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, 1999
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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
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CONSOL Energy Inc.
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(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
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(Address or principal executive offices)
(Zip Code)
(302) 477-1260
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(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 May 17, 1999, there were 80,267,558 shares of Common Stock, $.01 par
value, outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998............................................. 3
Consolidated Statements of Income for the three months
ended March 31, 1999 and March 31, 1998....................... 5
Consolidated Statements of Stockholders' Equity (Deficit)
for the three months ended March 31, 1999..................... 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998....................... 7
Notes to Financial Statements................................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION................. 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................. 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 17
ITEM 5. OTHER INFORMATION............................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 17
SIGNATURE..................................................... 18
INDEX TO EXHIBITS............................................. 19
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOL Energy Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
-------------- ----------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 26,470 $ 31,285
Accounts and Notes Receivable:
Trade 254,151 261,215
Related Parties 408 1,358
Other Receivables 25,859 26,760
Inventories 212,334 170,574
Deferred Income Taxes 96,617 96,412
Prepaid Expenses 36,094 27,585
----------- --------------
Total Current Assets 651,933 615,189
Property, Plant and Equipment:
Property, Plant and Equipment 4,786,543 4,844,035
Less - Accumulated Depreciation,
Depletion and Amortization 2,134,820 2,157,023
----------- --------------
Total Property, Plant and
Equipment - Net 2,651,723 2,687,012
Other Assets:
Deferred Income Taxes 248,993 245,076
Advance Mining Royalties 119,432 119,160
Other 192,456 196,953
----------- --------------
Total Other Assets 560,881 561,189
----------- --------------
Total Assets $ 3,864,537 $ 3,863,390
=========== ==============
See notes to Consolidated Financial Statements.
3
CONSOL Energy Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
-------------- ----------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 188,589 $ 226,289
Short-Term Notes Payable 643,500 551,719
Current Portion of Long-Term Debt 13,449 115,793
Accrued Income Taxes 9,074 11,260
Other Accrued Liabilities 340,540 312,556
------------ ----------------
Total Current Liabilities 1,195,152 1,217,617
Long-Term Debt:
Long-Term Debt 295,297 294,375
Capital Lease Obligations 19,636 20,720
------------ ----------------
Total Long-Term Debt 314,933 315,095
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,176,440 1,174,964
Pneumoconiosis Benefits 479,174 483,423
Mine Closing 278,572 277,026
Worker's Compensation 215,695 212,807
Reclamation 14,156 12,859
Other 268,432 272,820
------------ ----------------
Total Deferred Credits and Other Liabilities 2,432,469 2,433,899
Stockholders' Equity (Deficit):
Common Stock, $.01 par value;
500,000,000 Shares Authorized; 57,667,558
Issued and Outstanding 577 577
Preferred Stock, 15,000,000 Shares Authorized;
None Issued and Outstanding -- --
Capital in Excess of Par Value 302,427 302,427
Retained Earnings Deficit (379,997) (405,602)
Other Comprehensive Loss (1,024) (623)
------------ ----------------
Total Stockholders' Equity (Deficit) (78,017) (103,221)
------------ ----------------
Total Liabilities and Stockholders' Equity $ 3,864,537 $ 3,863,390
============ ================
See notes to Consolidated Financial Statements.
4
CONSOL Energy Inc. and Subsidiaries
CONSOLIDATED STATEMENTS of INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in Thousands - Except Per Share Information)
Three Months Ended March 31,
-----------------------------------
1999 1998
-------------- ----------------
Sales - Outside $ 563,056 $ 557,501
Sales - Related Parties 4,437 28,160
Other Income 10,949 15,491
-------------- --------------
Total Revenue 578,442 601,152
Cost of Goods Sold and Other
Operating Charges 397,793 375,527
Selling, General and Administrative Expense 13,292 13,300
Depreciation, Depletion and Amortization 62,203 59,366
Interest Expense 16,481 11,193
Taxes Other Than Income 56,364 54,864
-------------- --------------
Total Costs 546,133 514,250
-------------- --------------
Earnings Before Income Taxes 32,309 86,902
Income Taxes 6,704 20,511
-------------- --------------
Net Income $ 25,605 $ 66,391
============= ==============
Net Income Per Share $ 0.44 $ 0.61
============= ==============
Weighted Average Shares Outstanding 57,667,558 108,806,714
============= ==============
See notes to Consolidated Financial Statements.
5
CONSOL Energy Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Total
Capital in Retained Other Stockholders'
Common Excess of Earnings Comprehensive Equity
Stock Par Value Deficit Loss (Deficit)
-------------- ---------------- ------------ ---------------- --------------
Balance - December 31, 1998 $ 577 $ 302,427 $ (405,602) $ (623) $ (103,221)
------------- -------------- ------------ ---------------- -------------
1999 Activity (Unaudited):
Net Income 25,605 25,605
Unrealized Loss on Securities
(net of $255 tax) (401) (401)
------------- -------------- ------------ ---------------- -------------
Comprehensive Income -- -- 25,605 (401) 25,204
------------- -------------- ------------ ---------------- -------------
Balance - March 31, 1999 $ 577 $ 302,427 $ (379,997) $ (1,024) $ (78,017)
============= ============== ============ ============== =============
See notes to Consolidated Financial Statements.
6
CONSOL Energy Inc. and Subsidiaries
CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended March 31,
-----------------------------------
1999 1998
-------------- ----------------
Operating Activities:
Net Income $ 25,605 $ 66,391
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 62,203 59,366
Gain on the Sale of Assets (505) (181)
Amortization of Advance Mining Royalties 3,149 3,607
Deferred Income Taxes (2,979) (1,358)
Changes in Operating Assets:
Accounts and Notes Receivable 8,915 (18,375)
Inventories (41,760) (20,763)
Prepaid Expenses (8,509) (9,515)
Changes in Other Assets 3,841 763
Changes in Operating Liabilities:
Accounts Payable (43,098) (54,356)
Other Operating Liabilities 25,798 40,476
Changes in Other Liabilities (1,430) 145
Other (1,112) (182)
------------- ---------------
4,513 (373)
------------- ---------------
Net Cash Provided by Operating Activities 30,118 66,018
Investing Activities:
Capital Expenditures (22,877) (34,146)
Additions to Advance Mining Royalties (2,326) (2,646)
Proceeds from Sales of Assets 1,451 2,847
Change in Marketable Securities - Net - (30,506)
------------- ---------------
Net Cash Used in Investing Activities (23,752) (64,451)
Financing Activities:
Proceeds from (Payments on) Borrowings 88,819 (6,732)
Payments on Long Term Notes (100,000) -
------------- ---------------
Net Cash Used in Financing Activities (11,181) (6,732)
------------- ---------------
Net Decrease in Cash and Cash Equivalents (4,815) (5,165)
Cash and Cash Equivalents at Beginning of Period 31,285 18,788
------------- ---------------
Cash and Cash Equivalents at End of Period $ 26,470 $ 13,623
============= ===============
See notes to Consolidated Financial Statements.
7
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999
--------------
(Dollars in thousands, except for per share information)
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 March 31, 1999
are not necessarily indicative of the results that may be expected for the
future periods.
The balance sheet at December 31, 1998 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 December 31, 1998 included in CONSOL Energy Inc.'s
("CONSOL Energy") Registration Statement on Form S-1, as amended and declared
effective April 28, 1999.
CONSOL Energy expects to change its fiscal year from a year ending December
31 to a year ending June 30. CONSOL Energy will have a transitional fiscal
period ending June 30, 1999. CONSOL Energy's first full fiscal year ending June
30 will be the year that starts July 1, 1999 and ends June 30, 2000. CONSOL
Energy is undertaking this change in order to align its fiscal year with that of
RWE AG, which beneficially owns through subsidiaries approximately 67.8% of the
common stock of CONSOL Energy.
8
NOTE 2 - ACQUISITION:
- --------------------
On September 22, 1998, CONSOL Energy purchased 100% of the outstanding
stock of the Rochester and Pittsburgh Coal Company ("R&P") for $100,408 (net of
$49,275 cash acquired). The acquisition has been accounted for as a purchase
and, accordingly, the operating results of R&P have been included in CONSOL
Energy's consolidated financial statements since the date of acquisition. Pro
forma revenues for CONSOL Energy, giving effect to the acquisition of R&P as if
it had occurred on January 1, 1998, were $683,349 for the first quarter of 1998.
The pro forma effect on net income of CONSOL Energy was not material for this
period.
NOTE 3 - INVENTORIES:
- --------------------
The components of inventories consist of the following:
March 31, December 31,
1999 1998
--------- ------------
Coal $133,716 $ 91,886
Merchandise for resale 36,816 37,209
Supplies 41,802 41,479
-------- --------
Total Inventories $212,334 $170,574
======== ========
NOTE 4 - CONTINGENT LIABILITIES:
- -------------------------------
CONSOL Energy is subject to various lawsuits and claims with respect to
such matters as personal injury, damage to property, governmental regulations
including environmental remediation, and other actions, arising out of the
normal course of business. The costs of mine closing and reclamation are accrued
over the productive life of the mine. In addition, CONSOL Energy has accrued
$3,275 in other liabilities for remediation of a waste disposal site. In the
opinion of management, the ultimate liabilities resulting from such lawsuits and
claims will not materially affect CONSOL Energy.
A public utility filed suit against CONSOL Energy alleging breach of a
long-term coal supply contract based upon CONSOL Energy's refusal to agree to
reductions in the price for coal under the contract's "gross inequities" clause.
Damages claimed, including interest, are approximately $190,000. On August 31,
1998, CONSOL Energy was awarded a summary judgement dismissing the claims
against it. The public utility has appealed the court's order dismissing the
suit. Management believes that the claims are without merit, and, accordingly,
CONSOL Energy has not accrued any liability associated with the action.
9
CONSOL Energy received, from a group of public utilities, two notices of
intent to submit certain price disputes to arbitration pursuant to a 1987 coal
sales contract. The notices claim that the utilities have been overcharged by
approximately $50,000 for coal under the price adjustment clause of the
contract. In accordance with contract procedure, CONSOL Energy submitted its
response asserting that the price adjustments were made in conformity with the
contract. The parties have not yet submitted their positions to an arbitrator.
Management believes that the claims are without merit, and accordingly, CONSOL
Energy has not accrued any liability associated with this proceeding.
NOTE 5 - SEGMENT INFORMATION:
- ----------------------------
Industry segment results at March 31, 1999:
Industrial
Supplies &
Coal Equipment Elimination Consolidated
---------- ---------- ------------ ------------
Sales - outside $ 523,830 $39,226 $ - $ 563,056
Sales - related companies 4,437 - - 4,437
Intersegment transfers - 22,526 (22,526) -
---------- ------- -------- ------------
Total Sales $ 528,267 $61,752 $(22,526) $ 567,493
========== ======= ======== ============
Earnings before income taxes $ 31,046 1,263 32,309
Income taxes 6,209 495 6,704
---------- ------- ------------
Net Income $ 24,837 $ 768 $ 25,605
========== ======= ============
Identifiable assets $3,803,308 $61,229 $3,864,537
========== ======= ============
Depreciation, depletion and
amortization $ 62,013 $ 190 $ 62,203
========== ======= ============
Additions to property, plant
and equipment $ 27,872 $ 508 $ 28,380
========== ======= ===========
10
Industry segment results at March 31, 1998:
Industrial
Supplies &
Coal Equipment Elimination Consolidated
---------- ----------- ------------ ------------
Sales - outside $ 534,165 $23,336 $ - $ 557,501
Sales - related companies 6,747 21,413 - 28,160
Intersegment transfers - 21,775 (21,775) -
---------- ------- -------- ------------
Total Sales $ 540,912 $66,524 $(21,775) $ 585,661
========== ======= ======== ============
Earnings before income taxes $ 86,372 $ 530 $ 86,902
Income taxes 20,303 208 20,511
---------- ------- ------------
Net Income $ 66,069 $ 322 $ 66,391
========== ======= ============
Identifiable assets $3,522,359 $72,377 $3,594,736
========== ======= ============
Depreciation, depletion and
amortization $ 59,106 $ 260 $ 59,366
========== ======= ============
Additions to property, plant
and equipment $ 34,588 $ 92 $ 34,680
========== ======= ============
NOTE 6 - SUBSEQUENT EVENT:
- --------------------------
On May 5, 1999 CONSOL Energy sold 22,600,000 shares of common stock in an
Initial Public Offering. After deducting the underwriters' discount of $0.80
per share, CONSOL Energy received $343,520. CONSOL Energy reasonably estimates
that the amount of its legal and accounting expenses, printing costs, filing
fees paid to NASD Regulation, Inc. and the listing fees paid to the New York
Stock Exchange will total approximately $2,250. The proceeds of the issue were
used to reduce short-term borrowings and increase shareholders' equity by
$341,270. The pro forma effects of this offering, assuming consummation of the
offering as of January 1, 1999 and the application of the net proceeds of the
offering, would have been net income of $28,369, net income per share of $.35
and weighted average number of common shares outstanding of 80,267,558.
CONSOL Energy's Board of Directors declared a $22,500 dividend on April 15,
1999, payable to the shareholders of record at the close of business on April
15, 1999. This dividend was paid on May 5, 1999.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
First Quarter 1999 Compared with First Quarter 1998
Net Income. CONSOL Energy's net income for the quarter ended
March 31, 1999 ("1999 Period") was $26 million compared with $66
million for the quarter ended March 31, 1998 ("1998 Period"). The
decrease of $40 million primarily was due to a decline in coal prices
and an increase in coal production costs in the 1999 Period compared
with the 1998 Period. The increase in costs was due to the addition of
production capacity with no commensurate increase in sales volumes due
to several market factors.
Mild winter weather in the Eastern United States dampened
demand for coal by electricity generators, leaving utilities' coal
inventories above planned levels. Low prices for oil, certain petroleum
by-products and natural gas led to increase use of these fuels by
electricity generators. Sales of U.S. steam coal in Europe were
adversely affected by competition from other countries. Also, annual
negotiations of prices for metallurgical coal bound for overseas
markets resulted in significant price reductions, causing some U.S.
producers to elect to offer these coals as a steam coal in U.S. markets
in an effort to obtain a higher price. These market factors contributed
to the decline in income.
Revenue. Sales decreased 3.1% to $567 million for the 1999
Period from $586 million for the 1998 Period. The decrease of $19
million primarily was due to a decrease of $16 million from sales of
company-produced coal and a decrease of $5 million from sales of
industrial supplies, partially offset by an increase of $5 million from
sales of purchased coal. Prices for company-produced coal sales for the
1999 Period decreased 3.5% from the 1998 Period while volumes were
comparable for these periods. The decreased revenue from sales of
industrial supplies was mainly due to decreased volumes. The increase
in revenue from sales of purchased coal was due mainly to higher
volumes related to contracts acquired with the acquisition of Rochester
and Pittsburgh Coal Company ("R&P") on September 22, 1998.
Related party sales reflect the change in the categorization
of sales to E. I. du Pont de Nemours and Company ("DuPont") from
related party sales to outside sales due to the purchase of shares from
DuPont Energy Company ("DuPont Energy") on November 5, 1998.
Other income, which consists of interest income, gain on the
disposition of assets, service income, royalty income, rental income
and miscellaneous income, decreased 29.3% to $11 million for the 1999
Period from $15 million for the 1998 Period. This decrease of $4
million was due principally to
12
receipt of a one-time payment in the 1998 Period pursuant to an
agreement by which CONSOL Energy was compensated for not mining certain
coal reserves.
Costs. Cost of goods sold and other operating charges increased
5.9% to $398 million for the 1999 Period compared to $376 million for
the 1998 Period. This increase primarily was due to costs associated
with capacity added by the R&P acquisition. Cost of goods sold related
to purchased coal increased due to the higher volume of purchased coal
sold in the 1999 Period compared with the 1998 Period. The increase in
cost of goods sold was offset in part by decreased cost of sales for
CONSOL Energy's industrial supply business.
Selling, general and administrative expenses remained stable
at $13 million for the 1999 and 1998 Periods.
Depreciation, depletion and amortization increased 4.8% to $62
million for the 1999 Period from $59 million for the 1998 Period. The
increase of $3 million was primarily due to the increase in
depreciation related to the assets obtained with the R&P acquisition.
Interest expense increased 47.2% to $16 million for the 1999
Period from $11 million for the 1998 Period. The increase of $5 million
was due primarily to higher average debt levels outstanding during the
1999 Period compared to the 1998 Period. Higher debt levels resulted
from the issuance of commercial paper to finance the purchase of common
stock from DuPont Energy in November 1998.
Taxes other than income increased 2.7% to $56 million for the
1999 Period from $55 million for the 1998 Period. The increase of $1
million was due primarily to increased payroll and property taxes due
to the acquisition of R&P partially offset by lower West Virginia
severance taxes due to lower production in that state.
Income Taxes. Income taxes decreased 67.3% to $7 million for
the 1999 Period from $21 million for the 1998 Period. The $14 million
decrease reflects the decreased earnings in the 1999 Period compared to
the 1998 Period. The effective tax rate was 20.8% for the 1999 Period
compared to 23.6% for the 1998 Period. The decreased effective tax rate
for the 1999 Period resulted primarily from the impact of percentage
depletion on lower 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 for at least the next
several years. 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. In
the past, CONSOL Energy has funded acquisitions primarily with cash
generated from operations, but CONSOL Energy may consider a variety of
other sources, depending on the size of any transaction, including debt
or equity financing. There can be no assurance that such additional
capital resources will be available to CONSOL Energy on terms that
CONSOL Energy finds acceptable, or at all.
13
Cash Flows. Net cash provided by operating activities was $30
million in the 1999 Period compared to $66 million in the 1998 Period.
The change in net cash provided by operating activities reflects
decreases in net income and changes in working capital. Coal
inventories increased by $42 million in the 1999 Period compared to a
$19 million increase in the 1998 Period.
Net cash used in investing activities was $24 million in the
1999 Period compared to $64 million in the 1998 Period. The change in
net cash used in investing activities reflects the purchase of
marketable securities in the 1998 Period. In addition, capital
expenditures in the 1999 Period were $23 million compared with $34
million in the 1998 Period.
Net cash used in financing activities was $11 million in the
1999 Period compared with $7 million in the 1998 Period. The change in
net cash used in financing activities reflects the decrease in long-
term debt of $100 million due to scheduled maturity. This was paid
primarily with the proceeds received from the issuance of commercial
paper.
Capital Expenditures. Capital expenditures were $23 million in
the 1999 Period. CONSOL Energy made such expenditures for replacement
of mining equipment, the expansion of mining capacity and projects to
improve the efficiency of mining operations. CONSOL Energy anticipates
making capital expenditures of approximately $200 million during the
calendar year 1999 and approximately $280 million during the calendar
year 2000, primarily for maintenance and replacement of mining
equipment and operations. Capital expenditures for pollution abatement
and reclamation currently are projected to be $5 million for the
calendar year 1999, $6 million for calendar year 2000 and $4 million
for calendar year 2001. CONSOL Energy expects to fund its anticipated
capital expenditures with cash generated by operations and the issuance
of commercial paper.
Debt. At March 31, 1999, CONSOL Energy had total long-term
debt of $328 million, including current portion of long-term debt of
$13 million. Such long-term debt consisted of:
. an aggregate principal amount of $156 million of unsecured notes
which bear interest at rates ranging from 8.21% to 8.28% per annum
and are due at various dates between 2002 and 2007,
. an aggregate principal amount of $103 million of two series of
industrial revenue bonds which were issued in order to finance CONSOL
Energy's Baltimore port facility and bear interest at the rate of
6.50% per annum and mature in 2010 and 2011,
. an aggregate principal amount of $12 million of variable rate notes
due at various dates through 2001,
. $28 million in advance royalty commitments,
. an aggregate principal amount of $5 million of notes maturing at
various dates through 2031, and
. an aggregate principal amount of $24 million of capital leases.
At March 31, 1999, CONSOL Energy had an aggregate principal
amount of $644 million of commercial paper outstanding which had
maturities ranging up to 48 days with interest at varying rates ranging
from 5.10% to 5.15%. CONSOL Energy used the proceeds of its initial
public offering on May 5, 1999 to reduce the amount of commercial paper
outstanding.
14
CONSOL Energy currently has credit facilities available to it
under which it may borrow up to $800 million in the aggregate less the
outstanding principal amount of commercial paper. At March 31, 1999,
there were no borrowings outstanding under the credit facilities. To
date, CONSOL Energy has used these credit facilities to support the
payment of its commercial paper. However, CONSOL Energy could borrow
amounts available under the credit facilities for other purposes.
Borrowings under these credit facilities bear interest based on the
London Interbank Offer Rate or the Prime Rate at CONSOL Energy's
option. Funds may be borrowed for periods ranging from one to 360 days,
depending upon the interest rate selected by CONSOL Energy. See "Part
II, Item 5. Other Information".
Impact of Year 2000 Issue. CONSOL Energy's plan to resolve
year 2000 issues involves four phases: assessment, remediation, testing
and implementation. In September 1997, CONSOL Energy formed a committee
to address this issue. The committee has completed its assessment of
all material information technology systems that would be affected by
the year 2000 issue if not modified and has initiated a program to
modify or replace portions of its software so that CONSOL Energy's
computer systems will function properly in the year 2000 and
thereafter. To date, CONSOL Energy is 98% complete on the remediation
and testing phase of its plan. CONSOL Energy expects software
reprogramming and replacement, testing and implementation to be
completed by the end of the second quarter of 1999. The total cost of
the year 2000 project is estimated to be less than $2 million and is
being expensed as incurred and funded through operating cash flows.
Since September of 1996, CONSOL Energy has expensed $0.8 million
related to all phases of the year 2000 project. In the first quarter of
1999, CONSOL Energy expensed $0.2 million and expects to expense $0.8
million for the remainder of 1999.
Management believes that the primary risks are external to
CONSOL Energy and related to the year 2000 readiness of customers,
suppliers, transportation suppliers such as railroads, barge lines,
terminal operators, ocean vessel brokers, and others. In the worst case
scenario, CONSOL Energy's utility customers may not purchase coal if
their generators fail to operate, CONSOL Energy may not be able to
access its bank accounts or receive payments and its transportation
providers may not be able to make timely coal shipments to customers.
CONSOL Energy's mines and processing plants are highly mechanized and
employ equipment that incorporates microprocessing chips. The failure
of such embedded chips in critical equipment due to the year 2000
problem could cause significant coal mining and processing disruptions.
CONSOL Energy has not established contingency plans in case of
failure of its information technology systems since it expects to have
its material systems in place by the end of the second quarter of 1999.
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; actions of CONSOL Energy's
15
competitors and its ability to respond to such actions; risks inherent
in mining; 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; management's ability to correctly
estimate and accrue for contingent liabilities; and CONSOL Energy's
ability to successfully finance, consummate the acquisition of, and
integrate other companies as part of its acquisition strategy .
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, 1999, CONSOL Energy
had outstanding $313 million aggregate principal amount of debt under fixed-rate
instruments and $659 million aggregate principal amount of debt under variable-
rate instruments. CONSOL Energy's primary exposure to market risk for changes
in interest rates relate to its commercial paper program. At March 31, 1999,
CONSOL Energy had an aggregate of $644 million in commercial paper outstanding.
CONSOL Energy's commercial paper bore interest at an average rate of 5.23% per
annum during the three months ended March 31, 1999. A 52.3 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 March 31, 1999 by
approximately $0.5 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 does not engage in any interest rate, foreign currency
exchange rate or commodity price-hedging transactions.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material litigation has been filed against CONSOL Energy during the
three months ended March 31, 1999, and there have been no material changes in
legal proceedings previously disclosed. See "Part I, Item 1. Financial
Statements -- Note 4."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CONSOL Energy filed a Registration Statement on Form S-1 (File No. 333-
68987) with the Securities and Exchange Commission in connection with its
initial public offering of up to 25,990,000 shares of Common Stock, par value
$0.01 per share, including 3,390,000 shares of Common Stock subject to an over-
allotment option granted to the underwriters of the offering. The Commission
declared the Registration Statement effective on April 28, 1999. J.P. Morgan
Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as
the representatives of the underwriters for the offering. At the date of the
filing of this Report on Form 10-Q, the underwriters have not exercised their
over-allotment option.
CONSOL Energy and the underwriters consummated the public offering and
sale on
16
May 5, 1999 of 22,600,000 shares of Common Stock at an initial price to
the public of $16.00 per share for an aggregate initial public offering price of
$361.6 million. After deducting the underwriters' discount of $0.80 per share,
CONSOL Energy received net proceeds of approximately $343.5 million. In
addition to the underwriters' discount, CONSOL Energy reasonably estimates that
the amount of legal and accounting expenses, printing costs, filing fees paid to
NASD Regulation, Inc. and listing fees paid to the New York Stock Exchange will
total approximately $2.3 million. CONSOL Energy has made no direct or indirect
payments to any director, officer or affiliate in connection with the offering.
At May 13, 1999, CONSOL Energy had used the $343.5 million of the
proceeds of the offering to repay $343.5 principal amount of the commercial
paper that was issued in order to finance the acquisition of R&P and the
repurchase of Common Stock from DuPont Energy. At May 13, 1999 CONSOL Energy
had an aggregate of $360.1 million of commercial paper outstanding which had
maturities of up to 15 days.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 1, 1999, the stockholders of CONSOL Energy adopted
resolutions by unanimous written consent to establish the annual retainer fee
and attendance fees to be paid to independent directors and the attendance fees
to be paid to directors for services as members of committees designated by the
Board of Directors.
CONSOL Energy's stockholders approved and adopted the Restated By-Laws
of the Company by unanimous written consent on February 17, 1999.
On February 26, 1999, the stockholders approved and adopted the
Restated Certificate of Incorporation of the Company by unanimous written
consent.
ITEM 5. OTHER INFORMATION
On May 13, 1999, Standard & Poor's removed CONSOL Energy and related
subsidiaries from CreditWatch with negative implications and changed corporate
credit and senior unsecured debt ratings for CONSOL Energy from A- to BBB+.
Standard and Poor's rated the outlook for CONSOL Energy as stable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by CONSOL Energy during the
three months ended March 31, 1999.
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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 17, 1999
/s/ D. L. Fassio
By:________________________
D. L. Fassio,
Vice President and Secretary
Date: May 17, 1999
/s/ William J. Lyons
___________________________
William J. Lyons,
Vice President and Controller
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INDEX TO EXHIBITS
Exhibit No. Descriptions
- ----------- ------------
27 Financial Data Schedule
19