CNX-3.31.13-10Q


 
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, 2013
OR
o
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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1000 CONSOL Energy Drive
Canonsburg, PA 15317-6506
(724) 485-4000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 __________________________________________________ 
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x    Accelerated filer  o    Non-accelerated filer  o    Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares outstanding as of April 22,2013
Common stock, $0.01 par value
 
228,629,068
 




TABLE OF CONTENTS

 
 
Page
PART I FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Condensed Financial Statements
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
PART II OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 4.
Mine Safety Disclosures
 
 
 
ITEM 6.




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
 
March 31,
 
2013
 
2012
Sales—Outside
$
1,226,165

 
$
1,311,471

Sales—Gas Royalty Interests
14,204

 
12,206

Sales—Purchased Gas
1,358

 
839

Freight—Outside
14,061

 
49,293

Other Income
33,852

 
52,961

Total Revenue and Other Income
1,289,640

 
1,426,770

Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)
932,963

 
904,137

Gas Royalty Interests Costs
11,806

 
10,249

Purchased Gas Costs
959

 
517

Freight Expense
14,061

 
49,293

Selling, General and Administrative Expenses
33,670

 
38,903

Depreciation, Depletion and Amortization
161,315

 
155,347

Interest Expense
53,378

 
58,120

Taxes Other Than Income
82,787

 
91,627

Total Costs
1,290,939

 
1,308,193

(Loss) Earnings Before Income Taxes
(1,299
)
 
118,577

Income Taxes
522

 
21,381

Net (Loss) Income
(1,821
)
 
97,196

Add: Net Loss Attributable to Noncontrolling Interest
257

 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders
$
(1,564
)
 
$
97,196

Earnings Per Share:
 
 
 
Basic
$
(0.01
)
 
$
0.43

Dilutive
$
(0.01
)
 
$
0.42

Weighted Average Number of Common Shares Outstanding:
 
 
 
Basic
228,318,123

 
227,269,269

Dilutive
228,318,123

 
230,124,011

Dividends Paid Per Share
$

 
$
0.125

The accompanying notes are an integral part of these financial statements.


3



CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)

 
Three Months Ended
 
March 31,
 
2013
 
2012
Net (Loss) Income
$
(1,821
)
 
$
97,196

Other Comprehensive Income:

 

  Actuarially Determined Long-Term Liability Adjustments (Net of tax: ($28,250), ($35,897))
45,757

 
59,573

  Net (Decrease) Increase in the Value of Cash Flow Hedge (Net of tax: $13,966, ($49,008))
(18,595
)
 
76,076

  Reclassification of Cash Flow Hedges from OCI to Earnings (Net of tax: $11,984, $31,380)
(22,713
)
 
(47,941
)


 

Other Comprehensive Income
4,449

 
87,708



 

Comprehensive Income
2,628

 
184,904



 

Add: Comprehensive Loss Attributable to Noncontrolling Interest
257

 



 

Comprehensive Income Attributable to CONSOL Energy Inc. Shareholders
$
2,885

 
$
184,904

























The accompanying notes are an integral part of these financial statements.




4





CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 
 
(Unaudited)
 
 
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
25,058

 
$
21,878

Accounts and Notes Receivable:
 
 

Trade
408,350

 
428,328

Notes Receivables
322,406

 
318,387

Other Receivables
153,697

 
131,131

       Accounts Receivable - Securitized
30,119

 
37,846

Inventories
217,034

 
247,766

Deferred Income Taxes
160,750

 
148,104

Recoverable Income Taxes
6,602

 

Restricted Cash

 
48,294

Prepaid Expenses
115,156

 
157,360

Total Current Assets
1,439,172

 
1,539,094

Property, Plant and Equipment:
 
 
 
Property, Plant and Equipment
15,749,523

 
15,545,204

Less—Accumulated Depreciation, Depletion and Amortization
5,516,319

 
5,354,237

Total Property, Plant and Equipment—Net
10,233,204

 
10,190,967

Other Assets:
 
 
 
Deferred Income Taxes
425,079

 
444,585

Restricted Cash
20,383

 
20,379

Investment in Affiliates
248,127

 
222,830

Notes Receivable
25,995

 
25,977

Other
201,234

 
227,077

Total Other Assets
920,818

 
940,848

TOTAL ASSETS
$
12,593,194

 
$
12,670,909

















The accompanying notes are an integral part of these financial statements.


5



CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
 
(Unaudited)
 
 
 
March 31,
2013
 
December 31,
2012
LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
463,886

 
$
507,982

Current Portion of Long-Term Debt
13,353

 
13,485

Short-Term Notes Payable

 
25,073

Accrued Income Taxes

 
34,219

Borrowings Under Securitization Facility
30,119

 
37,846

Other Accrued Liabilities
839,294

 
768,494

Total Current Liabilities
1,346,652

 
1,387,099

Long-Term Debt:
 
 
 
Long-Term Debt
3,124,240

 
3,124,473

Capital Lease Obligations
48,299

 
50,113

Total Long-Term Debt
3,172,539

 
3,174,586

Deferred Credits and Other Liabilities:
 
 
 
Postretirement Benefits Other Than Pensions
2,825,925

 
2,832,401

Pneumoconiosis Benefits
175,952

 
174,781

Mine Closing
449,891

 
446,727

Gas Well Closing
150,973

 
148,928

Workers’ Compensation
154,573

 
155,648

Salary Retirement
172,306

 
218,004

Reclamation
43,833

 
47,965

Other
128,316

 
131,025

Total Deferred Credits and Other Liabilities
4,101,769

 
4,155,479

TOTAL LIABILITIES
8,620,960

 
8,717,164

Stockholders’ Equity:
 
 
 
Common Stock, $.01 Par Value; 500,000,000 Shares Authorized, 228,609,116 Issued and 228,574,361 Outstanding at March 31, 2013; 228,129,467 Issued and 228,094,712 Outstanding at December 31, 2012
2,289

 
2,284

Capital in Excess of Par Value
2,320,223

 
2,296,908

Preferred Stock, 15,000,000 shares authorized, None issued and outstanding

 

Retained Earnings
2,393,528

 
2,402,551

Accumulated Other Comprehensive Loss
(742,893
)
 
(747,342
)
Common Stock in Treasury, at Cost—34,755 Shares at March 31, 2013 and 34,755 Shares at December 31, 2012
(609
)
 
(609
)
Total CONSOL Energy Inc. Stockholders’ Equity
3,972,538

 
3,953,792

Noncontrolling Interest
(304
)
 
(47
)
TOTAL EQUITY
3,972,234

 
3,953,745

TOTAL LIABILITIES AND EQUITY
$
12,593,194

 
$
12,670,909






The accompanying notes are an integral part of these financial statements.


6



CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
 
 
Common
Stock
 
Capital in
Excess
of Par
Value
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Common
Stock in
Treasury
 
Total CONSOL Energy Inc.
Stockholders’
Equity
 
Non-
Controlling
Interest
 
Total

Equity
December 31, 2012
$
2,284

 
$
2,296,908

 
$
2,402,551

 
$
(747,342
)
 
$
(609
)
 
$
3,953,792

 
$
(47
)
 
$
3,953,745

(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss

 

 
(1,564
)
 

 

 
(1,564
)
 
(257
)
 
(1,821
)
Other Comprehensive Income

 

 

 
4,449

 

 
4,449

 

 
4,449

Comprehensive Income (Loss)

 

 
(1,564
)
 
4,449

 

 
2,885

 
(257
)
 
2,628

Issuance of Common Stock
5

 
904

 

 

 

 
909

 

 
909

Treasury Stock Activity

 

 
(7,459
)
 

 

 
(7,459
)
 

 
(7,459
)
Tax Cost From Stock-Based Compensation

 
(3,658
)
 

 

 

 
(3,658
)
 

 
(3,658
)
Amortization of Stock-Based Compensation Awards

 
26,069

 

 

 

 
26,069

 

 
26,069

Balance at March 31, 2013
$
2,289

 
$
2,320,223

 
$
2,393,528

 
$
(742,893
)
 
$
(609
)
 
$
3,972,538

 
$
(304
)
 
$
3,972,234






























The accompanying notes are an integral part of these financial statements.


7



CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Three Months Ended
 
March 31,
 
2013

2012
Operating Activities:
 
 
 
Net (Loss) Income
$
(1,821
)
 
$
97,196

Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:

 

Depreciation, Depletion and Amortization
161,315

 
155,347

Stock-Based Compensation
26,069

 
16,252

Gain on Sale of Assets
(2,176
)
 
(19,713
)
Amortization of Mineral Leases
503

 
1,886

Deferred Income Taxes
305

 
(2,265
)
Equity in Earnings of Affiliates
(4,797
)
 
(7,935
)
Changes in Operating Assets:

 

Accounts and Notes Receivable
27,137

 
(17,990
)
Inventories
30,732

 
(26,662
)
Prepaid Expenses
7,944

 
6,231

Changes in Other Assets
6,749

 
10,837

Changes in Operating Liabilities:

 

Accounts Payable
(26,474
)
 
(39,312
)
Other Operating Liabilities
19,940

 
62,233

Changes in Other Liabilities
16,652

 
(8,928
)
Other
6,202

 
2,309

Net Cash Provided by Operating Activities
268,280

 
229,486

Investing Activities:

 

Capital Expenditures
(405,972
)
 
(306,446
)
Change in Restricted Cash
48,294

 

Proceeds from Sales of Assets
138,636

 
28,611

Investments In Equity Affiliates
(12,500
)
 
(10,250
)
Net Cash Used in Investing Activities
(231,542
)
 
(288,085
)
Financing Activities:

 

Payments on Miscellaneous Borrowings
(27,601
)
 
(2,330
)
Payments on Securitization Facility
(7,727
)
 

Tax Benefit from Stock-Based Compensation
730

 
750

Dividends Paid

 
(28,387
)
Issuance of Common Stock
909

 
54

Issuance of Treasury Stock

 
109

Debt Issuance and Financing Fees
131

 
(20
)
Net Cash Used In Financing Activities
(33,558
)
 
(29,824
)
Net Increase (Decrease) in Cash and Cash Equivalents
3,180

 
(88,423
)
Cash and Cash Equivalents at Beginning of Period
21,878

 
375,736

Cash and Cash Equivalents at End of Period
$
25,058

 
$
287,313



The accompanying notes are an integral part of these financial statements.


8



CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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 months ended March 31, 2013 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2012 has been derived from the Audited Consolidated Financial Statements at that date but does not include all the notes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Consolidated Financial Statements and related notes for the year ended December 31, 2012 included in CONSOL Energy Inc.'s Form 10-K.

Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2012, with no effect on previously reported net income or stockholders' equity.

Basic earnings per share are computed by dividing net (loss) income attributable to shareholders by the weighted average shares outstanding during the reporting period. Dilutive earnings per share are computed similarly to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options and performance stock options and the assumed vesting of restricted and performance share units, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and performance share options were exercised, that outstanding restricted stock units and performance share units were released, and that the proceeds from such activities were used to acquire shares of common stock at the average market price during the reporting period. CONSOL Energy Inc. (CONSOL Energy or the Company) includes the impact of pro forma deferred tax assets in determining potential windfalls and shortfalls for purposes of calculating assumed proceeds under the treasury stock method. The table below sets forth the share-based awards that have been excluded from the computation of the diluted earnings per share because their effect would be anti-dilutive:
 
Three Months Ended March 31,
 
2013
 
2012
Anti-Dilutive Options
5,011,771
 
 
1,574,922
 
Anti-Dilutive Restricted Stock Units
1,459,228
 
 
12,203
 
Anti-Dilutive Performance Share Units
700,040
 
 
 
Anti-Dilutive Performance Share Options
602,101
 
 
100,350
 
Anti-Dilutive CONSOL Share Units
891,921
 
 
 
 
8,665,061
 
 
1,687,475
 

The table below sets forth the share-based awards that have been exercised or released:
 
Three Months Ended March 31,
 
2013
 
2012
Options
84,994
 
 
11,716
 
Restricted Stock Units
478,509
 
 
458,018
 
Performance Share Units
159,228
 
 
229,730
 
 
722,731
 
 
699,464
 

The weighted average exercise price per share of the options exercised during the three months ended March 31, 2013 and 2012 was $10.65 and $13.81, respectively.


9



The computations for basic and dilutive earnings per share are as follows:
 
 
Three Months Ended March 31,
 
2013
 
2012
Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders
$
(1,564
)
 
$
97,196
 
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
228,318,123
 
 
227,269,269
 
Effect of stock-based compensation awards
 
 
2,854,742
 
Dilutive
228,318,123
 
 
230,124,011
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.43
 
Dilutive
$
(0.01
)
 
$
0.42
 

Changes in Accumulated Other Comprehensive Income / (Loss) by component, net of tax, were as follows:
 
Gains and Losses on Cash Flow Hedges
 
Postretirement Benefits
 
Total
Balance at December 31, 2012
$
76,761
 
 
$
(824,103
)
 
$
(747,342
)
Other comprehensive income before reclassifications
(18,595
)
 
18,497
 
 
(98
)
Amounts reclassified from accumulated other comprehensive income
(22,713
)
 
27,260
 
 
4,547
 
New current period other comprehensive income
(41,308
)
 
45,757
 
 
4,449
 
Balance at March 31, 2013
$
35,453
 
 
$
(778,346
)
 
$
(742,893
)

The following table shows the reclassification of adjustments out of Accumulated Other Comprehensive Loss:

 
Three Months Ended March 31,

2013
 
2012
Derivative Instruments (Note 12)
 
 
 
Natural gas price swaps
$
(34,697
)
 
$
(79,321
)
Tax benefit
11,984
 
 
31,380
 
Net of tax
$
(22,713
)
 
$
(47,941
)
Actuarially Determined Long-Term Liability Adjustments*(Note 3 and Note 4)
 
 
 
Amortization of prior service costs
$
(8,212
)
 
$
(12,106
)
Recognized net actuarial loss
25,188
 
 
27,005
 
Settlement loss
27,115
 
 
 
Total
44,091
 
 
14,899
 
Tax expense
(16,831
)
 
(5,602
)
Net of tax
$
27,260
 
 
$
9,297
 
 
*Excludes amounts related to the remeasurement of the Actuarially Determined Long-Term Liabilities for the three months ended March 31, 2013 and March 31, 2012.






10



NOTE 2—ACQUISITIONS AND DISPOSITIONS:
    
During the three months ended March 31, 2013, CNX Gas Company LLC (CNX Gas Company), a wholly owned subsidiary of CONSOL Energy, completed negotiations with the Allegheny County Airport Authority, which operates the Pittsburgh International Airport and the Allegheny County Airport, for the lease of the oil and gas rights on approximately 9.3 thousand acres.  A majority of these contiguous acres are in the liquids area of the Marcellus Shale play.  CNX Gas Company paid $46,315 as an up-front bonus payment at closing.  Approximately 7.6% of the bonus payment was placed into escrow while negotiations continue for a portion of the acres associated with the Allegheny County Airport and other acres that have potentially defective title.  CNX Gas Company must spud a well by February 21, 2015 and proceed with due diligence to complete the well or the lease terminates and CNX Gas Company foregoes the bonus. Our joint venture partner, Noble Energy, has indicated that it intends to acquire 50% of the acreage and accordingly, incur 50% of the associated costs.

In March 2013, CONSOL Energy completed a sale-leaseback of longwall shields for the Shoemaker Mine. Cash proceeds for the sale were $63,839. A loss of $279 was recognized due to transaction fees and is included in Other Income in the Consolidated Statement of Income. The lease has been accounted for as an operating lease. The lease term is five years.

In January 2013, CONSOL Energy completed a sale-leaseback of longwall shields for the Bailey Mine. Cash proceeds for the sale were $71,166. A loss of $358 was recognized due to transaction fees and is included in Other Income in the Consolidated Statement of Income. The lease has been accounted for as an operating lease. The lease term is five years.

On December 21, 2012, CONSOL Energy completed the disposition of its non-producing Ram River & Scurry Ram assets in Western Canada which consisted of 36 thousand acres of coal lands. In December 2012, cash proceeds of $51,869, of which $48,294 was restricted, were received related to this transaction. These proceeds were net of $637 in transaction fees. The restrictions on the cash were removed during the three months ended March 31, 2013 and are reflected as a Change in Restricted Cash in the Investing section of the Consolidated Statement of Cash Flows. Additionally, a note receivable was recognized in 2012 related to the two additional cash payments to be received in June 2013 and June 2014. Notes receivables of $25,500 and $24,500 were recorded in Accounts and Notes Receivables and Other Assets in the Consolidated Balance Sheet, respectively. The gain on the transaction was $89,943 and was included in Other Income in the Consolidated Statement of Income for the year ended December 31, 2012.

On February 9, 2012, CONSOL Energy completed the disposition of its Burning Star No. 4 property in Illinois, which consisted of 4.3 thousand acres of coal lands and surface rights, for proceeds of $13,023. The gain on the transaction was $11,261 and is included in Other Income in the Consolidated Statements of Income for the three month period ended March 31, 2012.

NOTE 3—COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT (OPEB) PLANS NET PERIODIC BENEFIT COSTS:

Components of net periodic costs for the three months ended March 31 are as follows:
 
Pension Benefits
 
Other Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Service cost
$
5,706

 
$
5,153

 
$
4,849

 
$
5,200

Interest cost
8,843

 
9,378

 
29,619

 
35,527

Expected return on plan assets
(12,144
)
 
(11,627
)
 

 

Amortization of prior service cost (credits)
(408
)
 
(408
)
 
(7,804
)
 
(11,599
)
Recognized net actuarial loss
12,175

 
12,263

 
17,595

 
20,345

Settlement loss
27,115

 

 

 

Net periodic benefit cost
$
41,287

 
$
14,759

 
$
44,259

 
$
49,473


For the three months ended March 31, 2013, $18,560 was paid to the pension trust for pension benefits from operating cash flows. CONSOL Energy expects to contribute to the pension trust using prudent funding methods. Currently, depending on asset values and asset returns held in the trust, we expect to contribute $50,000 to the pension trust in 2013. Net periodic benefit costs are allocated to Costs of Goods Sold and Other Operating Charges and Selling, General and Administrative Expenses in the results of operations.


11




According to the Defined Benefit Plans Topic of the FASB Accounting Standards Codification, if the lump sum distributions made for the plan year, which for CONSOL Energy is January 1 to December 31, exceed the total of the projected service cost and interest cost for the plan year, settlement accounting is required. Lump sum payments exceeded this threshold during the first quarter of 2013. Accordingly, CONSOL Energy recognized expense of $27,115 for the quarter ended March 31, 2013 in Costs of Goods Sold and Other Operating Charges in the results of operations. The settlement charge represented a pro rata portion of the net unrecognized loss based on the percentage reduction in the projected benefit obligation due to the lump sum payments. The settlement charge noted above also resulted in a remeasurement of the pension plan at March 31, 2013. The remeasurement resulted in a change to the discount rate to 4.12% at March 31, 2013 from 4.00% at December 31, 2012. The remeasurement reduced the pension liability by $29,916. The settlement and the corresponding remeasurement of the pension plan resulted in an adjustment of $35,261 in other comprehensive income, net of $21,770 in deferred taxes. Currently, the settlement and remeasurement of the pension plan will result in a $6,760 reduction to pension expense compared to what was originally expected to be recognized for the remaining nine months of 2013. It is reasonably possible that CONSOL Energy will incur additional settlement charges in 2013, which would require the pension plan to be remeasured using updated assumptions.

CONSOL Energy does not expect to contribute to the other postemployment benefit plan in 2013. We intend to pay benefit claims as they become due. For the three months ended March 31, 2013, $41,922 of other postemployment benefits have been paid.
NOTE 4—COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS:
Components of net periodic costs (benefits) for the three months ended March 31 are as follows:
 
 
CWP
 
Workers' Compensation
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Service cost
$
2,135

 
$
1,928

 
$
3,533

 
$
3,634

Interest cost
1,808

 
1,991

 
1,655

 
1,778

Amortization of actuarial gain
(4,213
)
 
(4,934
)
 
(699
)
 
(986
)
State administrative fees and insurance bond premiums

 

 
1,659

 
1,910

Legal and administrative costs

 

 
591

 
648

Net periodic (benefit) cost
$
(270
)
 
$
(1,015
)
 
$
6,739

 
$
6,984


CONSOL Energy does not expect to contribute to the CWP plan in 2013. We intend to pay benefit claims as they become due. For the three months ended March 31, 2013, $2,698 of CWP benefit claims have been paid.
CONSOL Energy does not expect to contribute to the workers’ compensation plan in 2013. We intend to pay benefit claims as they become due. For the three months ended March 31, 2013, $8,640 of workers’ compensation benefits, state administrative fees and surety bond premiums have been paid.

NOTE 5—INCOME TAXES:

The following is a reconciliation, stated in dollars and as a percentage of pretax income, of the U.S. statutory federal income tax rate to CONSOL Energy’s effective tax rate:
 


12



 
For the Three Months Ended March 31,
 
2013
 
2012
 
Amount
 
Percent
 
Amount
 
Percent
Statutory U.S. federal income tax rate
$
(455
)
 
35.0
 %
 
$
41,502

 
35.0
 %
Impact of excess tax depletion
1,428

 
(109.9
)
 
(26,514
)
 
(22.4
)
Net effect of state income taxes
(179
)
 
13.7

 
3,510

 
3.0

Other
(272
)
 
21.0

 
2,883

 
2.4

Income Tax Expense / Effective Rate
$
522

 
(40.2
)%
 
$
21,381

 
18.0
 %

The effective rates for the three months ended March 31, 2013 and 2012 were calculated using the annual effective rate projection on recurring earnings and include tax liabilities related to certain discrete transactions which are described below. The effective tax rate is sensitive to changes in annual profitability and percentage depletion.

During the three months ended March 31, 2012, CONSOL Energy reached an agreement with the Internal Revenue Service Appeals Division on its Extraterritorial Income Exclusion refund claim for tax years 2004-2005. As a result of the agreement, the Company reflected $983 as a discrete reduction to income tax expense. The discrete transaction was reflected in the Other line of the rate reconciliation.
The total amounts of uncertain tax positions at March 31, 2013 and 2012 were $22,770 and $25,570, respectively. If these uncertain tax positions were recognized, approximately $2,071 and $3,891, respectively, would affect CONSOL Energy’s effective tax rate. There were no additions to the liability for unrecognized tax benefits during the three months ended March 31, 2013 and 2012.
CONSOL Energy recognizes interest accrued related to uncertain tax positions in its interest expense. As of March 31, 2013 and 2012, the Company reported an accrued interest liability relating to uncertain tax positions of $5,165 and $5,741, respectively. The accrued interest liability includes interest expense that is reflected in the Company’s Consolidated Statements of Income for the three months ended March 31, 2013 and 2012 of $335 and $368, respectively.
CONSOL Energy recognizes penalties related to uncertain tax positions in its income tax expense. As of March 31, 2013 and 2012, CONSOL Energy had no accrued liability for tax penalties.

CONSOL Energy and its subsidiaries file federal income tax returns with the United States and returns within various states and Canadian jurisdictions. With few exceptions, the Company is no longer subject to United States federal, state, local, or non-U.S. income tax determinations by tax authorities for the years before 2008.

NOTE 6—INVENTORIES:

Inventory components consist of the following:
 
March 31,
2013
 
December 31,
2012
Coal
$
51,954

 
$
78,825

Merchandise for resale
35,120

 
35,363

Supplies
129,960

 
133,578

Total Inventories
$
217,034

 
$
247,766


         
Inventories are stated at the lower of cost or market. The cost of coal inventories is determined by the first-in, first-out (FIFO) method. Coal inventory costs include labor, supplies, equipment costs, operating overhead, depreciation, depletion and amortization, and other related costs.

Merchandise for resale is valued using the last-in, first-out (LIFO) cost method. The excess of replacement cost of merchandise for resale inventories over carrying LIFO value was $19,726 and $19,700 at March 31, 2013 and December 31, 2012, respectively.





13



NOTE 7—ACCOUNTS RECEIVABLE SECURITIZATION:
CONSOL Energy and certain of our U.S. subsidiaries are party to a trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. The facility allows CONSOL Energy to receive on a revolving basis up to $200,000. The facility also allows for the issuance of letters of credit against the $200,000 capacity. At March 31, 2013, there were letters of credit outstanding against the facility of $159,281. CONSOL Energy management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on the Company's financial condition. No amounts related to these financial guarantees and letters of credit are recorded as liabilities on the financial statements.
CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary, buys and sells eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to CNX Funding Corporation, who in turn sells these receivables to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. This retained interest, which is included in Accounts and Notes Receivable Trade in the Consolidated Balance Sheets, is recorded at fair value. Due to a short average collection cycle for such receivables, our collection experience history and the composition of the designated pool of trade accounts receivable that are part of this program, the fair value of our retained interest approximates the total amount of the designated pool of accounts receivable. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.
In accordance with the Transfers and Servicing Topics of the Financial Accounting Standards Board (FASB) Accounting Standards Codification, CONSOL Energy records transactions under the securitization facility as secured borrowings on the Consolidated Balance Sheets. The pledge of collateral is reported as Accounts Receivable - Securitized and the borrowings are classified as debt in Borrowings under Securitization Facility.
The cost of funds under this facility is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $472 and $419 for the three months ended March 31, 2013 and 2012, respectively. These costs have been recorded as financing fees which are included in Cost of Goods Sold and Other Operating Charges in the Consolidated Statements of Income. No servicing asset or liability has been recorded. The receivables facility expires in March 2017 with the underlying liquidity agreement renewing annually each March.
At March 31, 2013 and December 31, 2012, eligible accounts receivable totaled $199,800 and $200,000, respectively. There was subordinated retained interest of $10,400 at March 31, 2013. There was no subordinated retained interest at December 31, 2012. There were $30,119 borrowings under the Securitization Facility recorded on the Consolidated Balance Sheet as of March 31, 2013 and $37,846 at December 31, 2012. The accounts receivable securitization program decreased by $7,727 in the three months ended March 31, 2013 and there was no change in the three months ended March 31, 2012. The decrease is reflected in the Net Cash Used in Financing Activities in the Consolidated Statement of Cash Flows. In accordance with the facility agreement, the Company is able to receive proceeds based upon the eligible accounts receivable at the previous month end.





















14



NOTE 8—PROPERTY, PLANT AND EQUIPMENT:
 
 
March 31,
2013
 
December 31,
2012
Coal and other plant and equipment
$
6,032,128

 
$
6,030,620

Intangible drilling cost
1,623,391

 
1,550,297

Proven gas properties
1,600,532

 
1,596,838

Coal properties and surface lands
1,351,271

 
1,346,151

Unproven gas properties
1,321,108

 
1,266,017

Gas gathering equipment
1,024,952

 
1,006,882

Airshafts
711,586

 
706,388

Mine development
561,288

 
537,939

Leased coal lands
529,741

 
529,758

Gas wells and related equipment
508,768

 
492,367

Coal advance mining royalties
394,438

 
391,501

Other gas assets
82,094

 
82,217

Gas advance royalties
8,226

 
8,229

Total Property Plant and Equipment
15,749,523

 
15,545,204

Less: Accumulated DD&A
5,516,319

 
5,354,237

Total Net PP&E
$
10,233,204

 
$
10,190,967


Industry Participation Agreements

CONSOL Energy has two significant industry participation agreements (referred to as "joint ventures" or "JVs") that provided drilling and completion carries for our retained interests.

On October 21, 2011, CNX Gas Company, a wholly owned subsidiary of CONSOL Energy, completed a sale to Hess Ohio Developments, LLC (Hess) of 50% of nearly 200 thousand net Utica Shale acres in Ohio. As part of the transaction, CONSOL Energy and Hess entered into a joint development agreement pursuant to which Hess agreed to pay approximately $534,000 in the form of a 50% drilling carry of certain CONSOL Energy working interest obligations as the acreage is developed. Under the asset acquisition agreement, Hess had the right to perform due diligence on the title to the oil and gas interests which we conveyed to them and Hess's aggregate carried cost obligation under the joint venture agreements would be reduced by the value the parties allocated in the transaction to the acreage which subsequently proved to be defective. Based on title work performed by Hess as part of the title defect process, we believe that there are chain of title issues with respect to approximately 38 thousand of the joint venture acres (with a carry value of approximately $153,000), most of which likely cannot be cured. We are currently in discussions with Hess regarding an agreement to finally resolve the title defect process. If we are unable to reach an agreement, the title defects that Hess formally asserts will be resolved in arbitration in accordance with the asset acquisition agreement.
  
On September 30, 2011, CNX Gas Company completed a sale to Noble Energy, Inc. (Noble) of 50% of the Company's undivided interest in certain Marcellus Shale oil and gas properties in West Virginia and Pennsylvania covering approximately 628 thousand net acres and 50% of the Company's undivided interest in certain of its existing Marcellus Shale wells and related leases. As part of the transaction, CNX Gas Company also received a commitment from Noble to pay one-third of the Company's working interest share of certain drilling and completion costs, up to approximately $2,100,000 with certain restrictions. These restrictions include the suspension of carry if average Henry Hub natural gas prices are below $4.00 per million British thermal units (MMBtu) for three consecutive months. The carry is currently suspended and will remain suspended until average natural gas prices are above $4.00/MMBtu for three consecutive months. Restrictions also include a $400,000 annual maximum on Noble's carried cost obligation. The aggregate amount of the drilling carry may also be adjusted downward under provisions of the joint venture agreements in certain events.

Under our joint venture agreement with Noble, Noble had the right to perform due diligence on the title to the oil and gas interests which we conveyed to them and to assert that title to the acreage is defective. CONSOL Energy can then review and respond to the asserted title defects, or cure them, and ultimately, if the claim is not resolved, either party can submit the defect to an arbitrator for resolution. If Noble establishes any title defects which are either not resolved in favor of CONSOL Energy or cured by us, then subject to certain deductibles, Noble's aggregate carried cost obligation under the joint venture agreement will be reduced by the value the parties previously allocated to the affected acreage in the transaction. If a significant


15



percentage of the oil and gas interests we contributed have title defects which cannot be resolved or cured, the carried costs could be materially reduced and our aggregate share of the drilling and completion costs for wells in this joint venture could materially increase. Pursuant to the joint venture agreement, Noble Energy has submitted a final title defect notice to CONSOL Energy. Based on our review of this title defect notice, Noble has asserted title defects with respect to approximately 93 thousand gross deal acres, having a carry value of approximately $610,000, which we have not yet addressed. We are working closely with Noble to address these alleged defects and we believe that we will resolve or cure most of these defects favorably to CONSOL Energy. To date, we have conceded defects which have an aggregate value of approximately $37,000 in excess of the applicable deductible, and will attempt to cure as many of those defects as possible. The impact of these conceded defects on the Company's financial statements was $6,310 for the three months ended March 31, 2013.

The following table provides information about our industry participation agreements as of March 31, 2013:
Shale Play
 
Industry Participation Agreement Partner
 
Industry Participation Agreement Date
 
Drilling Carries Remaining*
Marcellus
 
Noble Energy, Inc.
 
September 30, 2011
 
$
2,052,790

Utica
 
Hess Ohio Developments, LLC
 
October 21, 2011
 
$
496,723


*See above for a description of the impact on the drilling carries of title defects that have been asserted and that may be asserted by Noble Energy and Hess.

NOTE 9—SHORT-TERM NOTES PAYABLE:
CONSOL Energy's $1,500,000 Senior Secured Credit Agreement expires April 12, 2016. The facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries. CONSOL Energy's credit facility allows for up to $1,500,000 of borrowings and letters of credit. CONSOL Energy can request an additional $250,000 increase in the aggregate borrowing limit amount. Fees and interest rate spreads are based on a ratio of financial covenant debt to twelve-month trailing earnings before interest, taxes, depreciation, depletion and amortization (Adjusted EBITDA), measured quarterly. The facility includes a minimum interest coverage ratio covenant of no less than 2.50 to 1.00, measured quarterly. The interest coverage ratio was 4.42 to 1.00 at March 31, 2013. The facility includes a maximum leverage ratio covenant of not more than 4.75 to 1.00, measured quarterly through March 31, 2013, and no more than 4.50 to 1.00 thereafter. The leverage ratio was 2.86 to 1.00 at March 31, 2013. The facility also includes a senior secured leverage ratio covenant of not more than 2.00 to 1.00, measured quarterly. The senior secured leverage ratio was 0.09 to 1.00 at March 31, 2013. Affirmative and negative covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock, pay dividends, merge with another corporation and amend, modify or restate the senior unsecured notes. At March 31, 2013 and December 31, 2012, the $1,500,000 facility had no borrowings outstanding and $100,292 of letters of credit outstanding, leaving $1,399,708 of capacity available for borrowings and the issuance of letters of credit.

CNX Gas Corporation's (CNX Gas) $1,000,000 Senior Secured Credit Agreement expires April 12, 2016. The facility is secured by substantially all of the assets of CNX Gas and its subsidiaries. CNX Gas' credit facility allows for up to $1,000,000 for borrowings and letters of credit. CNX Gas can request an additional $250,000 increase in the aggregate borrowing limit amount. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Covenants in the facility limit CNX Gas’ ability to dispose of assets, make investments, pay dividends and merge with another corporation. The credit facility allows investments in joint ventures for the development and operation of gas gathering systems and provides for $600,000 of loans, advances and dividends from CNX Gas to CONSOL Energy. Investments in CONE Gathering, LLC (CONE) are unrestricted. The facility includes a maximum leverage ratio covenant of not more than 3.50 to 1.00, measured quarterly. The leverage ratio was 0.56 to 1.00 at March 31, 2013. The facility also includes a minimum interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 42.09 to 1.00 at March 31, 2013. At March 31, 2013 and December 31, 2012, the $1,000,000 facility had no borrowings outstanding and $70,203 of letters of credit outstanding, leaving $929,797 of capacity available for borrowings and the issuance of letters of credit. The average interest rate for the three months ended March 31, 2013 was 1.89%. Accrued interest of $119 and $29 is included in Other Accrued Liabilities in the Consolidated Balance Sheet at March 31, 2013 and at December 31, 2012, respectively.







16



NOTE 10—LONG-TERM DEBT:
 
March 31,
2013
 
December 31,
2012
Debt:
 
 
 
Senior notes due April 2017 at 8.00%, issued at par value
$
1,500,000

 
$
1,500,000

Senior notes due April 2020 at 8.25%, issued at par value
1,250,000

 
1,250,000

Senior notes due March 2021 at 6.375%, issued at par value
250,000

 
250,000

MEDCO revenue bonds in series due September 2025 at 5.75%
102,865

 
102,865

Advance royalty commitments (7.43% weighted average interest rate for March 31, 2013 and December 31, 2012)
20,394

 
20,394

Other long-term notes maturing at various dates through 2031 (total value of $6,956 less unamortized discount of $1,411 at March 31, 2013)
5,545

 
5,758

 
3,128,804

 
3,129,017

Less amounts due in one year *
4,564

 
4,544

Long-Term Debt
$
3,124,240

 
$
3,124,473


* Excludes current portion of Capital Lease Obligations of $8,789 and $8,941 at March 31, 2013 and December 31, 2012, respectively.

Accrued interest related to Long-Term Debt of $113,586 and $63,363 was included in Other Accrued Liabilities in the Consolidated Balance Sheets at March 31, 2013 and December 31, 2012, respectively.

NOTE 11—COMMITMENTS AND CONTINGENCIES:
CONSOL Energy and its subsidiaries are subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes and other claims and actions arising out of the normal course of business. We accrue the estimated loss for these lawsuits and claims when the loss is probable and can be estimated. Our current estimated accruals related to these pending claims, individually and in the aggregate, are immaterial to the financial position, results of operations or cash flows of CONSOL Energy. It is possible that the aggregate loss in the future with respect to these lawsuits and claims could ultimately be material to the financial position, results of operations or cash flows of CONSOL Energy; however, such amounts cannot be reasonably estimated. The amount claimed against CONSOL Energy is disclosed below when an amount is expressly stated in the lawsuit or claim, which is not often the case. The maximum aggregate amount claimed in those lawsuits and claims, regardless of probability, where a claim is expressly stated or can be estimated, exceeds the aggregate amounts accrued for all lawsuits and claims by approximately $845,000.

The following lawsuits and claims include those for which a loss is probable and an accrual has been recognized.

American Electric Corp: On August 8, 2011, the United States Environmental Protection Agency, Region IV, sent Consolidation Coal Company a General Notice and Offer to Negotiate regarding the Ellis Road/American Electric Corp. Superfund Site in Jacksonville, Florida. The General Notice was sent to approximately 180 former customers of American Electric Corp. CONSOL Energy has confirmed that it did business with American Electric Corp. in 1983 and 1984. The General Notice indicated that the Environmental Protection Agency (EPA) has determined that polychlorinated biphenyls (PCBs) and other contaminants in the soils and sediments at and near the site require a removal action. The Offer to Negotiate invited the potentially responsible parties (PRPs) to enter into an Administrative Settlement Agreement and Order on Consent (AOC) to provide for conducting the removal action under the EPA oversight and to reimburse the EPA for its past costs, in the amount of $384 and for its future costs. CONSOL Energy responded to the EPA indicating its willingness to participate in such negotiations, and CONSOL Energy is participating in a group of potentially responsible parties to conduct the removal action. The AOC was signed on July 20, 2012, and as a result, the EPA granted the performing parties a $408 orphan share credit, which will offset the EPA's past costs. The actual scope of the work has yet to be determined, but the current estimate of the total costs of the removal action is in the range of $2,000 to $5,400, with CONSOL Energy's share of such costs at approximately 8%. In 2011, CONSOL Energy established an initial accrual based on its allocated share of the costs among the viable former customers of American Electric Corp. During the year ended December 31, 2012, CONSOL Energy funded $250 to an independent trust established for the remediation, which is 50% of CONSOL Energy's allocated share of the trust fund. The liability is immaterial to the overall financial position of CONSOL Energy and is included in Other Accrued Liabilities on the Consolidated Balance Sheet.


17



    
Ward Transformer Superfund Site: CONSOL Energy was notified in November 2004 by the EPA that it is a potentially responsible party (PRP) under the Superfund program established by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), with respect to the Ward Transformer site in Wake County, North Carolina. The EPA, CONSOL Energy and two other PRPs entered into an administrative Settlement Agreement and Order of Consent, requiring those PRPs to undertake and complete a PCB soil removal action, at and in the vicinity of the Ward Transformer property. In June 2008, while conducting the PCB soil excavation on the Ward property, it was determined that PCBs have migrated onto adjacent properties and in September 2008, the EPA notified CONSOL Energy and 60 other companies that they are PRPs for these additional areas. The current estimated cost of remedial action for the area CONSOL Energy was originally named a PRP, including payment of the EPA's past and future cost, is approximately $65,000. The current estimated cost of the most likely remediation plan for the additional areas discovered is approximately $11,000. CONSOL Energy recognized no expense in Cost of Goods Sold and Other charges in the three months ended March 31, 2013 and 2012, respectively. Also, CONSOL Energy has provided funding to an independent trust established for this remediation. No funding was made in the three months ended March 31, 2013 or 2012, respectively. As of March 31, 2013, CONSOL Energy and the other participating PRPs had asserted CERCLA cost recovery and contribution claims against approximately 225 nonparticipating PRPs to recover a share of the costs incurred and to be incurred to conduct the removal actions at the Ward Site. CONSOL Energy's portion of recoveries from settled claims is $4,393. Accordingly, the liability reflected in Other Accrued Liabilities was reduced by these settled claims. The remaining net liability at March 31, 2013 is $3,167.

Asbestos-Related Litigation: One of our subsidiaries, Fairmont Supply Company (Fairmont), which distributes industrial supplies, currently is named as a defendant in approximately 6,900 asbestos-related claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, Texas and Illinois. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time, and in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. Based on over 15 years of experience with this litigation, we have established an accrual to cover our estimated liability for these cases. This accrual is immaterial to the overall financial position of CONSOL Energy and is included in Other Accrued Liabilities on the Consolidated Balance Sheet. Past payments by Fairmont with respect to asbestos cases have not been material.
 
Ryerson Dam Litigation: In 2008, the Pennsylvania Department of Conservation and Natural Resources (the Commonwealth) filed a six-count Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, claiming that the Company's underground longwall mining activities at its Bailey Mine caused cracks and seepage damage to the Ryerson Park Dam. The Commonwealth subsequently breached the dam, thereby eliminating the Ryerson Park Lake. The Commonwealth claimed that the Company is liable for dam reconstruction costs, lake restoration costs and natural resource damages totaling $58,000. In October 2008, the Common Pleas Court ruled that natural resource damages were not recoverable and referred the Commonwealth's claim to the Pennsylvania Department of Environmental Protection (DEP). On February 16, 2010, the DEP issued an interim report, concluding that the alleged damage was subsidence related. The DEP estimated the cost of repair to be approximately $20,000. The Company has appealed the DEP's findings to the Pennsylvania Environmental Hearing Board (PEHB), which will consider the case de novo, meaning without regard to the DEP's decision, as to any finding of causation of damage and/or the amount of damages. Either party may appeal the decision of the PEHB to the Pennsylvania Commonwealth Court, and then, as may be allowed, to the Pennsylvania Supreme Court. As to the underlying claim, CONSOL Energy believes it is not responsible for the damage to the dam and that numerous grounds exist upon which to challenge the propriety of the claims. If CONSOL Energy is ultimately found to be liable for damages to the dam, we believe the range of loss would be between $9,000 and $30,000. There have been settlement discussions and we have established an accrual to cover our estimated settlement liability for this case. This accrual is immaterial to the overall financial position of CONSOL Energy and is included in Other Accrued Liabilities on the Consolidated Balance Sheet. See Note 18 - Subsequent Events for additional information.

South Carolina Electric & Gas Company Arbitration: In April, 2009, South Carolina Electric & Gas Company (SCE&G), a public utility, filed an arbitration complaint, against CONSOL of Kentucky and CONSOL Energy Sales Company, both wholly owned subsidiaries of CONSOL Energy, seeking $36,000 in damages. SCE&G claimed it suffered those damages in obtaining cover coal to replace coal which was not delivered in 2008 under a coal sales agreement.  CONSOL Energy counterclaimed against SCE&G for $9,400 for terminating coal shipments under the sales agreement, alleging that SCE&G had agreed that shortfalls could be made up in 2009.  A four day hearing on the claims commenced on April 30, 2012. On December 21, 2012, the Arbitration Panel awarded SCE&G $9,735, plus interest at 8.75% from January 9, 2011, and attorney


18



fees. The Award is against CONSOL of Kentucky only. The Panel is currently considering SCE&G's attorney fee claim of $1,873, which has been vigorously opposed by CONSOL Energy. We have established an accrual to cover our estimated liability for this case. This accrual is immaterial to the overall financial position of CONSOL Energy and is included in Other Accrued Liabilities on the Consolidated Balance Sheet.

Hale Litigation: A purported class action lawsuit was filed on September 23, 2010 in the U.S. District Court in Abingdon, Virginia styled Hale v. CNX Gas Company, et. al. The lawsuit alleges that the plaintiff class consists of forced-pooled unleased gas owners whose gas ownership is in conflict, the Virginia Supreme Court and General Assembly have decided that coalbed methane (CBM) belongs to the owner of the gas estate, the Virginia Gas and Oil Act of 1990 unconstitutionally provides only a 1/8 net proceeds royalty to CBM owners for gas produced under the forced-pooled orders, and CNX Gas Company relied upon control of only the coal estate in force pooling the CBM notwithstanding decisions by the Virginia Supreme Court. The lawsuit seeks a judicial declaration of ownership of the CBM and that the entire net proceeds of CBM production (that is, the 1/8 royalty and the 7/8 of net revenues since production began) be distributed to the class members. The lawsuit also alleges CNX Gas Company failed to either pay royalties due conflicting claimant, deemed lessors or paid them less than required because of the alleged practice of improper below market sales and/or taking alleged improper post-production deductions. The Magistrate Judge issued a Report and Recommendation in which she recommended that the District Judge decide that the deemed lease provision of the Gas and Oil Act is constitutional as is the 1/8 royalty. The Magistrate Judge recommended against the dismissal of certain other claims. The District Judge affirmed the Magistrate Judge's recommendations in their entirety. An amended complaint was filed, which added additional allegations that include gas hedging receipts should have been used as the basis for royalty payments, severance tax should not be allowed as a post-production deduction from royalties, and damages incurred because gas was produced prior to the entry of pooling orders. A motion to dismiss the Amended Complaint was filed and denied. The Magistrate Judge heard oral arguments on plaintiff's Motion for Class Certification on November 30, 2012 and has not yet issued a Report and Recommendation. Discovery is proceeding in this litigation. CONSOL Energy believes that the case has meritorious defenses and intends to defend it vigorously. We have established an accrual to cover our estimated liability for this case. This accrual is immaterial to the overall financial position of CONSOL Energy and is included in Other Accrued Liabilities on the Consolidated Balance Sheet.

Addison Litigation: A purported class action lawsuit was filed on April 28, 2010 in the United States District Court in Abingdon, Virginia styled Addison v. CNX Gas Company, et al.  The lawsuit alleges that the plaintiff class consists of gas lessors whose gas ownership is in conflict. The lawsuit alleges that the Virginia Supreme Court and General Assembly have decided that the plaintiff owns the gas and is entitled to royalties held in escrow by the Commonwealth of Virginia or CNX.  The lawsuit also alleges CNX Gas failed to either pay royalties due these conflicting claimant lessors or paid them less than required because of the alleged practice of improper below market sales and/or taking alleged improper post-production deductions. Plaintiff seeks a declaratory judgment regarding ownership, an accounting and compensatory and punitive damages for breach of contract; conversion; negligence (voluntary undertaking) for improperly asserting that conflicting ownership exists, negligence (breach of duties as an operator); breach of fiduciary duties; and unjust enrichment. The Magistrate Judge issued a Report and Recommendation recommending dismissing some claims and allowing others to proceed. The District Judge affirmed the Magistrate Judge's recommendations in their entirety. An Amended Complaint was filed which added an additional allegation that gas hedging receipts should have been used as the basis for royalty payments. A motion to dismiss those claims was filed and was denied. The Magistrate Judge heard oral arguments on plaintiff's Motion for Class Certification on November 30, 2012 and has not yet issued a Report and Recommendation. Discovery is proceeding in this litigation. CONSOL Energy believes that the case has meritorious defenses and intends to defend it vigorously. We have established an accrual to cover our estimated liability for this case. This accrual is immaterial to the overall financial position of CONSOL Energy and is included in Other Accrued Liabilities on the Consolidated Balance Sheet.

CNX Gas Shareholders Litigation: CONSOL Energy was named as a defendant in four putative class actions brought by alleged shareholders of CNX Gas challenging the tender offer by CONSOL Energy to acquire all of the shares of CNX Gas common stock that CONSOL Energy did not already own for $38.25 per share. The two cases filed in Pennsylvania Common Pleas Court have been stayed and the two cases filed in the Delaware Chancery Court have been consolidated under the caption In Re CNX Gas Shareholders Litigation (C.A. No. 5377-VCL).  (A third case filed in Delaware was voluntarily dismissed by the plaintiff in 2010.) All four actions generally allege that CONSOL Energy breached and/or aided and abetted in the breach of fiduciary duties purportedly owed to CNX Gas public shareholders, essentially alleging that the $38.25 per share price that CONSOL Energy paid to CNX Gas shareholders in the tender offer and subsequent short-form merger was unfair. Among other things, the actions sought a permanent injunction against or rescission of the tender offer, damages, and attorneys' fees and expenses. Following a mediation, the parties to the Delaware litigation have agreed in principle to a settlement and release of all of the claims of the plaintiff class (as defined in a January 20, 2011 order of certification) in exchange for defendants' agreement to establish a settlement fund in the amount of $42,730 for distribution to class members, of which CONSOL Energy is responsible for $20,200. This settlement agreement is subject to the execution of definitive documentation and to judicial approval.



19



The following lawsuits and claims include those for which a loss is reasonably possible, but not probable, and accordingly no accrual has been recognized.

The following royalty and land right lawsuits and claims include those for which a loss is reasonably possible, but not probable, and accordingly, no accrual has been recognized. These claims are influenced by many factors which prevent the estimation of a range of potential loss. These factors include, but are not limited to, generalized allegations of unspecified damages (such as improper deductions), discovery having not commenced or not having been completed, unavailability of expert reports on damages and non-monetary issues are being tried. For example, in instances where a gas lease termination is sought, damages would depend on speculation as to if and when the gas production would otherwise have occurred, how many wells would have been drilled on the lease premises, what their production would be, what the cost of production would be, and what the price of gas would be during the production period. An estimate is calculated, if applicable, when sufficient information becomes available.

Ratliff: On March 22, 2012, the Company was served with four complaints filed on May 31, 2011 by four individuals against CCC, ICCC, CNX Gas Company, subsidiaries of CONSOL Energy, as well as CONSOL Energy itself in the Circuit Court of Russell County, Virginia. The complaints seek damages and injunctive relief in connection with the deposit of water from mining activities at CCC's Buchanan Mine into nearby void spaces at some of the mines of ICCC. The suits allege damage to coal and coalbed methane and seek recovery in tort, contract and assumpsit (quasi-contract). The cases were removed to federal court, motions to dismiss were filed by CCC, and then were voluntarily dismissed by the plaintiffs. On January 30, 2013, the four plaintiffs filed a single consolidated complaint in the United States District Court for the Western District of Virginia, alleging the same damage and theories of recovery for storage of water in the mine voids ostensibly underlying their property. The suit seeks damages ranging from $4,000 to $8,000 plus punitive damages. Service was effected by April 1, 2013 by waiver, and defendants' responsive pleadings are due May 31, 2013. CONSOL energy intends to vigorously defend the suit.
 
Hall Litigation: A purported class action lawsuit was filed on December 23, 2010 styled Hall v. CONSOL Gas Company in Allegheny County Pennsylvania Common Pleas Court.  The named plaintiff is Earl D. Hall.  The purported class plaintiffs are all Pennsylvania oil and gas lessors to Dominion Exploration and Production Company, whose leases were acquired by CONSOL Energy.  The complaint alleges more than 1,000 similarly situated lessors.  The lawsuit alleges that CONSOL Energy incorrectly calculated royalties by (i) calculating line loss on the basis of allocated volumes rather than on a well-by-well basis, (ii) possibly calculating the royalty on the basis of an incorrect price, (iii) possibly taking unreasonable deductions for post-production costs and costs that were not arms-length, (iv) not paying royalties on gas lost or used before the point of sale, and (v) not paying royalties on oil production. The complaint also alleges that royalty statements were false and misleading.  The complaint seeks damages, interest and an accounting on a well-by-well basis. CONSOL Energy believes that the case is without merit and intends to defend it vigorously. Consequently, we have not recognized any liability related to these actions.
    Kennedy Litigation: The Company is a party to a case filed on March 26, 2008 captioned Earl Kennedy (and others) v. CNX Gas Company and CONSOL Energy in the Court of Common Pleas of Greene County, Pennsylvania. The lawsuit alleges that CNX Gas Company and CONSOL Energy trespassed and converted gas and other minerals allegedly belonging to the plaintiffs in connection with wells drilled by CNX Gas Company. The complaint, as amended, seeks injunctive relief, including removing CNX Gas Company from the property, and compensatory damages of $20,000. The suit also sought to overturn existing law as to the ownership of coalbed methane in Pennsylvania, but that claim was dismissed by the court; the plaintiffs are seeking to appeal that dismissal. The suit also seeks a determination that the Pittsburgh 8 coal seam does not include the “roof/rider” coal. The court denied the plaintiff's summary judgment motion on that issue. The court held a bench trial on the “roof/rider” coal issue in November 2011 and ruled for CNX Gas Company and CONSOL Energy, holding that the “roof/rider” coal is included in the Pittsburgh 8 coal seam. The plaintiffs have indicated that they intend to appeal that decision. A trial on the issue of whether a drilling that deviates from the coal seam results in damage to the gas owner is now scheduled for October 21, 2013. CNX Gas Company and CONSOL Energy believe this lawsuit to be without merit and intend to vigorously defend it. Consequently, we have not recognized any liability related to these actions.
Rowland Litigation: Rowland Land Company filed a complaint in May 2011 against CONSOL Energy, CNX Gas Company, Dominion Resources, and EQT Production Company (EQT) in Raleigh County Circuit Court, West Virginia. Rowland is the lessor on a 33,000 acre oil and gas lease in southern West Virginia. EQT was the original lessee, but farmed out the development of the lease to Dominion Resources in exchange for an overriding royalty. Dominion Resources sold the indirect subsidiary that held the lease to a subsidiary of CONSOL Energy on April 30, 2010. Subsequent to that acquisition, the subsidiary that held the lease was merged into CNX Gas Company as part of an internal reorganization. Rowland alleges that (i) Dominion Resources' sale of the subsidiary to CONSOL Energy was a change in control that required its consent under the terms of the farmout agreement and lease, and/or (ii) the subsequent merger of the subsidiary into CNX Gas Company was an


20



assignment that required its consent under the lease. Rowland has amended its complaint twice to include allegations that CONSOL Energy and Dominion Resources are liable for their subsidiaries' actions and that Rowland's title has been slandered. Motions to dismiss have been denied, discovery is proceeding but stayed pending mediation. Initial mediation efforts have been unsuccessful but are continuing. CONSOL Energy believes that the case is without merit and intends to defend it vigorously. Consequently, we have not recognized any liability related to these actions.
Majorsville Storage Field Declaratory Judgment: On March 3, 2011, an attorney sent a letter to CNX Gas Company regarding certain leases that CNX Gas Company obtained from Columbia Gas in Greene County, Pennsylvania involving the Majorsville Storage Field. The letter was written on behalf of three lessors alleging that the leases totaling 525 acres are invalid, and had expired by their terms. The plaintiffs' theory is that the rights of storage and production are severable under the leases. Ignoring the fact that the leases have been used for gas storage, they claim that since there has been no production or development of production, the right to produce gas expired at the end of the primary terms. On June 16, 2011, in the Court of Common Pleas of Greene County, Pennsylvania, the Company filed a declaratory judgment action, seeking to have a court confirm the validity of the leases. We believe that we will prevail in this litigation based on the language of the leases and the current status of the law. Consequently, we have not recognized any liability related to these actions.
The following lawsuit and claims include those for which a loss is remote and accordingly, no accrual has been recognized, although if a non-favorable verdict were received the impact could be material.
Comer Litigation: In 2005, plaintiffs Ned Comer and others filed a purported class action lawsuit in the U.S. District Court for the Southern District of Mississippi against a number of companies in energy, fossil fuels and chemical industries, including CONSOL Energy styled, Comer, et al. v. Murphy Oil, et al. The plaintiffs, residents and owners of property along the Mississippi Gulf coast, alleged that the defendants caused the emission of greenhouse gases that contributed to global warming, which in turn caused a rise in sea levels and added to the ferocity of Hurricane Katrina, which combined to destroy the plaintiffs' property. The District Court dismissed the case and the plaintiffs appealed. The Circuit Court panel reversed and the defendants sought a rehearing before the entire court. A rehearing before the entire court was granted, which had the effect of vacating the panel's reversal, but before the case could be heard on the merits, a number of judges recused themselves and there was no longer a quorum. As a result, the District Court's dismissal was effectively reinstated. The plaintiffs asked the U.S. Supreme Court to require the Circuit Court to address the merits of their appeal. On January 11, 2011, the Supreme Court denied that request. Although that should have resulted in the dismissal being final, the plaintiffs filed a lawsuit on May 27, 2011, in the same jurisdiction against essentially the same defendants making nearly identical allegations as in the original lawsuit. The trial court has dismissed this case. The dismissal is being appealed.
       
At March 31, 2013, CONSOL Energy has provided the following financial guarantees, unconditional purchase obligations and letters of credit to certain third parties, as described by major category in the following table. These amounts represent the maximum potential total of future payments that we could be required to make under these instruments. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credit are recorded as liabilities on the financial statements. CONSOL Energy management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition.
 
Amount of Commitment
Expiration Per Period
 
Total
Amounts
Committed
 
Less Than
1  Year
 
1-3 Years
 
3-5 Years
 
Beyond
5  Years
Letters of Credit:
 
 
 
 
 
 
 
 
 
Employee-Related
$
190,158

 
$
126,654

 
$
63,504

 
$

 
$

Environmental
56,293

 
34,346

 
21,947

 

 

Other
83,398

 
46,452

 
36,946

 

 

Total Letters of Credit
329,849

 
207,452

 
122,397

 

 

Surety Bonds:
 
 
 
 
 
 
 
 
 
Employee-Related
204,884

 
204,884

 

 

 

Environmental
533,974

 
524,072

 
9,902

 

 

Other
29,487

 
29,476

 
11

 

 

Total Surety Bonds
768,345

 
758,432

 
9,913

 

 

Total Commitments
$
1,098,194

 
$
965,884

 
$
132,310

 
$

 
$



21




Employee-related financial guarantees have primarily been provided to support the United Mine Workers’ of America’s 1992 Benefit Plan and various state and federal workers’ compensation self-insurance programs. Environmental financial guarantees have primarily been provided to support various performance bonds related to reclamation and other environmental issues. Coal and Gas financial guarantees have primarily been provided to support various sales contracts. Other guarantees have also been extended to support insurance policies, legal matters, full and timely payments of mining equipment leases, and various other items necessary in the normal course of business.
CONSOL Energy and CNX Gas enter into long-term unconditional purchase obligations to procure major equipment purchases, natural gas firm transportation, gas drilling services and other operating goods and services. These purchase obligations are not recorded on the Consolidated Balance Sheet. As of March 31, 2013, the purchase obligations for each of the next five years and beyond were as follows:
 
Obligations Due
Amount
Less than 1 year
$
349,513

1 - 3 years
227,586

3 - 5 years
128,338

More than 5 years
414,276

Total Purchase Obligations
$
1,119,713


Costs related to these purchase obligations include:
 
 
 
 
 
Three Months Ended
 
 
 
 
March, 31
 
 
 
 
2013
 
2012
Major equipment purchases
 
 
 
$
33,426

 
$
13,166

Firm transportation expense
 
 
 
28,525

 
15,045

Gas drilling obligations
 
 
 
28,863

 
29,576

Other
 
 
 

 
298

Total costs related to purchase obligations
 
 
 
$
90,814

 
$
58,085

        

NOTE 12—DERIVATIVE INSTRUMENTS:

CONSOL Energy enters into financial derivative instruments to manage our exposure to commodity price volatility. The fair value of CONSOL Energy's derivatives (natural gas price swaps) are based on intra-bank pricing models which utilize inputs that are either readily available in the public market, such as natural gas forward curves, or can be corroborated from active markets or broker quotes. These values are then compared to the values given by our counterparties for reasonableness. Changes in the fair value of the derivatives are recorded currently in earnings unless special hedge accounting criteria are met. For derivatives designated as fair value hedges, the changes in fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivatives are reported in Other Comprehensive Income or Loss (OCI) on the Consolidated Balance Sheets and reclassified into Outside Sales on the Consolidated Statements of Income in the same period or periods which the forecasted transaction affects earnings. The ineffective portions of hedges are recognized in earnings in the current period. CONSOL Energy currently utilizes only cash flow hedges that are considered highly effective.

CONSOL Energy formally assesses both at inception of the hedge and on an ongoing basis whether each derivative is highly effective in offsetting changes in the fair values or the cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, CONSOL Energy will discontinue hedge accounting prospectively.

CONSOL Energy is exposed to credit risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is subject to continuing review. The Company has not experienced any issues of non-performance by derivative counterparties.

None of our counterparty master agreements currently requires CONSOL Energy to post collateral for any of its hedges. However, as stated in the counterparty master agreements, if CONSOL Energy's obligations with one of its


22



counterparties cease to be secured on the same basis as similar obligations with the other lenders under the credit facility, CONSOL Energy would have to post collateral for hedges in a liabilities position in excess of defined thresholds.  

                Each of CONSOL Energy's counterparty master agreements allows, in the event of default, the ability to elect early termination of outstanding contracts. If early termination is elected, CONSOL Energy and the applicable counterparty would net settle all open hedge positions.

CONSOL Energy has entered into swap contracts for natural gas to manage the price risk associated with the forecasted natural gas revenues. The objective of these hedges is to reduce the variability of the cash flows associated with the forecasted revenues from the underlying commodity. As of March 31, 2013, the total notional amount of the Company’s outstanding natural gas swap contracts was 147.4 billion cubic feet. These swap contracts are forecasted to settle through December 31, 2015 and meet the criteria for cash flow hedge accounting. As these contracts settle, the cash received and/or paid will be shown on the Consolidated Statements of Cash Flows as Changes in Prepaid Expenses, Changes in Other Assets, Changes in Other Operating Liabilities and/or Changes in Other Liabilities. During the next twelve months, $20,494 of unrealized gain is expected to be reclassified from Other Comprehensive Income on the Consolidated Balance Sheets and into Outside Sales on the Consolidated Statements of Income, as a result of the gross settlements of cash flow hedges. No gains or losses have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

The gross fair value at March 31, 2013 of CONSOL Energy's derivative instruments, which were all natural gas swaps and qualify as cash flow hedges, was an asset of $83,677 and a liability of $20,949. The total asset is comprised of $46,837 and $36,840 which were included in Prepaid Expense and Other Assets, respectively, on the Consolidated Balance Sheets. The total liability is comprised of $10,877 and $10,072 which were included in Other Accrued Liabilities and Other Liabilities, respectively, on the Consolidated Balance Sheets.

The gross fair value at December 31, 2012 of CONSOL Energy's derivative instruments, which were all natural gas swaps and qualify as cash flow hedges, was an asset of $135,969 and a liability of $7,024. The total asset is comprised of $80,057 and $55,912 which were included in Prepaid Expense and Other Assets, respectively, on the Consolidated Balance Sheets. The total liability is comprised of $970 and $6,054 which were included in Other Accrued Liabilities and Other Liabilities, respectively, on the Consolidated Balance Sheets.

The effect of derivative instruments in cash flow hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of Stockholders' Equity were as follows:
 
 
 
Three Months Ended March 31,
 
2013
 
2012
Natural Gas Price Swaps
 
 
 
Beginning Balance – Accumulated OCI

$
76,761

 
$
151,780

Gain/(Loss) recognized in Accumulated OCI
$
(18,595
)
 
$
76,076

Less: Gain reclassified from Accumulated OCI into Outside Sales
$
22,713

 
$
47,941

Ending Balance – Accumulated OCI

$
35,453

 
$
179,915

Gain/(Loss) recognized in Outside Sales for ineffectiveness 
$
1,041

 
$
(835
)

There were no amounts excluded from the assessment of hedge effectiveness in 2013 or 2012.

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS:

The financial instruments measured at fair value on a recurring basis are summarized below:
 
 
Fair Value Measurements at March 31, 2013
 
Fair Value Measurements at December 31, 2012
Description
Quoted Prices in
Active Markets
for Identical
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Quoted Prices in
Active Markets
for Identical
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Gas Cash Flow Hedges
$

 
$
62,728

 
$

 
$

 
$
128,945

 
$




23



The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value due to the short-term maturity of these instruments.
Restricted cash: The carrying amount reported in the balance sheets for restricted cash approximates its fair value due to the short-term maturity of these instruments.
Short-term notes payable: The carrying amount reported in the balance sheets for short-term notes payable approximates its fair value due to the short-term maturity of these instruments.
Borrowings under Securitization Facility: The carrying amount reported in the balance sheets for borrowings under the securitization facility approximates its fair value due to the short-term maturity of these instruments.
Long-term debt: The fair value of long-term debt is measured using unadjusted quoted market prices or estimated using discounted cash flow analyses. The discounted cash flow analyses are based on current market rates for instruments with similar cash flows.
The carrying amounts and fair values of financial instruments for which the fair value option was not elected are as follows:
 
 
March 31, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and Cash Equivalents
$
25,058

 
$
25,058

 
$
21,878

 
$
21,878

Restricted Cash
$
20,383

 
$
20,383

 
$
68,673

 
$
68,673

Short-Term Notes Payable
$

 
$

 
$
(25,073
)
 
$
(25,073
)
Borrowings Under Securitization Facility
$
(30,119
)
 
$
(30,119
)
 
$
(37,846
)
 
$
(37,846
)
Long-Term Debt
$
(3,128,804
)
 
$
(3,396,271
)
 
$
(3,129,017
)
 
$
(3,378,058
)



24



NOTE 14—SEGMENT INFORMATION:
CONSOL Energy has two principal business divisions: Coal and Gas. The principal activities of the Coal division are mining, preparation and marketing of thermal coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal division includes four reportable segments. These reportable segments are Thermal, Low Volatile Metallurgical, High Volatile Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines or type of coal sold). For the three months ended March 31, 2013, the Thermal aggregated segment includes the following mines: Bailey, Blacksville #2, Enlow Fork, Fola Complex, Loveridge, McElroy, Miller Creek Complex, Robinson Run and Shoemaker. For the three months ended March 31, 2013, the Low Volatile Metallurgical aggregated segment includes the Buchanan Mine and Amonate Complex. For the three months ended March 31, 2013, the High Volatile Metallurgical aggregated segment includes: Bailey, Blacksville #2, Enlow Fork, Fola Complex, Loveridge and Robinson Run coal sales. The Other Coal segment includes our purchased coal activities, idled mine activities, general and administrative activities as well as various other activities assigned to the Coal division but not allocated to each individual mine. The principal activity of the Gas division is to produce pipeline quality natural gas for sale primarily to gas wholesalers. The Gas division includes four reportable segments. These reportable segments are Coalbed Methane, Marcellus, Shallow Oil and Gas and Other Gas. The Other Gas segment includes our purchased gas activities, general and administrative activities as well as various other activities assigned to the Gas division but not allocated to each individual well type. CONSOL Energy’s All Other segment includes terminal services, river and dock services, industrial supply services, general and administrative activities and other business activities. Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses. Assets are reflected at the division level only (coal, gas and other) and are not allocated between each individual segment. This presentation is consistent with the information regularly reviewed by the chief operating decision maker. The assets are not allocated to each individual segment due to the diverse asset base controlled by CONSOL Energy where each individual asset may service more than one segment within the division. An allocation of such asset base would not be meaningful or representative on a segment by segment basis.
Annually, the preparation of our gas reserve estimates are completed in accordance with CONSOL Energy's prescribed internal control procedures, which include verification of input data into a gas reserve forecasting and economic evaluation software, as well as multi-functional management review. The input data verification includes reviews of the price and cost assumptions used in the economic model to determine the reserves. Also, the production volumes are reconciled between the system used to calculate the reserves and other accounting/measurement systems. The technical employee responsible for overseeing the preparation of the reserve estimates is a petroleum engineer with over 10 years of experience in the oil and gas industry. Our 2012 gas reserve results, which are reported in the Supplemental Gas Data year ended December 31, 2012 Form 10-K, were audited by Netherland Sewell. The technical person primarily responsible for overseeing the audit of our reserves is a registered professional engineer in the state of Texas with over 14 years of experience in the oil and gas industry.




25



Industry segment results for the three months ended March 31, 2013 are:
 
 
Thermal
 
Low Volatile
Metallurgical
 
High Volatile
Metallurgical
 
Other
Coal
 
Total Coal
 
Coalbed
Methane
 
Marcellus
Shale
 
Shallow Oil and Gas
 
Other
Gas
 
Total
Gas
 
All
Other
 
Corporate,
Adjustments
&
Eliminations
 
Consolidated
 
Sales—outside
$
761,272

 
$
146,828

 
$
58,622

 
$
5,663

 
$
972,385

 
$
83,640

 
$
48,411

 
$
32,436

 
$
3,355

 
$
167,842

 
$
85,938

 
$

 
$
1,226,165

(A)
Sales—purchased gas

 

 

 

 

 

 

 

 
1,358

 
1,358

 

 

 
1,358

  
Sales—gas royalty interests

 

 

 

 

 

 

 

 
14,204

 
14,204

 

 

 
14,204

  
Freight—outside

 

 

 
14,061

 
14,061

 

 

 

 

 

 

 

 
14,061

  
Intersegment transfers

 

 

 

 

 

 

 

 
836

 
836

 
35,477

 
(36,313
)
 

  
Total Sales and Freight
$
761,272

 
$
146,828

 
$
58,622

 
$
19,724

 
$
986,446

 
$
83,640

 
$
48,411

 
$
32,436

 
$
19,753

 
$
184,240

 
$
121,415

 
$
(36,313
)
 
$
1,255,788

  
Earnings (Loss) Before Income Taxes
$
128,432

 
$
54,717

 
$
13,352

 
$
(102,999
)
 
$
93,502

 
$
21,312

 
$
13,768

 
$
(4,161
)
 
$
(31,559
)
 
$
(640
)
 
$
(40,552
)
 
$
(53,609
)
 
$
(1,299
)
(B)
Segment assets
 
 
 
 
 
 
 
 
$
5,698,504

 
 
 
 
 
 
 
 
 
$
5,879,988

 
$
358,663

 
$
656,039

 
$
12,593,194

(C)
Depreciation, depletion and amortization
 
 
 
 
 
 
 
 
$
102,711

 
 
 
 
 
 
 
 
 
$
52,399

 
$
6,205

 
$

 
$
161,315

  
Capital expenditures
 
 
 
 
 
 
 
 
$
197,338

 
 
 
 
 
 
 
 
 
$
207,130

 
$
1,504

 
$

 
$
405,972

  
 
(A)    Included in the Coal segment are sales of $170,982 to First Energy and $183,121 to Xcoal Energy & Resources each comprising over 10% of sales.
(B)     Includes equity in earnings of unconsolidated affiliates of $817, $3,182 and $798 for Coal, Gas and All Other, respectively.
(C)    Includes investments in unconsolidated equity affiliates of $20,334, $167,058 and $60,735 for Coal, Gas and All Other, respectively.


26



Industry segment results for the three months ended March 31, 2012 are:
 
 
Thermal
 
Low Volatile
Metallurgical
 
High Volatile
Metallurgical
 
Other
Coal
 
Total
Coal
 
Coalbed
Methane
 
Marcellus
Shale
 
Shallow Oil and Gas
 
Other
Gas
 
Total Gas
 
All
Other
 
Corporate,
Adjustments
&
Eliminations
 
Consolidated
 
Sales—outside
$
812,053

 
$
172,740

 
$
60,568

 
$
8,955

 
$
1,054,316

 
$
99,535

 
$
23,791

 
$
34,373

 
$
2,504

 
$
160,203

 
$
96,952

 
$

 
$
1,311,471

(D)
Sales—purchased gas

 

 

 

 

 

 

 

 
839

 
839

 

 

 
839

  
Sales—gas royalty interests

 

 

 

 

 

 

 

 
12,206

 
12,206

 

 

 
12,206

  
Freight—outside

 

 

 
49,293

 
49,293

 

 

 

 

 

 

 

 
49,293

  
Intersegment transfers

 

 

 

 

 

 

 

 
466

 
466

 
37,209

 
(37,675
)
 

  
Total Sales and Freight
$
812,053

 
$
172,740

 
$
60,568

 
$
58,248

 
$
1,103,609

 
$
99,535

 
$
23,791

 
$
34,373

 
$
16,015

 
$
173,714

 
$
134,161

 
$
(37,675
)
 
$
1,373,809

  
Earnings (Loss) Before Income Taxes
$
128,449

 
$
79,341

 
$
15,936

 
$
(61,256
)
 
$
162,470

 
$
36,390

 
$
3,251

 
$
(3,722
)
 
$
(23,419
)
 
$
12,500

 
$
4,083

 
$
(60,476
)
 
$
118,577

(E)
Segment assets
 
 
 
 
 
 
 
 
$
5,360,577

 
 
 
 
 
 
 
 
 
$
6,110,585

 
$
358,746

 
$
765,703

 
$
12,595,611

(F)
Depreciation, depletion and amortization
 
 
 
 
 
 
 
 
$
100,762

 
 
 
 
 
 
 
 
 
$
48,803

 
$
5,782

 
$

 
$
155,347

  
Capital expenditures
 
 
 
 
 
 
 
 
$
194,429

 
 
 
 
 
 
 
 
 
$
98,455

 
$
13,562

 
$

 
$
306,446

  

(D)
Included in the Coal segment are sales of $144,155 to First Energy and $138,341 to Xcoal Energy & Resources each comprising over 10% of sales.
(E)
Includes equity in earnings of unconsolidated affiliates of $4,807, $1,944 and $1,184 for Coal, Gas and All Other, respectively.
(F)    Includes investments in unconsolidated equity affiliates of $39,373, $108,858 and $51,990 for Coal, Gas and All Other, respectively.



27




Reconciliation of Segment Information to Consolidated Amounts:
Earnings Before Income Taxes:
 
 
For the Three Months Ended March 31,
 
2013
 
2012
Segment Earnings Before Income Taxes for total reportable business segments
$
92,862

 
$
174,970

Segment (Loss) Earnings Before Income Taxes for all other businesses
(40,552
)
 
4,083

Interest expense, net and other non-operating activity (G)
(52,660
)
 
(60,042
)
Other Corporate Items (G)
(949
)
 
(434
)
(Loss) Earnings Before Income Taxes
$
(1,299
)
 
$
118,577

 
Total Assets:
March, 31
2013
 
2012
Segment assets for total reportable business segments
$
11,578,492

 
$
11,471,162

Segment assets for all other businesses
358,663

 
358,746

Items excluded from segment assets:
 
 
 
Cash and other investments (G)
23,669

 
121,807

Recoverable income taxes
6,602

 

Deferred tax assets
585,829

 
596,657

Bond issuance costs
39,939

 
47,239

Total Consolidated Assets
$
12,593,194

 
$
12,595,611

_________________________ 
(G) Excludes amounts specifically related to the gas segment.


28




NOTE 15—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:
The payment obligations under the $1,500,000, 8.000% per annum senior notes due April 1, 2017, the $1,250,000, 8.250% per annum senior notes due April 1, 2020, and the $250,000, 6.375% per annum senior notes due March 1, 2021 issued by CONSOL Energy are jointly and severally, and also fully and unconditionally guaranteed by substantially all subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission (SEC), the following financial information sets forth separate financial information with respect to the parent, CNX Gas, a guarantor subsidiary, the remaining guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries include investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all other wholly owned subsidiaries. These include, for example, deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

Income Statement for the Three Months Ended March 31, 2013 (unaudited):
 
<
 
Parent
Issuer
 
CNX Gas
Guarantor
 
Other
Subsidiary
Guarantors
 
Non-
Guarantors
 
Elimination
 
Consolidated
Sales—Outside
$

 
$
168,679

 
$
1,004,157

 
$
54,053

 
$
(724
)
 
$
1,226,165

Sales—Gas Royalty Interests

 
14,204

 

 

 

 
14,204

Sales—Purchased Gas

 
1,358

 

 

 

 
1,358

Freight—Outside

 

 
14,061

 

 

 
14,061

Other Income
77,976

 
13,224

 
15,255

 
5,373

 
(77,976
)
 
33,852

Total Revenue and Other Income
77,976

 
197,465

 
1,033,473

 
59,426

 
(78,700
)
 
1,289,640

Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)
75,990

 
114,352

 
681,705

 
53,726

 
7,190

 
932,963

Gas Royalty Interests Costs

 
11,817