UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 001-14901
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CONSOL Energy Inc.
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(Exact name of registrant as specified in its charter)
Delaware 51-0337383
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(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)
(412) 831-4000
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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 October 28, 1999, there were 79,994,558 shares of Common Stock, $.01 par
value, outstanding.
1
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Consolidated Statements of Income for the three months
ended September 30, 1999 and September 30, 1998................ 3
Consolidated Balance Sheets at September 30, 1999
and June 30, 1999.............................................. 4
Consolidated Statements of Stockholders' Equity for the three
months ended September 30, 1999................................ 6
Consolidated Statements of Cash Flows for the three months
ended September 30, 1999 and September 30, 1998................ 7
Notes to Financial Statements.................................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.............................................. 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20
ITEM 5. OTHER INFORMATION........................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 21
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 September 30,
---------------------------------
1999 1998
----------- ------------
Sales - Outside $ 545,169 $ 520,810
Sales - Related Parties 43 25,769
Other Income 11,180 10,962
----------- ------------
Total Revenue 556,392 557,541
Costs of Goods Sold and Other
Operating Charges 417,192 409,825
Selling, General and Administrative Expenses 14,157 13,241
Depreciation, Depletion and Amortization 61,090 58,014
Interest Expense 12,838 9,716
Taxes Other Than Income 40,590 45,402
----------- ------------
Total Costs 545,867 536,198
Earnings Before Income Taxes 10,525 21,343
Income Taxes (Note 3) (202) 2,983
----------- ------------
Net Income $ 10,727 $ 18,360
=========== ============
Earnings Per Share $0.13 $0.17
=========== ============
Weighted Average Number of
Common Shares Outstanding 80,250,718 108,806,714
=========== ============
Dividends Declared Per Share $0.28 $ -
=========== ============
The accompanying notes are an integral part of these financial statements.
3
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands, except per share data)
(Unaudited)
September 30, June 30,
1999 1999
-------------- ----------
ASSETS
- ------
Current Assets:
Cash and Cash Equivalents $ 21,512 $ 23,559
Accounts and Notes Receivable:
Trade 271,040 241,054
Related Parties 11 743
Other Receivables 18,972 21,030
Inventories (Note 4) 169,753 206,995
Recoverable Income Taxes 774 -
Deferred Income Taxes 93,665 94,575
Prepaid Expenses 34,371 34,692
---------- ----------
Total Current Assets 610,098 622,648
Property, Plant and Equipment:
Property, Plant and Equipment 4,877,278 4,863,138
Less - Accumulated Depreciation,
Depletion and Amortization 2,241,603 2,188,872
---------- ----------
Total Property, Plant and Equipment - Net 2,635,675 2,674,266
Other Assets:
Deferred Income Taxes 269,552 267,304
Advance Mining Royalties 115,968 117,808
Other 187,034 193,000
---------- ----------
Total Other Assets 572,554 578,112
---------- ----------
Total Assets $3,818,327 $3,875,026
========== ==========
The accompanying notes are an integral part of these financial statements.
4
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands, except per share data)
(Unaudited)
September 30, June 30,
1999 1999
-------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts Payable $ 192,585 $ 194,592
Short-Term Notes Payable 301,197 345,525
Current Portion of Long-Term Debt 11,942 13,752
Accrued Income Taxes - 2,393
Other Accrued Liabilities 328,014 327,813
---------- ----------
Total Current Liabilities 833,738 884,075
Long-Term Debt:
Long-Term Debt 294,934 294,311
Capital Lease Obligations 17,401 18,432
---------- ----------
Total Long-Term Debt 312,335 312,743
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,185,531 1,177,639
Pneumoconiosis Benefits 472,764 473,459
Mine Closing 278,480 278,452
Workers' Compensation 215,178 216,846
Reclamation 11,904 14,397
Other 267,253 262,690
---------- ----------
Total Deferred Credits and Other Liabilities 2,431,110 2,423,483
Stockholders' Equity:
Common Stock, $.01 Par Value; 500,000,000 Shares
Authorized; 80,267,558 Issued and 80,143,358
Outstanding at September 30, 1999, 80,267,558
Issued and Outstanding at June 30, 1999 803 803
Preferred Stock, 15,000,000 Shares Authorized;
None Issued and Outstanding
Capital in Excess of Par Value 642,947 642,947
Retained Earnings Deficit (399,811) (388,063)
Other Comprehensive Loss (1,139) (962)
Common Stock in Treasury, at Cost-124,200 Shares (1,656) -
---------- ----------
Total Stockholders' Equity 241,144 254,725
---------- ----------
Total Liabilities and Stockholders' Equity $3,818,327 $3,875,026
========== ==========
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)
Capital in Other Total
Common Excess of Retained Comprehen- Treasury Stockholders'
Stock Par Value Earnings sive Loss Stock Equity
------ ---------- ---------- ----------- --------- --------------
Balance at
June 30, 1999 $803 $642,947 $(388,063) $ (962) $ - $254,725
------ ---------- --------- ---------- -------- --------
(Unaudited):
Net Income - - 10,727 - - 10,727
Unrealized Loss
on Securities
(Net of $112 tax) - - - (177) - (177)
------ ---------- --------- ---------- -------- --------
Comprehensive Income - - 10,727 (177) - 10,550
Dividends - - (22,475) - - (22,475)
Treasury Stock
Purchased
(124,200 Shares) - - - - (1,656) (1,656)
------ ---------- --------- ---------- -------- --------
Balance at
September 30, 1999 $803 $642,947 $(399,811) $(1,139) $(1,656) $241,144
====== ========== ========= ========== ======== ========
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)
Three Months Ended September 30,
---------------------------------
1999 1998
-------- ----------
Operating Activities:
Net Income $ 10,727 $ 18,360
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 61,090 58,014
Gain on Sale of Assets (2,331) (763)
Amortization of Advance Mining Royalties 3,388 3,306
Deferred Income Taxes (1,226) (2,408)
Changes in Operating Assets:
Accounts and Notes Receivable (27,196) (1,278)
Inventories 37,242 21,339
Prepaid Expenses 321 319
Changes in Other Assets 6,109 (1,838)
Changes in Operating Liabilities:
Accounts Payable (2,007) 13,932
Other Operating Liabilities (2,966) 296
Changes in Other Liabilities 7,627 (4,795)
Other 300 (1,030)
-------- ---------
80,351 85,094
-------- ---------
Net Cash Provided by Operating Activities 91,078 103,454
-------- ---------
Investing Activities:
Capital Expenditures (23,694) (69,677)
Additions to Advance Mining Royalties (1,571) (1,465)
Acquisition of R & P Coal Co. - Net of Cash Acquired - (100,408)
Proceeds from Sales of Assets 3,024 1,105
Changes in Marketable Securities - Net - 87,415
-------- ---------
Net Cash Used in Investing Activities (22,241) (83,030)
-------- ---------
Financing Activities:
(Payments on) Proceeds from Commercial Paper (44,552) 56,286
Payments on Miscellaneous Borrowings (2,201) (59,428)
Dividends Paid (22,475) -
Purchase of Treasury Stock (1,656) -
-------- ---------
Net Cash Used in Financing Activities (70,884) (3,142)
-------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (2,047) 17,282
Cash and Cash Equivalents at Beginning of Period 23,559 20,646
-------- ---------
Cash and Cash Equivalents at End of Period $ 21,512 $ 37,928
======== =========
The accompanying notes are an integral part of these financial statements.
7
CONSOL ENERGY INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 1999
------------------
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
future periods.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all the footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes for the transitional period ended June 30, 1999 included in CONSOL
Energy Inc.'s ("CONSOL Energy") Form 10-K, as filed on September 28, 1999.
CONSOL Energy changed its fiscal year from a year ending December 31 to a year
ending June 30. CONSOL Energy had a transitional period ending June 30, 1999.
CONSOL Energy's first full fiscal year ending June 30 started July 1, 1999 and
ends June 30, 2000. CONSOL Energy has made this change in order to align its
fiscal year with that of RWE AG, which beneficially owns through subsidiaries
approximately 72% of the common stock of CONSOL Energy.
NOTE 2 - ACQUISITION:
- --------------------
On September 22, 1998, CONSOL Energy purchased 100% of the outstanding stock of
the Rochester and Pittsburgh Coal Company ("R&P") for $100,408 (net of $49,275
cash acquired). The acquisition has been accounted for as a purchase and,
accordingly, the operating results of R&P have been included in CONSOL Energy's
consolidated financial statements since the date of acquisition. Pro forma
revenues for CONSOL Energy, giving effect to the acquisition of R&P as if it had
occurred on July 1, 1998, were $638,747 for the three months ended September 30,
1998. The pro forma effect on net income of CONSOL Energy was not material for
this period.
8
NOTE 3 - INCOME TAXES:
- ----------------------
The following is a reconciliation, stated as a percentage of pretax income of
the U. S. statutory federal income tax rate, to CONSOL Energy's effective tax
rate:
For the Three For the Three
Months Ended Months Ended
September 30, September 30,
1999 1998
-------------- --------------
Statutory U. S. federal income tax rate 35.0% 35.0%
Excess tax depletion (20.0) (22.4)
Adjustment of prior year's taxes (18.4) -
Non-conventional fuel tax credit - ( 0.9)
Net effect of state tax 1.7 2.3
Net effect of foreign tax 0.7 0.6
Other ( 0.9) ( 0.6)
------ -----
Effective Income Tax Rate ( 1.9)% 14.0%
====== =====
The provision for income taxes is adjusted at the time the returns are filed.
These adjustments decreased income tax expense by $1,942 for the three months
ended September 30, 1999. There was no prior year tax adjustment recorded in
the three months ended September 30, 1998.
NOTE 4 - INVENTORIES:
- --------------------
The components of inventories consist of the following:
September 30, June 30,
1999 1999
-------- --------
Coal $ 92,124 $127,019
Merchandise for resale 34,943 36,614
Supplies 42,686 43,362
-------- --------
Total Inventories $169,753 $206,995
======== ========
9
NOTE 5 - CONTINGENT LIABILITIES:
- -------------------------------
CONSOL Energy is subject to various lawsuits and claims with respect to such
matters as personal injury, damage to property, governmental regulations
including environmental remediation, and other actions arising out of the normal
course of business. The costs of mine closing and reclamation are accrued over
the productive life of the mine. In addition, CONSOL Energy has accrued $3,275
in other liabilities for remediation of a waste disposal site. In the opinion
of management, the ultimate liabilities resulting from such lawsuits and claims
will not materially affect CONSOL Energy.
On June 22, 1999, an underground fire was discovered in the old workings of the
idled Loveridge Mine and CONSOL Energy sealed the mine to extinguish the fire.
Mine reserves and equipment are not believed to be impaired.
A public utility filed suit against CONSOL Energy alleging breach of a long-term
coal supply contract based upon CONSOL Energy's refusal to agree to reductions
in the price for coal under the contract's "gross inequities" clause. Damages
claimed, including interest, are approximately $190,000. On August 31, 1998,
CONSOL Energy was awarded a summary judgment dismissing the claims against it.
The public utility appealed the court's order dismissing the suit. On August
27, 1999, the United States Court of Appeals for the Eighth Circuit affirmed the
judgment of the district court. Management believes that the claims are without
merit, and, accordingly, CONSOL Energy has not accrued any liability associated
with the action.
CONSOL Energy received, from a group of public utilities, two notices of intent
to submit certain price disputes to arbitration pursuant to a 1987 coal sales
contract. The notices claim that the utilities have been overcharged by
approximately $50,000 for coal under the price adjustment clause of the
contract. In accordance with contract procedure, CONSOL Energy submitted its
response asserting that the price adjustments were made in conformity with the
contract. The parties have not yet submitted their positions to an arbitrator.
Management believes that the claims are without merit, and, accordingly, CONSOL
Energy has not accrued any liability associated with this proceeding.
10
NOTE 6 - SEGMENT INFORMATION:
- ----------------------------
Industry segment results for the three months ended September 30, 1999:
Industrial
Supplies &
Coal Equipment Elimination Consolidated
---------- --------- ----------- ------------
Sales - outside $ 509,273 $35,896 $ - $ 545,169
Sales - related companies 43 - - 43
Intersegment transfers - 16,946 (16,946) -
---------- ------- -------- ------------
Total Sales $ 509,316 $52,842 $(16,946) $ 545,212
========== ======= ======== ============
Earnings before income taxes $ 11,167 $ (642) $ 10,525
Income taxes (benefit) 140 (342) (202)
---------- ------- ------------
Net Income (Loss) $ 11,027 $ (300) $ 10,727
========== ======= ============
Segment assets $3,760,232 $58,095 $3,818,327
========== ======= ============
Depreciation, depletion and
amortization $ 60,834 $ 256 $ 61,090
========== ======= ============
Additions to property, plant
and equipment $ 24,098 $ 126 $ 24,224
========== ======= ============
11
Industry segment results for the three months ended September 30, 1998:
Industrial
Supplies &
Coal Equipment Elimination Consolidated
---------- ----------- ------------ ------------
Sales - outside $ 497,271 $23,539 $ - $520,810
Sales - related companies 6,202 19,567 - 25,769
Intersegment transfers - 20,789 (20,789) -
---------- ------- ---------- ------------
Total Sales $ 503,473 $63,895 $ (20,789) $546,579
========== ======= ========== ============
Earnings before income taxes $ 21,465 $ (122) $ 21,343
Income taxes (benefit) 3,004 (21) 2,983
---------- ------- ----------
Net Income (Loss) $ 18,461 $ (101) $ 18,360
========== ======= ==========
Segment assets $3,926,151 $63,078 $3,989,229
========== ======= ==========
Depreciation, depletion and
amortization $ 57,757 $ 257 $ 58,014
========== ======= ==========
Additions to property, plant
and equipment $ 470,363 $ 251 $ 470,614 /A/
========== ======= ==========
/A/ Includes $248,879 acquired from Rochester and Pittsburgh Coal Company.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
The poor market for the sale of bituminous coal during the January through June
1999 period continued in the month of July 1999. However, as the result of the
hot summer in most of the eastern United States, CONSOL Energy's coal shipments
were strong in August and September 1999. CONSOL Energy believes that
inventories at coal fired generating stations have been reduced to normal or
below normal levels, and prices have stabilized. CONSOL Energy expects this
improving market trend to continue in the second quarter.
CONSOL Energy has implemented strategies to reduce costs. We have imposed
spending limits on our mines, reducing supply costs. We have deferred capacity
expansion projects, reducing planned capital expenditures. We also have taken
steps to restructure CONSOL Energy to respond to the short-term pressures on
earnings while maintaining our ability to grow.
Currently, the administrative staff and information systems are being reviewed
to ensure that they provide relevant and timely cost information to mine
managers. Also, CONSOL Energy has focused the Research and Development
Department on only those activities that add value to the marketing effort or
make a significant contribution to reducing mining costs. CONSOL Energy will
continue efforts to review its organization in order to identify value adding
changes. In the first quarter, CONSOL Energy made several changes in the
organization in order to reduce costs, increase operating efficiency and improve
responsiveness to changing market dynamics. The number of operating groups has
been reduced from seven to four, eliminating three vice president positions, and
operations staff support functions have been consolidated. In addition, two
senior vice president-mining positions were eliminated, reducing a management
layer. In the marketing department, one vice president position was eliminated.
Results of Operations
First Quarter 1999/2000 Compared with First Quarter 1998/1999
Net Income
CONSOL Energy's net income for the three months ended September 30, 1999 (the
1999 period) was $11 million compared with $18 million for the three months
ended September 30, 1998 (the 1998 period). The decrease of $7 million
primarily was due to reduced coal prices and increased idle mine costs, offset
somewhat by increased sales volumes.
13
Revenue
Sales decreased 0.4% to $545 million for the 1999 period from $547 million for
the 1998 period.
Produced Coal sales volumes were 19.6 million tons in the 1999 period, an
increase of 7.3% over the 1998 period; however, average sales prices decreased
7.0% to $23.99 per ton for the 1999 period from $25.80 per ton for the 1998
period, resulting in flat Produced Coal revenues.
Revenues from the sale of Purchased Coal increased by $6 million to $28 million
in the 1999 period from $22 million in the 1998 period. Purchased Coal
contracts obtained from the September 22, 1998 acquisition of Rochester &
Pittsburgh Coal Company (R&P) were $10 million during the 1999 period, while
other purchased coal sales decreased by $4 million, primarily from sales
directed to the export market.
Industrial supply sales decreased $8 million to $36 million in the 1999 period
from $44 million in the 1998 period due to reduced volumes.
Related party sales reflect the recategorization of sales to E. I. Du Pont de
Nemours and Company ("DuPont") from related party sales to outside sales due to
the purchase of CONSOL Energy's shares from DuPont Energy Company ("DuPont
Energy") in November 1998.
Costs
Cost of goods sold and other operating charges increased 1.8% to $417 million in
the 1999 period compared to $410 million in the 1998 period.
Cost of goods sold for company produced coal was $321 million for the 1999
period, an increase of $7 million, or 2% from the 1998 period. This reflects an
increase of $23 million due to increased volumes, and a reduction of $16 million
due to lower costs at mine operations.
Idle mine costs increased to $10 million in the 1999 period from $2 million in
the 1998 period. The increase of $8 million was primarily due to the Loveridge
and Ohio No. 11 mines being idle the entire 1999 period, the VP No. 8 mine being
idle for six weeks in the 1999 period, and increased benefit costs as the result
of a mine accident at Powhatan.
Purchased coal costs increased 24% to $27 million in the 1999 period from $22
million in the 1998 period. The $5 million increase was due mainly to volume
added with the R&P acquisition partially offset with reduced export sales.
Industrial supplies cost of goods sold decreased 16% to $54 million in the 1999
period from $64 million in the 1998 period. The $10 million decrease was due to
reduced sales.
14
Other operating charges decreased 47% to $4 million in the 1999 period from $8
million in the 1998 period. The decrease of $4 million was primarily due to
reduced benefit costs, which reflects a nine month actuarial adjustment recorded
in the 1998 period.
Selling, general and administrative expenses increased 6.9% to $14 million in
the 1999 period compared to $13 million in the 1998 period. The increase of $1
million was primarily due to increased professional service fees.
Depreciation, depletion and amortization expense increased 5.3% to $61 million
in the 1999 period compared to $58 million in the 1998 period. The increase of
$3 million was primarily due to the increase in depreciation and depletion
related to the assets acquired with the R&P acquisition.
Interest expense increased 32.1% to $13 million for the 1999 period compared to
$10 million for the 1998 period. The increase of $3 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 CONSOL Energy's common stock from DuPont Energy in
November 1998.
Taxes other than income decreased 10.6% to $41 million for the 1999 period
compared to $45 million for the 1998 period. The decrease of $4 million was due
primarily to decreased West Virginia severance taxes due to lower production in
that state and reduced property taxes due to reduced assessments on closed
operations.
Income Taxes
Income taxes were a $0.2 million benefit in the 1999 period compared to a $3
million expense in the 1998 period. The decrease in expense was due to lower
earnings before income taxes in the 1999 period and the recording of a $1.9
million benefit in the 1999 period resulting from filing the federal tax return
for the period January 1, 1998 through December 31, 1998.
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.
15
CONSOL Energy frequently evaluates potential acquisitions. In the past, CONSOL
Energy has funded acquisitions primarily with cash generated from operations,
but CONSOL Energy may consider a variety of other sources, depending on the size
of any transaction, including debt or equity financing. There can be no
assurance that such additional capital resources will be available to CONSOL
Energy on terms which CONSOL Energy finds acceptable, or at all.
Stockholders' Equity and Dividends
CONSOL Energy had stockholders' equity of $241 million at September 30, 1999 and
$255 million at September 30, 1998. A quarterly dividend was declared on July
20, 1999 of $0.28 per share of common stock for shareholders of record on August
4, 1999. This dividend was paid on September 2, 1999. A quarterly dividend of
$0.28 per share was declared on October 27, 1999, payable to shareholders of
record on November 8, 1999. This dividend will be paid on November 22, 1999.
The Board of Directors currently intends to pay quarterly dividends on the
common stock. Current outstanding indebtedness of CONSOL Energy does not
restrict CONSOL Energy's ability to pay cash dividends.
CONSOL Energy Share Buyback Program
Effective August 23, 1999, CONSOL Energy announced that it would begin a share
repurchase program of up to 1,000,000 shares of CONSOL Energy's Common Stock.
The timing of the purchases and the number of shares to be purchased are
dependent upon market conditions. As of September 30, 1999, CONSOL Energy had
repurchased in open market transactions on the New York Stock Exchange 124,200
shares at an average price of $13.24 per share. As of October 28, 1999, CONSOL
Energy had repurchased 273,000 shares in open market transactions on the New
York Stock Exchange at the average price of $13.44 per share.
Cash Flows
Net cash provided by operating activities was $91 million in the 1999 period
compared to $103 million in the 1998 period. The change in net cash provided by
operating activities reflects decreases in net income, liquidation of
inventories, offset by an increase in accounts receivable.
Net cash used in investing activities was $22 million in the 1999 period
compared to $83 million in the 1998 period. The change in net cash used in
investing activities reflects the purchase of R&P and the sale of marketable
securities in the 1998 period. In addition, capital expenditures in the 1999
period were $24 million compared with $70 million in the 1998 period.
16
Net cash used in financing activities was $71 million in the 1999 period
compared with $3 million in the 1998 period. The change in net cash used in
financing activities reflects the payments made on outstanding commercial paper
in the 1999 period compared to the proceeds from issuance of commercial paper in
the 1998 period. Also, a $22 million dividend was paid in the 1999 period.
This increased use of cash was partially offset by decreased payments on other
borrowings.
Capital Expenditures
Capital expenditures were $24 million in the 1999 period. CONSOL Energy made
such expenditures for replacement of mining equipment and projects to improve
the efficiency of mining operations. CONSOL Energy anticipates making capital
expenditures of approximately $200 million during the fiscal year ending June
30, 2000 and approximately $200 million during the fiscal year ending June 30,
2001, primarily for replacement of mining equipment and improvement in the
efficiency of mining operations. Capital expenditures for pollution abatement
currently are projected to be $5 million for the fiscal year ending June 30,
2000 and $13 million for fiscal year ending June 30, 2001.
Debt
At September 30, 1999, CONSOL Energy had total long-term debt of $324 million,
including current portion of long-term debt of $12 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 $14 million of variable rate notes due at
various dates through 2001,
. $28 million in advance royalty commitments,
. an aggregate principal amount of $1 million of notes maturing at various
dates through 2031 and
. an aggregate principal amount of $22 million of capital leases.
At September 30, 1999, CONSOL Energy had an aggregate principal amount of $301
million of commercial paper outstanding which had maturities ranging up to 45
days with interest at varying rates ranging from 5.53% to 5.80%.
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.
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At this time, CONSOL Energy is confident in its year 2000 preparations and
believes computerized processes have been identified, tested and/or vendor
certified as year 2000 compliant. 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 1997, CONSOL Energy has
expensed $1.4 million related to all phases of the year 2000 project. In the
first quarter of the fiscal year ending June 30, 2000, CONSOL Energy expensed
$0.3 million and expects to expense $0.3 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 is in the process of establishing a contingency plan in case of
failure of its information technology systems for all business units. In the
event CONSOL Energy's intermediaries or vendors do not expect to be year 2000
compliant, CONSOL Energy's contingency plan may include replacing such
intermediaries or vendors or conducting the particular operation itself.
Forward-Looking Statements
CONSOL Energy is including the following cautionary statement in this Report on
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of CONSOL Energy. With the exception of
historical matters, the matters discussed in this Report on Form 10-Q are
forward-looking statements (as defined in Section 21E of the Exchange Act) that
involve risks and uncertainties that could cause actual results to differ
materially from projected results. In addition to other factors and matters
discussed elsewhere in this Report on Form 10-Q, these risks, uncertainties and
contingencies include, but are not limited to, the following: the success or
failure of CONSOL Energy's efforts to implement its business strategy; reliance
on major customers and long-term contracts; the effects of market demand and
price on performance; the ability to renew coal sales agreements upon
expiration; the price of coal sold under any new sales agreements; fluctuating
sales prices; contract penalties; actions of CONSOL Energy's competitors and
CONSOL Energy's ability to respond to such actions; risks inherent in mining
including geological conditions and mine accidents; weather-related factors;
results of litigation; the effects of government regulation; the risk of work
stoppages; the risk of transportation
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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 September 30, 1999, CONSOL Energy had
outstanding $310 million aggregate principal amount of debt under fixed-rate
instruments and $315 million aggregate principal amount of debt under variable-
rate instruments. CONSOL Energy's primary exposure to market risk for changes
in interest rates relates to its commercial paper program. At September 30,
1999, CONSOL Energy had an aggregate of $301 million in commercial paper
outstanding. CONSOL Energy's commercial paper bore interest at an average rate
of 5.40% per annum during the three months ended September 30, 1999. A 100
basis-point increase in the average rate for CONSOL Energy's commercial paper
would have decreased CONSOL Energy's net income for the three months ended
September 30, 1999 by approximately $2 million.
Almost all of CONSOL Energy's transactions are denominated in U.S. dollars, and,
as a result, it does not have material exposure to currency exchange-rate risks.
CONSOL Energy did not engage in any interest rate, foreign currency exchange
rate or commodity price hedging transactions.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material litigation has been filed against CONSOL Energy during the three
months ended September 30, 1999, and other than noted, there have been no
material changes in legal proceedings previously disclosed by CONSOL Energy.
See Part I, Item 1. Financial Statements-Note 5.
On September 18, 1996, Union Electric, a Missouri corporation, commenced an
action in the U. S. District Court for the Eastern District of Missouri against
Consolidation Coal Company (an indirect wholly owned subsidiary of CONSOL Energy
Inc.), CONSOL Inc., and CONSOL Energy Inc. alleging, among other things, breach
of contract and asserting unjust enrichment claims against each defendant. The
claims relate to a long-term coal supply contract originally entered into
between Union Electric and Consolidation Coal Company on December 30, 1966.
Union Electric claimed that Consolidation Coal Company breached the contract by
refusing to agree to price reductions in the per-ton price for coal when
requested to do so by Union Electric under the contract's gross inequities
clause. The defendants disputed all of Union Electric's allegations and did not
believe that Union Electric suffered any gross inequity or was entitled to any
relief under the contract. Union Electric estimated
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its damages to be $124 million plus $66 million in interest. On August 31, 1998,
CONSOL Energy and the other defendants were awarded a summary judgment
dismissing Union Electric's claims. Union Electric then appealed the district
court's order dismissing the suit. On August 27, 1999, the United States Court
of Appeals for the Eighth Circuit affirmed the judgment of the district court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None for the quarter ending September 30, 1999.
ITEM 5. OTHER INFORMATION
CONSOL Energy will close its Keystone Complex in November because its
economically mineable reserves will be depleted. In calendar year 1998, the
Keystone Complex produced approximately 2.0 million tons which were shipped to a
single customer. CONSOL Energy has renegotiated the contract with the customer
to allow the coal to be provided from other CONSOL Energy mines.
CONSOL Energy will close its Helvetia Coal Company's Lucerne #6 Extension Mine,
the Marshall Run Mine, the Helvetia Preparation Plant and Kent Coal Mining
Company's Marshall Run Surface Mine in December because their economically
minable reserves will be depleted. In calendar year 1998, the mines produced
approximately 1.7 million tons of coal. CONSOL Energy plans to supply the
existing Helvetia customers from its other mines in Pennsylvania.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The following condensed consolidated financial statements of CONSOL Energy Inc.
and subsidiaries are included in this filing on the pages indicated:
Page
----
Consolidated Statements of Income for the three months ended September 30, 1999 and
September 30, 1998.................................................................... 3
Consolidated Balance Sheets at September 30, 1999 and June 30, 1999.................... 4
Consolidated Statements of Stockholders' Equity for the three months ended September
30, 1999.............................................................................. 6
Consolidated Statements of Cash Flows for the three months ended September 30, 1999
and September 30, 1998................................................................ 7
Notes to Consolidated Financial Statements............................................. 8
a (2) Financial Statement Schedules:
No financial statement schedules required to be presented by CONSOL Energy.
a (3) Exhibits filed as part of this Report:
The response to this portion of Item 6 is submitted as a separate part of this
report.
(b) (1) Reports on Form 8-K:
None
27 Financial Data Schedule, Exhibit 27.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOL ENERGY INC.
Date: November 10, 1999
By: /s/ Rolf Zimmermann
___________________________
R. Zimmermann,
Executive Vice President
Date: November 10, 1999
By: /s/ M. F. Nemser
________________________
M. F. Nemser
Vice President and Treasurer
(Chief Financial Officer)
Date: November 10, 1999
By: /s/ William J. Lyons
___________________________
William J. Lyons,
Vice President and Controller
(Principal Financial and Accounting Officer)
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