletion and
amortization $ 165,123 $ 1,174 $ 5,953 $ 8,104 $ 180,354
=============== ============== =============== =============== ===============
Additions to property, plant
and equipment $ 131,035 $ 656 $ 21,660 $ 10,272 $ 163,623
=============== =============== =============== =============== ===============
(F) Includes equity in earnings of unconsolidated affiliates of ($777), ($197),
$17,122, and ($1,020) for Coal, Industrial Supplies & Equipment, Gas, and
All Other, respectively. Also, included in Coal is $65,675 of income related
to the Export Sales Excise Tax resolution.
(G) Includes investments in unconsolidated equity affiliates of $37,532,
$183,504, and $840 for Coal, Gas, and All Other, respectively. Also,
included in Coal is $98,571 of receivables related to the Export Sales
Excise Tax resolution.
14
Industry segment results for the nine months ended March 31, 2000:
Industrial
Supplies &
Coal Equipment Gas All Other Elimination Consolidated
--------------- -------------- -------------- --------------- --------------- -----------------
Sales - outside $ 1,442,497 $ 106,745 $ 29,507 $ 10,053 $ $ 1,588,802
Sales - related parties 3,307 3,307
Intersegment transfers 52,933 12,514 (65,447)
--------------- -------------- -------------- --------------- --------------- --------------
Total Sales $ 1,445,804 $ 159,678 $ 29,507 $ 22,567 $ (65,447) $ 1,592,109
=============== ============== ============== =============== =============== ==============
Pretax Operating
Income (Loss) $ 99,442 $ (2,320) $ 8,365 $ (1,657) $ 103,830(H)
=============== ============== ============== =============== ==============
Segment assets $ 2,788,090 $ 42,190 $ 295,489 $ 343,500 $ 3,469,269(I)
=============== ============== ============== =============== ==============
Depreciation, depletion and
amortization $ 174,438 $ 789 $ 4,356 $ 8,736 $ 188,319
=============== ============== ============== =============== ==============
Additions to property, plant
and equipment $ 79,605 $ 339 $ 121,306 $ 3,247 $ 204,497(J)
=============== ============== ============== =============== ==============
(H) Includes equity in earnings of unconsolidated affiliates of $245 for Gas.
(I) Includes investments in unconsolidated equity affiliates of $732, $510,
$161,641, and $800 for Coal, Industrial Supplies & Equipment, Gas, and All
Other, respectively.
(J) Gas segment includes $110,519 acquired from MCN.
Reconciliation of Segment Information to Consolidated Amounts:
Operating Profit
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------ ------------ -------------
Total segment pretax operating income $ 127,132 $ 34,562 $ 195,155 $ 103,830
Interest income (expense), net
and other non-operating activity 15,231 (14,477) (15,447) (40,811)
------------- ------------ ------------ -------------
Earnings Before Income Taxes $ 142,363 $ 20,085 $ 179,708 $ 63,019
============= ============= ============ =============
Total Assets
March 31,
-------------------------------
2001 2000
------------- --------------
Total assets for reportable segments $ 3,497,637 $ 3,469,269
Cash and investments 15,616 38,798
Deferred tax asset 375,499 388,057
Recoverable income taxes 3,513
------------- --------------
Total Consolidated Assets $ 3,888,752 $ 3,899,637
============= ==============
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Total coal sales for the three months ended March 31, 2001 (the 2001 period)
were 20.4 million tons, including the percentage attributable to sales by equity
affiliates, of which 19.9 million tons were produced by CONSOL Energy operations
or sold from inventory of company produced coal. This compares with total coal
sales of 19.4 million tons, of which 18.6 million tons were produced from CONSOL
Energy operations or sold from inventory of company produced coal in the same
quarter a year ago (the 2000 period). Demand for coal was strong in CONSOL
Energy's principal market areas. Increased demand for coal was due to colder
winter weather patterns and overall growth in demand for energy. Coal
operations were unable to satisfy demand because of production shortfalls and
low inventory levels at our mines. Total inventory levels, including the
percentage attributable to inventories of equity affiliates, at the end of the
2001 period were 1.7 million tons compared with 4.2 million tons at the end of
the 2000 period.
Production shortfalls were due to continued adverse geological conditions at
Mine 84 in Pennsylvania. Production at Mine 84 was 0.3 million tons in the 2001
period, 1.2 million tons less than production in the 2000 period. Mine plan
adjustments at Mine 84 are expected to improve mining productivity and
production during the latter stages of the quarter ending June 30, 2001
compared to the quarter ended March 31, 2001. However, Mine 84 production is not
expected to attain levels equal to the 2000 period.
Average sales prices for company-produced coal increased 5.6 percent in the 2001
period from the 2000 period. The increase was primarily due to the
strengthening of the coal market. Average sale prices for our coal have
improved in each of the last three quarters.
Production and sales volumes, including the percentage attributable to
production and sales volumes of equity affiliates, of coalbed methane gas
increased more than 95 percent when compared to the 2000 period because of the
acquisition of additional coalbed methane production wells made in the third
quarter of the fiscal year ended June 30, 2000. Gas sales volumes for the 2001
period, including equity production of unconsolidated affiliates, were 7.8 (net
of royalty production) billion cubic feet. Currently, plans call for the
drilling of approximately 35 additional wells during the fourth quarter. It is
anticipated that gas produced from these additional wells will raise daily
production of coalbed methane gas 2 to 3 percent from the 2001 period, including
the percentage attributable to production of equity affiliates, by the end of
fiscal year ended June 30, 2001.
Nationwide, prices for gas rose in the 2001 period compared with the 2000
period. The price increase is attributable to higher demand for gas, including
use of gas to generate electricity, and lower gas inventories. Average sale
prices, including percentages attributable to sales by equity affiliates,
improved 152 percent in the 2001 period when compared with the 2000 period.
Average realized price for gas sold, including percentages attributable to
sales by equity affiliates, was $6.75/MMBtu (dollars per million Btu). During
the 2001 period, all of our gas was sold
16
under short-term contracts with terms, typically, of 30 days, with excess
production being sold on a daily basis. Our pricing strategy reflects our
expectation that gas prices in the next several quarters should remain at levels
which are higher than those which we have seen in the last several years.
During the 2001 period, CONSOL Energy recognized $95 million of expense
reductions related to certain excise taxes paid on export sales of coal that
have been determined to be unconstitutional. CONSOL Energy had previously filed
claims with the Internal Revenue Service (IRS) seeking refunds for these excise
taxes that were paid during the period 1994 through 1999. The IRS has completed
an audit of CONSOL Energy's refund claims and confirmed the validity of the
claims filed by CONSOL Energy. Accordingly, CONSOL Energy recognized $65
million of pre tax earnings net of other charges and $30 million of interest
income related to these claims in the 2001 period.
The Board of Directors has approved a new incentive compensation program for
eligible full-time employees. This program is designed to increase compensation
payable to eligible employees when CONSOL Energy reaches predetermined earnings
targets and the employees reach predetermined performance targets.
In addition, the Board of Directors approved a program to grant stock options to
eligible full-time employees. Under the program eligible employees received a
one-time grant of 100 stock options to purchase CONSOL Energy shares at the fair
market value on the date of the option grant ($30.18 per share). There is a
one-year vesting requirement on these options.
The Board of Directors of CONSOL Energy has approved a conversion to a new
integrated information technology system to support business processes. The new
technology is expected to provide cost-effective strategic software alternatives
to meet future core business needs. The system will be implemented in stages
over the next three years at an estimated cost of $40 million.
Change in Fiscal Year
CONSOL Energy intends to change its fiscal year from a fiscal year ending on
June 30 to a calendar year ending December 31. CONSOL Energy will have a six
month transitional period ending December 31, 2001. CONSOL Energy's first full
fiscal year based on this change will be the year that starts January 1, 2002
and ends December 31, 2002. CONSOL Energy is undertaking this change in order
to align its year with that of its majority owner (Rheinbraun A. G. and
Rheinbraun U.S. GmbH).
17
Results of Operations
Three Months Ended March 31, 2001 Compared with Three Months
Ended March 31, 2000
Net Income
CONSOL Energy's net income for the three months ended March 31, 2001 (the 2001
period) was $101 million compared with $23 million for the three months ended
March 31, 2000 (the 2000 period). The increase of $78 million primarily was due
to the resolution of claims by CONSOL Energy related to certain excise taxes on
export sales that were declared unconstitutional. The increase was also due to
increased coal and gas sales volumes and average sales prices, a reversal of
accruals for export sales excise taxes which are no longer owed and the
completion of its restructuring program. These increases were partially offset
by an increase in cost of goods sold and other expenses related to increased
sales volumes, adverse geological conditions continuing at Mine 84, and an
income tax provision increase resulting primarily from higher pre-tax earnings.
Revenue
Sales increased $62 million, or 12.1% to $572 million for the 2001 period from
$510 million for the 2000 period.
Revenues from the sale of Produced Coal increased $46 million, or 10.8% to $478
million in the 2001 period from $432 million in the 2000 period. Sales volumes
of Produced Coal were 19.5 million tons in the 2001 period, an increase of 0.9
million tons or 4.9% from the 2000 period. Average sales price per ton of
Produced Coal sold increased 5.6% to $24.53 per ton for the 2001 period from
$23.24 per ton for the 2000 period. The increase in average sales price was
primarily due to weather-related demand increases and low inventory levels at
both mines and power stations.
Revenues from the sale of gas increased $24 million to $39 million in the 2001
period from $15 million in the 2000 period. Sales volumes were 6.5 BCF in the
2001 period, an increase of 2.6 BCF (Billion Cubic Feet) from the 2000 period.
The increase reflected the acquisition of BPC and OGI on February 25, 2000. The
increase was also due to an increase in the average sales price per MMBtu sold.
The average sales price was $6.65 for the 2001 period compared to $2.67 for the
2000 period.
Revenues from the sale of Purchased Coal decreased by $5 million, or 22.7% to
$20 million in the 2001 period from $25 million in the 2000 period. Sales
volumes of Purchased Coal decreased 0.2 million tons in the 2001 period to 0.6
million tons. Average sales price per ton of Purchased Coal increased 6.4% to
$33.76 per ton for the 2001 period from $31.74 per ton for the 2000 period. The
increase in price was primarily due to price improvements related to the
strengthening coal market.
18
Industrial supplies sales decreased $5 million, or 15.3% to $31 million in the
2001 period from $36 million in the 2000 period primarily due to reduced sales
volumes. An agreement has been signed with a group of companies to sell the
physical assets, inventory and operations associated with 18 industrial
locations and stores management sites which were originally established to serve
the industrial supply needs of various chemical plants. A portion of the sale
closed in March 2001. The remainder of the sale closed on April 20, 2001. The
sale did not have a material impact on net income. CONSOL Energy will continue
to operate 18 industrial supply locations nationwide.
Other income, which consists of interest income, gain on the disposition of
assets, equity in earnings of affiliates, service income, royalty income, rental
income and miscellaneous income, decreased $8 million to $18 million in the 2001
period from $26 million in the 2000 period. The decrease was primarily due to a
$14 million decrease in gain on sale of assets, offset in part by a $6 million
increase in equity in earnings of affiliates primarily related to gas
operations. The gain on sale of assets principally relates to the sale of
certain in place coal reserves. CONSOL Energy continually manages its coal
reserves and from time-to-time sells non-strategic reserves.
Costs
Cost of Goods Sold and Other Operating Expenses increased $48 million, or 13.0%
to $417 million in the 2001 period compared to $369 million in the 2000 period.
Cost of goods sold for Produced Coal was $307 million in the 2001 period, an
increase of $44 million, or 16.8% from the 2000 period. This is due primarily
to the 11.3% increase in the cost per ton of Produced Coal sold and the 4.9%
increase in volume of Produced Coal sold. The increased cost per ton produced
is primarily due to continued adverse geological conditions at Mine 84.
Overall, productivity as measured in tons produced per man-day excluding Mine 84
has improved in the 2001 period. Tons produced per man-day, excluding Mine 84,
were 47.4 in the 2001 period compared to 46.5 in the 2000 period.
Closed and idle mine costs were $26 million in the 2001 period compared to $9
million in the 2000 period. The increase of $17 million was primarily due to
$10 million of adjustments in reclamation liabilities as a result of updated
engineering studies and cost projections for closed and idled locations. The
increase in the 2001 period also reflects $6 million of additional costs related
to the re-entry and preparation for re-opening of the idled Loveridge Mine. The
Loveridge Mine resumed operations on March 1, 2001.
Gas operations cost of goods sold increased 53.5% to $9 million in the 2001
period from $6 million in the 2000 period. The increase of $3 million was due
mainly to increased sales volumes as a result of the acquisition of BPC and OGI
on February 25, 2000.
19
Costs also increased $6 million due to the CONSOL Energy Board of Directors
approval of a new incentive compensation program for eligible full-time
employees. This program is designed to increase compensation payable to
eligible employees when CONSOL Energy reaches predetermined earnings targets and
the employees reach predetermined performance targets.
These increases in Cost of Goods Sold and Other Expenses were offset, in part,
by decreased Purchased Coal costs of 20.6% to $19 million in the 2001 period
from $24 million in the 2000 period. The $5 million decrease was due to
decreased volumes of Purchased Coal sold in the 2001 period compared to the 2000
period. The decrease was offset in part by increased cost per ton of Purchased
Coal sold in the period-to-period comparison.
Industrial supplies cost of goods sold decreased 14.7% to $31 million in the
2001 period from $37 million in the 2000 period. The $6 million decrease was
due to reduced sales.
Royalty expense on certain land sale proceeds decreased $4 million, or 76.0% to
$1 million in the 2001 period. The decrease was primarily due to royalties owed
on proceeds from certain land sales that occurred in the 2000 period.
Selling, general and administrative expenses decreased 3.4% to $14 million in
the 2001 period compared to $15 million in the 2000 period. The decrease of $1
million was primarily due to salary cost savings from the Voluntary Separation
Incentive Program implemented in the last half of fiscal year ended June 30,
2000, offset in part by increased professional consulting fees associated
with the on-going review of business processes.
Depreciation, depletion and amortization expense decreased 3.7% to $61 million
in the 2001 period compared to $63 million in the 2000 period. The decrease of
$2 million was primarily due to reduced depletion expense from lower production
at Mine 84 and lower depreciation and amortization expense due to items becoming
fully depreciated after the 2000 period, offset in part by additional
depreciation for items placed in service after the 2000 period.
Interest expense remained stable at $15 million for the 2001 and 2000 period.
Taxes other than income decreased 18.9% to $37 million for the 2001 period
compared to $46 million for the 2000 period. The decrease of $9 million was due
primarily to reduced excise taxes in the 2001 period. As discussed in Note 6,
CONSOL Energy is no longer required to pay certain export sales excise taxes
and, therefore, is no longer accruing for this expense. Due to these taxes on
export coal sales being declared unconstitutional, prior year accruals of $11
million, which were not paid and are no longer owed, were reversed. The
decrease was partially offset by higher West Virginia severance taxes due to
higher sales prices in that state.
20
Certain export sales excise taxes paid 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 IRS has completed an audit of CONSOL Energy's
refund claims and confirmed the validity of the claims filed by CONSOL Energy.
Accordingly, CONSOL Energy has recognized $65 million of pre tax earnings net of
other charges and $30 million of interest income related to these claims in the
2001 period.
Restructuring charges were $10 million in the 2000 period and represent charges
for employee severance costs and outside professional consultant costs. These
costs related to the review of administrative and research staff functions that
began in the quarter ended December 31, 1999. The purpose of the review was to
assess the need for and to assist in a restructuring of those functions to
enable CONSOL Energy to respond to the cost challenges of the current
environment without losing the ability to take advantage of opportunities to
grow the business over the longer term.
Income Taxes
Income taxes were $42 million in the 2001 period compared to a $3 million
benefit in the 2000 period. The increase of $45 million was primarily the
result of a revised estimate of the effective tax rate expected to be applicable
for the full fiscal year. The new rate was used in providing for income taxes
on a year to date basis with the income tax expense for the current quarter
being the difference between the revised year to date estimate and the amounts
reported in previous interim periods of the fiscal year. The current rate of
29.2% was increased from the original effective rate of 10.3% due mainly to
higher pre-tax income. The lower effective rate in the 2000 period, prior to
the income tax settlement and actualization of prior period income tax accruals,
was primarily due to lower pre-tax income, with minimal effect on percentage
depletion benefits.
Nine Months Ended March 31, 2001 Compared with Nine Months
Ended March 31, 2000
Net Income
CONSOL Energy's net income for the nine months ended March 31, 2001 (the YTD
2001 period) was $134 million compared with $70 million for the nine months
ended March 31, 2000 (the YTD 2000 period). The increase of $64 million was
primarily due to the resolution of claims by CONSOL Energy related to certain
export sales excise taxes that were declared unconstitutional. Also, net income
increased due to increased gas sales volumes and prices, a reversal of accruals
for export sales excise taxes which are no longer owed, and the completion of
the restructuring program. These increases to net income were partially offset
by increased income tax expense due mainly to higher pre-tax earnings and
reduced revenues from coal sales due mainly to reduced sales volumes and prices.
21
Revenue
Sales decreased $26 million, or 1.6% to $1,566 million for the YTD 2001 period
from $1,592 million for the YTD 2000 period.
Revenues from the sale of Produced Coal decreased $64 million, or 4.7% to $1,301
million in the YTD 2001 period from $1,365 million in the YTD 2000 period.
Sales volumes of Produced Coal were 54.6 million tons in the YTD 2001 period, a
decrease of 2.5 million tons or 4.4% from the YTD 2000 period. This was
primarily due to lower production at Mine 84 resulting from continued adverse
geological conditions in the YTD 2001 period. Mine 84 encountered a sandstone
intrusion in the coal seam that ran across several longwall coal panels.
Because the sandstone is harder than coal, mining advance rates have been slowed
for both the longwall and continuous mining machines. Production for Mine 84
was 1.6 million tons in the YTD 2001 period compared to 4.4 million tons in
the YTD 2000 period. Mine plan adjustments at Mine 84 are expected to improve
mining productivity and production during the latter stages of the quarter
ended June 30, 2001. However, Mine 84 production for the fiscal year ending
June 30, 2001 is not expected to attain levels equal to the fiscal year ended
June 30, 2000. Lower production in the YTD 2001 period is also attributed to
the closing of the Keystone and Helvetia complexes in the YTD 2000 period.
Average sales price per ton of Produced Coal sold remained stable at $23.83
per ton for the YTD 2001 period compared to $23.90 per ton for the YTD 2000
period.
Industrial supply sales decreased $12 million, or 11.3% to $95 million in the
YTD 2001 period from $107 million in the YTD 2000 period primarily due to
reduced sales volumes.
Revenues from the sale of Purchased Coal decreased by $10 million, or 12.6% to
$71 million in the YTD 2001 period from $81 million in the YTD 2000 period. The
decrease is due primarily to decreased sales volumes. Purchased Coal sales
volumes decreased by 0.4 million tons to 2.3 million tons in the YTD 2001 period
from 2.7 million tons in the YTD 2000 period. The volume variances were
primarily due to a renegotiated contract that allows company-produced coal to be
shipped in the YTD 2001 period instead of coal purchased from third parties,
that was required to be shipped under the contract in the YTD 2000 period. It
also reflects the expiration of Purchased Coal contracts acquired with the
Rochester & Pittsburgh Coal Company acquisition in 1998.
These decreases in sales were partially offset by the increase in sales of
coalbed methane gas and related gathering fees. Revenues from gas sales
increased $59 million to $89 million in the YTD 2001 period from $30 million in
the YTD 2000 period. Sales volumes were 19.2 BCF in the YTD 2001 period, an 11.7
BCF increase over the YTD 2000 period. The increase was due to higher sales
volumes as a result of the acquisition of BPC and OGI on February 25, 2000. The
22
increase was also due to an increase in the average price per MMBtu sold. The
average price per MMBtu was $5.37 for the YTD 2001 period compared to $2.74 for
the YTD 2000 period. CONSOL Energy had one longer-term contract to sell 38
million cubic feet of gas per day which ended during the month of October, 2000
at a price of $3.20/MMBtu, which was less than the prevailing market price at
the time.
Other income, which consists of interest income, gain on the disposition of
assets, equity in earnings of affiliates, service income, royalty income, rental
income and miscellaneous income, increased $7 million to $56 million in the YTD
2001 period from $49 million in the YTD 2000 period. The increase was primarily
due to a $15 million increase in equity in earnings of affiliates related mainly
to gas and $3 million of miscellaneous reimbursements from freight carriers
related to expansion projects, offset in part by a $10 million decrease in gain
on sale of assets. The gain on sale of assets principally relates to the sale
of certain in place coal reserves. CONSOL Energy continually manages its coal
reserves and from time-to-time sells non-strategic reserves.
Costs
Cost of Goods Sold and Other Operating Expenses decreased $11 million, or 0.9%
to $1,149 million in the YTD 2001 period compared to $1,160 million in the YTD
2000 period.
Industrial supplies cost of goods sold decreased 12.4% to $95 million in the YTD
2001 period from $109 million in the YTD 2000 period. The $14 million decrease
was due to reduced sales.
Purchased Coal costs of goods sold and other expenses decreased 14.6% to $66
million in the YTD 2001 period from $78 million in the YTD 2000 period. The $12
million decrease was due mainly to a 16.2% decrease in the volume of Purchased
Coal sold. The decrease in volume was due primarily to a renegotiated contract
that allows produced coal to be shipped in the YTD 2001 period instead of coal
purchased from third parties which was required by the contract to be shipped in
the YTD 2000 period. It also reflects the expiration of purchased coal
contracts acquired with the Rochester & Pittsburgh Coal Company acquisition.
Royalty expense on certain land sale proceeds decreased $5 million, or 67.3% to
$2 million in the YTD 2001 period. The decrease was primarily due to royalties
owed on proceeds from certain land sales that occurred in the 2001 period.
Despite overall decreases in cost of goods sold and other expenses there was an
increase of $24 million in cost of goods sold and other expenses for Produced
Coal. Produced Coal cost of goods sold and other expenses were $898 million in
the YTD 2001 period, an increase of 2.7% from the YTD 2000 period. The increased
cost per ton produced is primarily due to continued adverse geological
conditions at Mine 84. However, overall, the cost per ton produced excluding
Mine 84, Keystone and Helvetia has remained steady in the YTD 2001 period
compared to the YTD 2000 period. Tons
23
produced per man-day, excluding Mine 84, Keystone and Helvetia, also remained
steady from period to period at 45.3. Keystone and Helvetia, which had higher
mining costs per ton and lower productivity than other CONSOL Energy mines, were
closed in the YTD 2000 period.
Closed and idle mine costs increased 8.5% to $40 million in the YTD 2001 period
from $37 million in the YTD 2000 period. The increase of $3 million was
primarily due to $10 million of adjustments which increased reclamation
liabilities as a result of updated engineering studies and cost projections for
closed and idled locations, offset by $10 million of adjustments which reduced
mine closing and perpetual care liabilities as a result of updated engineering
studies and cost projections for closed locations. Increases were also due to
increased costs related to the preparation for re-opening of the idled Loveridge
mine. Loveridge mine resumed operations on March 1, 2001. The increased costs
were partially offset by higher costs in the YTD 2000 period due to the initial
idling costs of several mines.
Gas operations cost of goods sold and other expenses increased 43.5% to $21
million in the YTD 2001 period from $15 million in the YTD 2000 period. The $6
million increase was primarily due to higher volumes of sales due to the
acquisition of BPC and OGI on February 25, 2000.
Costs also increased $6 million due to the CONSOL Energy Board of Directors
approval of a new incentive compensation program for eligible full-time
employees. This program is designed to increase compensation payable to
eligible employees when CONSOL Energy reaches predetermined earnings targets and
the employees reach predetermined performance targets.
Selling, general and administrative expenses increased 3.6% to $48 million in
the YTD 2001 period compared to $46 million in the YTD 2000 period. The
increase of $2 million was primarily due to increased professional consulting
fees associated with the on-going 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 the fiscal year ended June 30, 2000.
Depreciation, depletion and amortization expense decreased 4.2% to $180 million
in the YTD 2001 period compared to $188 million in the YTD 2000 period. The
decrease of $8 million was primarily due to reduced depreciation and depletion
expense as a result of the scheduled closing of the Powhatan Mine due to
economically depleted reserves. Depletion and amortization expense was also
reduced due to lower production tons in the YTD 2001 period. These decreases
were offset, in part, by increased depreciation expense related to assets placed
in service after the YTD 2000 period and the additional depreciation expense on
assets received in the acquisition of BPC and OGI.
24
Interest expense increased 13.8% to $45 million for the YTD 2001 period compared
to $40 million for the YTD 2000 period. The increase of $5 million was due
primarily to higher average debt levels outstanding during the YTD 2001 period
compared to the YTD 2000 period, along with an increase of 0.9% 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 on February 25, 2000, and the
purchase of a 50% joint venture interest in Line Creek Mine on December 31,
2000.
Taxes other than income decreased 13.3% to $115 million for the YTD 2001 period
compared to $133 million for the YTD 2000 period. The decrease of $18 million
was due primarily to reduced excise taxes in the YTD 2001 period. As discussed
in Note 6, CONSOL Energy is no longer required to pay certain excise taxes on
export coal sales and, therefore, is no longer accruing for this expense. Due
to these taxes on export coal sales being declared unconstitutional, prior year
accruals of $11 million, which were not paid and are no longer owed, were
reversed. The decrease also is due to lower excise taxes related to overall
reduced production tons and lower West Virginia severance taxes related to
reduced production tons and sales prices in that state. These decreases are
partially offset by increased property tax expense due to adjustments made in
the YTD 2000 period to reduce accruals to reflect lower assessments on closed
operations.
Certain export sales excise taxes paid 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 IRS has completed an audit of CONSOL Energy's
refund claims and confirmed the validity of the claims filed by CONSOL Energy.
Accordingly, CONSOL Energy has recognized $65 million of pre tax earnings net of
other charges and $30 million of interest income related to these claims in the
YTD 2001 period.
Restructuring charges were $11 million in the YTD 2000 period and represent
charges for employee severance costs and outside professional consultant costs.
These costs related to the review of administrative and research staff functions
that began in the quarter ended December 31, 1999. The purpose of the review
was to assess the need for and to assist in a restructuring of those functions
to enable CONSOL Energy to respond to the cost challenges of the current
environment without losing the ability to take advantage of opportunities to
grow the business over the longer term.
Income Taxes
Income taxes were $45 million in the YTD 2001 period compared to a $7 million
benefit in the YTD 2000 period. The increase in tax expense was due to the
recording of a $8 million benefit from a final agreement resolving disputed
federal income tax items for the years 1992 through 1994 and the recording of a
$4 million benefit resulting from filing the federal and various state tax
returns for the period January 1, 1998 through December 31, 1998 in the YTD 2000
period. No adjustments have been recorded in the YTD 2001 period. The
effective rate was 25.3% for the YTD 2001
25
period. The effective rate for the YTD 2000 period, before prior year income tax
adjustments and settlements, was 6.8%. The higher effective rate in the YTD 2001
period compared to the rate in the YTD 2000, before prior year income tax
adjustments and settlements, is due mainly to higher pre tax 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 and gas industries 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 debt
financing. There can be no assurance that additional capital resources,
including debt financing, 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 $323 million at March 31, 2001 and
$241 million at March 31, 2000. The Board of Directors currently intends to pay
quarterly dividends on the common stock. Dividend information for the current
fiscal year, to date, is as follows:
Declaration Date Amount Per Share Record Date Payment Date
---------------- ---------------- ----------- -------------
04/26/01 $0.28 05/11/01 05/31/01
01/25/01 $0.28 02/09/01 02/28/01
10/26/00 $0.28 11/10/00 11/29/00
07/27/00 $0.28 08/11/00 09/01/00
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 shares repurchased will be held in Treasury for future needs such as benefit
plan administration. The timing of the purchases and the number of shares to be
purchased are dependent upon market conditions. As of April 30, 2001, CONSOL
Energy had repurchased 412,600 shares at an average price of $10.92 in this
share repurchase program.
26
Cash Flows
Net cash provided by operating activities was $311 million for the nine months
ended March 31, 2001 (the YTD 2001 period) compared to $217 million for the nine
months ended March 31, 2000 (the YTD 2000 period). The change in net cash
provided by operating activities reflects increases in net income. The increase
in net income was primarily due to the resolution related to export sales excise
taxes that were declared unconstitutional. Also, net income was increased due
to higher gas sales volumes and prices, a reversal of accruals for export sales
excise taxes which are no longer owed, and the completion of the restructuring
program. These increases to net income were partially offset by increased
income tax expense due mainly to higher pre-tax earnings and reduced coal sales
due mainly to reduced sales volumes and prices.
Net cash used in investing activities was $184 million in the YTD 2001 period
compared to $230 million in the YTD 2000 period. The change in net cash used in
investing activities primarily reflects the acquisition of MCN Energy Group Inc.
for approximately $160 million in the YTD 2000 period. This decrease in cash
used for investing activities was offset in part by the purchase of a 50% joint
venture interest in Line Creek Mine for $38 million and an increase in capital
expenditures in the YTD 2001 period. Capital expenditures were $159 million in
the YTD 2001 period compared with $93 million in the YTD 2000 period. The
increase in capital expenditures in the YTD 2001 period was primarily related to
the acquisition of a longwall mining system for use at the Bailey Mine,
construction of a batch weigh system at the Bailey Central Preparation Plant and
increased expenditures related to gas operations.
Net cash used in financing activities was $120 million in the YTD 2001 period
compared with net cash provided by financing activities of $4 million in the YTD
2000 period. The change in net cash used in financing activities primarily
reflects payments made on commercial paper in the YTD 2001 period compared to
additional receipts from commercial paper in the YTD 2000 period. The
additional cash received from commercial paper in the YTD 2000 period primarily
was for the acquisition of BPC, OGI and a MCN subsidiary that owns a 50%
interest in Cardinal States Gathering Company. The change also reflects the
purchase of Treasury Stock, and scheduled payments on miscellaneous borrowing in
the YTD 2000 period.
27
Debt
At March 31, 2001, CONSOL Energy had total long-term debt of $304 million,
including the current portion of long-term debt of $30 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 with an
average interest rate of 6.9% due at various dates through 2001,
. $29 million in advance royalty commitments with an average interest rate of
7.3%, and
. an aggregate principal amount of $15 million of capital leases with an
average interest rate of 7.4%.
At March 31, 2001, CONSOL Energy had an aggregate principal amount of $412
million of commercial paper outstanding that had maturities remaining of up to
29 days with interest at varying rates ranging from 5.53% to 6.05%.
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.
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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 March 31, 2001, CONSOL Energy had
outstanding $303 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 March 31, 2001,
CONSOL Energy had an aggregate of $412 million in commercial paper outstanding.
CONSOL Energy's commercial paper bore interest at an average rate of 6.73% per
annum during the nine months ended March 31, 2001. 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 nine months ended March 31, 2001 by
approximately $1 million.
Almost all of CONSOL Energy's transactions are denominated in U.S. dollars and,
as a result, CONSOL Energy 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 nine
months ended March 31, 2001, other than noted in the Financial Statements-
Note 6.
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.
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ITEM 5. OTHER INFORMATION
Effective February 1, 2001, Christoph Koether was elected a Director of CONSOL
Energy and is to hold such position until the next annual election of Directors
and until his successor is duly elected and qualified.
On April 30, 2001 CONSOL Energy Inc. and American Electric Power (AEP) entered
into a memorandum of understanding regarding proposed coal supply agreements and
the purchase of AEP's affiliated mines in Ohio and West Virginia. Under the
memorandum of understanding, AEP proposes to enter into coal supply agreements
with CONSOL Energy to purchase approximately 34 million tons of coal to be
supplied by the AEP affiliated mines and by CONSOL Energy subsidiary mines
through 2008. The coal would be utilized at various AEP coal-fired power plants
including the Muskingum River, Cardinal and Gen. James M. Gavin plants. CONSOL
Energy proposes to purchase the stock of Windsor Coal Company, Southern Ohio
Coal Company and Central Ohio Coal Company. Details of the transaction will
remain confidential pending the negotiation of definitive agreements by the
parties. The definitive agreements must be approved by the Boards of Directors
of both companies following due diligence. The agreements are expected to close
by June 30, 2001.
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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 and nine months
ended March 31, 2001 and March 31, 2000................................................ 3
Consolidated Balance Sheets at March 31, 2001 and June 30, 2000........................ 4
Consolidated Statements of Stockholders' Equity for the nine months ended
March 31, 2001......................................................................... 6
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2001 and March 31, 2000...................................................... 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
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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: May 3, 2001
By: /s/ R. Zimmermann
-----------------
R. Zimmermann,
Executive Vice President
Date: May 3, 2001
By:/s/W. J. Lyons
---------------
William J. Lyons,
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
32