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, 2009 or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-14901
CONSOL Energy Inc.
(Exact name of registrant as specified in its charter)
Delaware | 51-0337383 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) | |
1000 CONSOL Drive Canonsburg, Pennsylvania |
15317-6506 | |
(Address of Principal Executive Offices) | (Zip Code) |
(724) 485-4000
(Registrants 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 ¨
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 ¨ No ¨
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 ¨ Non-accelerated filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
Class |
Shares outstanding as of April 17, 2009 | |
Common stock, $0.01 par value | 180,638,248 |
PART I
FINANCIAL INFORMATION
Page | ||||
ITEM 1. |
CONDENSED FINANCIAL STATEMENTS |
|||
Consolidated Statements of Income for the three months ended March 31, 2009 and March 31, 2008 |
1 | |||
Consolidated Balance Sheets at March 31, 2009 and December 31, 2008 |
2 | |||
Consolidated Statements of Stockholders Equity for the three months ended March 31, 2009 |
4 | |||
Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and March 31, 2008 |
5 | |||
6 | ||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
30 | ||
ITEM 3. |
47 | |||
ITEM 4. |
48 | |||
PART II | ||||
OTHER INFORMATION | ||||
ITEM 1. |
49 | |||
ITEM 1A. |
49 | |||
ITEM 2. |
49 | |||
ITEM 6. |
50 |
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, |
||||||||
2009 | 2008 | |||||||
SalesOutside |
$ | 1,150,244 | $ | 886,325 | ||||
SalesGas Royalty Interests |
12,632 | 16,504 | ||||||
SalesPurchased Gas |
1,465 | 3,539 | ||||||
FreightOutside |
30,916 | 44,744 | ||||||
Other Income |
23,494 | 74,619 | ||||||
Total Revenue and Other Income |
1,218,751 | 1,025,731 | ||||||
Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below) |
667,974 | 636,728 | ||||||
Gas Royalty Interests Costs |
10,591 | 16,074 | ||||||
Purchased Gas Costs |
1,530 | 3,421 | ||||||
Freight Expense |
30,916 | 44,744 | ||||||
Selling, General and Administrative Expense |
30,816 | 30,470 | ||||||
Depreciation, Depletion and Amortization |
106,219 | 92,728 | ||||||
Interest Expense |
8,512 | 10,176 | ||||||
Taxes Other Than Income |
77,839 | 71,606 | ||||||
Black Lung Excise Tax Refund |
(352 | ) | | |||||
Total Costs |
934,045 | 905,947 | ||||||
Earnings Before Income Taxes |
284,706 | 119,784 | ||||||
Income Taxes |
79,735 | 35,553 | ||||||
Net Income |
204,971 | 84,231 | ||||||
Less: Net Income Attributable to Noncontrolling Interest |
(9,152 | ) | (9,149 | ) | ||||
Net Income Attributable to CONSOL Energy Inc. Shareholders |
$ | 195,819 | $ | 75,082 | ||||
Basic Earnings Per Share |
$ | 1.08 | $ | 0.41 | ||||
Diluted Earnings Per Share |
$ | 1.08 | $ | 0.41 | ||||
Weighted Average Number of Common Shares Outstanding: |
||||||||
Basic |
180,576,479 | 182,572,985 | ||||||
Dilutive |
182,150,090 | 185,192,551 | ||||||
Dividends Paid Per Share |
$ | 0.10 | $ | 0.10 | ||||
The accompanying notes are an integral part of these financial statements.
1
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited) March 31, 2009 |
December 31, 2008 | |||||
ASSETS |
||||||
Current Assets: |
||||||
Cash and Cash Equivalents |
$ | 71,555 | $ | 138,512 | ||
Accounts and Notes Receivable: |
||||||
Trade |
259,879 | 221,729 | ||||
Other Receivables |
71,985 | 79,552 | ||||
Inventories |
277,676 | 227,810 | ||||
Deferred Income Taxes |
48,811 | 60,599 | ||||
Recoverable Income Taxes |
| 33,862 | ||||
Prepaid Expenses |
269,092 | 221,750 | ||||
Total Current Assets |
998,998 | 983,814 | ||||
Property, Plant and Equipment: |
||||||
Property, Plant and Equipment |
10,110,603 | 9,980,288 | ||||
LessAccumulated Depreciation, Depletion and Amortization |
4,269,952 | 4,214,316 | ||||
Total Property, Plant and EquipmentNet |
5,840,651 | 5,765,972 | ||||
Other Assets: |
||||||
Deferred Income Taxes |
310,590 | 333,543 | ||||
Investment in Affiliates |
75,637 | 72,996 | ||||
Other |
181,411 | 214,133 | ||||
Total Other Assets |
567,638 | 620,672 | ||||
TOTAL ASSETS |
$ | 7,407,287 | $ | 7,370,458 | ||
The accompanying notes are an integral part of these financial statements.
2
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited) March 31, 2009 |
December 31, 2008 |
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts Payable |
$ | 274,730 | $ | 385,197 | ||||
Short-Term Notes Payable |
520,400 | 557,700 | ||||||
Current Portion of Long-Term Debt |
22,045 | 22,401 | ||||||
Accrued Income Taxes |
28,913 | | ||||||
Other Accrued Liabilities |
511,812 | 546,442 | ||||||
Total Current Liabilities |
1,357,900 | 1,511,740 | ||||||
Long-Term Debt: |
||||||||
Long-Term Debt |
393,019 | 393,312 | ||||||
Capital Lease Obligations |
70,988 | 75,039 | ||||||
Total Long-Term Debt |
464,007 | 468,351 | ||||||
Deferred Credits and Other Liabilities: |
||||||||
Postretirement Benefits Other Than Pensions |
2,494,558 | 2,493,344 | ||||||
Pneumoconiosis Benefits |
193,009 | 190,261 | ||||||
Mine Closing |
418,827 | 404,629 | ||||||
Workers Compensation |
130,345 | 128,477 | ||||||
Salary Retirement |
188,638 | 194,567 | ||||||
Reclamation |
19,867 | 38,193 | ||||||
Other |
240,516 | 266,550 | ||||||
Total Deferred Credits and Other Liabilities |
3,685,760 | 3,716,021 | ||||||
Total Liabilities |
5,507,667 | 5,696,112 | ||||||
Stockholders Equity: |
||||||||
Common Stock, $.01 par value; 500,000,000 Shares Authorized, 183,014,426 Issued and 180,603,707 Outstanding at March 31, 2009; 183,014,426 Issued and 180,549,851 Outstanding at December 31, 2008 |
1,830 | 1,830 | ||||||
Preferred Stock, 15,000,000 Shares Authorized; None Issued and Outstanding |
| | ||||||
Capital in Excess of Par Value |
1,002,682 | 993,478 | ||||||
Retained Earnings |
1,186,324 | 1,010,902 | ||||||
Other Comprehensive Loss |
(436,503 | ) | (461,900 | ) | ||||
Common Stock in Treasury, at Cost2,410,719 Shares at March 31, 2009 and 2,464,575 Shares at December 31, 2008 |
(80,203 | ) | (82,123 | ) | ||||
Total CONSOL Energy Inc. Stockholders Equity |
1,674,130 | 1,462,187 | ||||||
Noncontrolling Interest |
225,490 | 212,159 | ||||||
Total Equity |
1,899,620 | 1,674,346 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 7,407,287 | $ | 7,370,458 | ||||
The accompanying notes are an integral part of these financial statements.
3
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) |
Other Compre- hensive Income (Loss) |
Treasury Stock |
Total CONSOL Energy, Inc. Stockholders Equity |
Noncont- rolling Interest |
Total Equity |
|||||||||||||||||||||||
BalanceDecember 31, 2008 |
$ | 1,830 | $ | 993,478 | $ | 1,010,902 | $ | (461,900 | ) | $ | (82,123 | ) | $ | 1,462,187 | $ | 212,159 | $ | 1,674,346 | ||||||||||||
(Unaudited) |
||||||||||||||||||||||||||||||
Net Income |
| | 195,819 | | | 195,819 | 9,152 | 204,971 | ||||||||||||||||||||||
Treasury Rate Lock (Net of ($12) tax) |
| | | (20 | ) | | (20 | ) | | (20 | ) | |||||||||||||||||||
FASB 158 Long-Term Liability Adjustment (Net of $915 tax) |
| | | 1,497 | | 1,497 | (4 | ) | 1,493 | |||||||||||||||||||||
Gas Cash Flow Hedge (Net of $18,295 tax) |
| | | 23,920 | | 23,920 | 4,785 | 28,705 | ||||||||||||||||||||||
Comprehensive Income |
| | 195,819 | 25,397 | | 221,216 | 13,933 | 235,149 | ||||||||||||||||||||||
Issuance of Treasury Stock |
| | (2,337 | ) | | 1,920 | (417 | ) | | (417 | ) | |||||||||||||||||||
Tax Benefit from Stock-Based Compensation |
| 140 | | | | 140 | | 140 | ||||||||||||||||||||||
Amortization of Stock-Based Compensation Awards |
| 8,786 | | | | 8,786 | 1,120 | 9,906 | ||||||||||||||||||||||
Stock-Based Compensation Awards to CNX Gas |
| 278 | | | | 278 | (278 | ) | | |||||||||||||||||||||
Net Change in Crown Drilling Noncontrolling Interest |
| | | | | | (1,444 | ) | (1,444 | ) | ||||||||||||||||||||
Dividends ($0.10 per share) |
| | (18,060 | ) | | | (18,060 | ) | | (18,060 | ) | |||||||||||||||||||
BalanceMarch 31, 2009 |
$ | 1,830 | $ | 1,002,682 | $ | 1,186,324 | $ | (436,503 | ) | $ | (80,203 | ) | $ | 1,674,130 | $ | 225,490 | $ | 1,899,620 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
4
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31, |
||||||||
2009 | 2008 | |||||||
Operating Activities: |
||||||||
Net Income |
$ | 204,971 | $ | 84,231 | ||||
Adjustments to Reconcile Net Income Attributable to CONSOL Energy Inc. to Net Cash Provided by Operating Activities: |
||||||||
Depreciation, Depletion and Amortization |
106,219 | 92,728 | ||||||
Stock-based Compensation |
9,906 | 5,657 | ||||||
Gain on the Sale of Assets |
(1,871 | ) | (7,286 | ) | ||||
Amortization of Mineral Leases |
1,671 | 2,087 | ||||||
Deferred Income Taxes |
16,452 | 14,428 | ||||||
Equity in Earnings of Affiliates |
(3,361 | ) | (1,355 | ) | ||||
Changes in Operating Assets: |
||||||||
Accounts Receivable Securitization |
| 11,400 | ||||||
Accounts and Notes Receivable |
(30,459 | ) | (81,648 | ) | ||||
Inventories |
(49,866 | ) | (21,167 | ) | ||||
Prepaid Expenses |
2,320 | 3,091 | ||||||
Changes in Other Assets |
5,327 | 13,341 | ||||||
Changes in Operating Liabilities: |
||||||||
Accounts Payable |
(43,690 | ) | (13,816 | ) | ||||
Other Operating Liabilities |
26,250 | 3,487 | ||||||
Changes in Other Liabilities |
2,938 | 38,837 | ||||||
Other |
2,973 | 2,078 | ||||||
Net Cash Provided by Operating Activities |
249,780 | 146,093 | ||||||
Investing Activities: |
||||||||
Capital Expenditures |
(299,560 | ) | (176,342 | ) | ||||
Net Investment in Equity Affiliates |
720 | 1,536 | ||||||
Proceeds from Sales of Assets |
43,827 | 15,803 | ||||||
Net Cash Used in Investing Activities |
(255,013 | ) | (159,003 | ) | ||||
Financing Activities: |
||||||||
(Payments on) Proceeds from Miscellaneous Borrowings |
(6,425 | ) | 5,001 | |||||
(Payments on) Proceeds from Short-Term Borrowings |
(37,300 | ) | 32,500 | |||||
Tax Benefit from Stock-Based Compensation |
140 | 9,521 | ||||||
Dividends Paid |
(18,060 | ) | (18,255 | ) | ||||
Issuance of Treasury Stock |
121 | 5,270 | ||||||
Purchases of Treasury Stock |
| (3 | ) | |||||
Noncontrolling Interest Member Distribution |
(200 | ) | | |||||
Net Cash Provided by (Used in) Financing Activities |
(61,724 | ) | 34,034 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
(66,957 | ) | 21,124 | |||||
Cash and Cash Equivalents at Beginning of Period |
138,512 | 41,651 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 71,555 | $ | 62,775 | ||||
The accompanying notes are an integral part of these financial statements.
5
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Dollars in thousands, except per share data)
NOTE 1BASIS 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, 2009 are not necessarily indicative of the results that may be expected for future periods.
The balance sheet at December 31, 2008 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, 2008 included in CONSOL Energys Form 10-K.
Effective January 1, 2009, CONSOL Energy adopted the provisions of Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment of ARB No. 51 (SFAS 160). This adoption resulted in modifications to the reporting of noncontrolling interests in the Consolidated Financial Statements. Additionally, certain reclassifications of prior period data have been made to conform to the three months ended March 31, 2009 classifications required by SFAS 160.
Basic earnings per share are computed by dividing net income attributable to CONSOL Energy 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 effect of dilutive potential common shares outstanding during the period as calculated in accordance with Statement of Financial Accounting Standard No. 123R (SFAS 123R). The number of additional shares is calculated by assuming that restricted stock units and performance share units were converted and outstanding stock options were exercised and that the proceeds from such activity were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 2,404,604 shares and 385,653 shares of common stock were outstanding for the three month period ended March 31, 2009 and 2008, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Unvested restricted stock units and unvested performance share units of 284 and 106,540, respectively, were outstanding for the three month period ended March 31, 2009, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Additionally, unvested restricted stock units and unvested performance share units of 61,246 and 41,581, respectively, were outstanding for the three month period March 31, 2008, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Options exercised during the three months ended March 31, 2009 and 2008 were 18,674 shares and 392,637 shares, respectively. The weighted average exercise price per share of the options exercised during the three months ended March 31, 2009 and 2008 was $8.12 and $14.58, respectively. Additionally, during the three months ended March 31, 2009 and 2008, respectively, 56,004 and 48,538 fully vested restricted stock awards were released.
6
The computations for basic and dilutive earnings per share from continuing operations are as follows:
Three Months Ended March 31, | ||||||
2009 | 2008 | |||||
Net Income Attributable to CONSOL Energy Inc. Shareholders |
$ | 195,819 | $ | 75,082 | ||
Average shares of common stock outstanding: |
||||||
Basic |
180,576,479 | 182,572,985 | ||||
Effect of share based payments |
1,573,611 | 2,619,566 | ||||
Dilutive |
182,150,090 | 185,192,551 | ||||
Earnings per share: |
||||||
Basic |
$ | 1.08 | $ | 0.41 | ||
Dilutive |
$ | 1.08 | $ | 0.41 | ||
NOTE 2ACQUISITIONS AND DISPOSITIONS:
In February 2009, CONSOL Energy completed a sale/lease-back of longwall shields for Bailey Mine. Cash proceeds from the sale were $42,282, which was the same as our basis in the equipment. Accordingly, no gain or loss was recognized on the transaction. The lease has been accounted for as an operating lease. The lease term is five years.
In December 2008, CONSOL Energy, through a subsidiary, completed the acquisition of the outstanding 51% interest in Southern West Virginia Energy, LLC (SWVE) for a cash payment of $11,521. This amount is included in capital expenditures in cash used in investing activities on the Consolidated Statement of Cash Flows. The purchase price was principally allocated to property, plant and equipment. SWVE wholly-owns Southern West Virginia Resources, LLC and Minway Contracting, LLC, and had previously been a 49% subsidiary of CONSOL Energy. Prior to the acquisition of the outstanding interest, SWVE had been fully consolidated in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities by CONSOL Energy. The proforma results for this acquisition are not material to CONSOL Energys financial results.
In November 2008, CONSOL Energy, through a subsidiary, completed the acquisition of North Penn Pipe & Supply, Inc. for a cash payment, net of cash acquired, of $22,550. This amount is included in capital expenditures in cash used in investing activities on the Consolidated Statements of Cash Flows. North Penn Pipe & Supply, Inc. is a distributor of oil and gas field equipment, primarily tubular goods, to the northern Appalachian Basin, a region stretching from the state of New York to southwestern Pennsylvania and northern West Virginia. The fair value of merchandise for resale acquired in this acquisition is $10,623 and is included in inventory on the Consolidated Balance Sheets. The proforma results for this acquisition are not significant to CONSOL Energys financial results.
In October 2008, CONSOL Energys Board of Directors authorized a purchase program for shares of CNX Gas Corporation common stock for an aggregate purchase price of up to $150 million. The authorization, which is not intended to take CNX Gas private, was effective as of October 21, 2008 for a twenty-four month period. During the year ended December 31, 2008, CONSOL Energy completed the purchase of $67,259 of CNX Gas stock on the open market at an average price of $26.53 per share. The purchase price was allocated to property, plant and equipment. The purchase of these 2,531,400 shares changed CONSOL Energys ownership percentage in CNX Gas from 81.7% to 83.3% at December 31, 2008. CONSOL Energy did not purchase any additional shares of CNX Gas stock during the three months ended March 31, 2009.
In July 2008, our 83.3% subsidiary, CNX Gas, completed the acquisition of several leases and gas wells from KIS Oil & Gas Inc. for a cash payment of $19,324. The purchase price was principally allocated to
7
property, plant and equipment. The sales agreement called for the transfer of 30 oil and gas wells and approximately 5,600 leased acres. This acquisition enhanced our acreage position in Northern Appalachia. The pro forma results for this acquisition were not significant to CONSOL Energys financial results.
In June 2008, CNX Gas completed the acquisition of the remaining 50% interest in Knox Energy, LLC and Coalfield Pipeline Company not already owned by CNX Gas for a cash payment of $36,000 which was principally allocated to property, plant and equipment. Prior to the acquisition of the outstanding interest, Knox Energy, LLC had been proportionately consolidated into CONSOL Energys financial statements during 2008. During 2006 and 2007, the equity method was used to account for these entities. Knox Energy, LLC is a natural gas production company and Coalfield Pipeline Company is a gathering and transportation company with operations in Tennessee. The pro forma results for this acquisition were not significant to CONSOL Energys financial results. The acquisition was not material to the CONSOL Energys consolidated financial statements.
In February 2008, CONSOL Energy, through a subsidiary, completed a sale of the Mill Creek Mining Complex located in Kentucky. The sales agreement called for the transfer of all of the assets comprising the complex. Cash proceeds from the sale were $14,649, with our basis in the assets being $9,934. Accordingly, a gain of $4,715 was recorded on the transaction.
NOTE 3COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS NET PERIODIC BENEFIT COSTS:
Components of net periodic costs for the three months ended March 31 are as follows:
Pension Benefits | Other Benefits | |||||||||||||||
Three Months Ended March 31, |
Three Months Ended March 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 2,867 | $ | 2,438 | $ | 3,378 | $ | 2,639 | ||||||||
Interest cost |
8,659 | 8,257 | 39,735 | 39,959 | ||||||||||||
Expected return on plan assets |
(9,070 | ) | (8,418 | ) | | | ||||||||||
Amortization of prior service costs (credit) |
(277 | ) | (278 | ) | (11,604 | ) | (12,156 | ) | ||||||||
Recognized net actuarial loss |
5,440 | 4,182 | 14,970 | 15,376 | ||||||||||||
Net periodic benefit cost |
$ | 7,619 | $ | 6,181 | $ | 46,479 | $ | 45,818 | ||||||||
For the three months ended March 31, 2009, $8,393 of contributions to the pension trusts and pension benefits have been paid from operating cash flows. CONSOL Energy presently anticipates contributing a total of approximately $65,600 to the pension trust in 2009.
We do not expect to contribute to the other post employment benefit plan in 2009. We intend to pay benefit claims as they become due. For the three months ended March 31, 2009, $40,033 of other post employment benefits have been paid.
8
NOTE 4COMPONENTS 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 March 31, |
Three Months Ended March 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 1,769 | $ | 1,259 | $ | 7,099 | $ | 7,257 | ||||||||
Interest cost |
3,014 | 2,937 | 2,191 | 2,082 | ||||||||||||
Amortization of actuarial gain |
(5,080 | ) | (6,027 | ) | (1,050 | ) | (1,235 | ) | ||||||||
State administrative fees and insurance bond premiums |
| | 1,759 | 1,293 | ||||||||||||
Legal and administrative costs |
675 | 675 | 850 | 806 | ||||||||||||
Net periodic (benefit) cost |
$ | 378 | $ | (1,156 | ) | $ | 10,849 | $ | 10,203 | |||||||
CONSOL Energy does not expect to contribute to the CWP plan in 2009. We intend to pay benefit claims as they become due. For the three months ended March 31, 2009, $2,588 of CWP benefit claims have been paid.
CONSOL Energy does not expect to contribute to the workers compensation plan in 2009. We intend to pay benefit claims as they become due. For the three months ended March 31, 2009, $9,584 of workers compensation benefits, state administrative fees and surety bond premiums have been paid.
NOTE 5INCOME TAXES:
The following is a reconciliation, stated in dollars as a percentage of pretax income, of the U.S. statutory federal income tax rate to CONSOL Energys effective tax rate:
For the Three Months Ended March 31, |
||||||||||||||
2009 | 2008 | |||||||||||||
Amount | Percent | Amount | Percent | |||||||||||
Statutory U.S. federal income tax rate |
$ | 99,647 | 35.0 | % | $ | 41,924 | 35.0 | % | ||||||
Excess tax depletion |
(27,816 | ) | (9.8 | ) | (10,409 | ) | (8.7 | ) | ||||||
Effect of Domestic Production Activities Deduction |
(4,328 | ) | (1.5 | ) | (1,377 | ) | (1.2 | ) | ||||||
Effect of Medicare Prescription Drug, Improvement and Modernization Act of 2003 |
712 | 0.3 | 299 | 0.3 | ||||||||||
Net Effect of state tax |
10,904 | 3.8 | 4,264 | 3.6 | ||||||||||
Other |
616 | 0.2 | 852 | 0.7 | ||||||||||
Income Tax Expense / Effective Rate |
$ | 79,735 | 28.0 | % | $ | 35,553 | 29.7 | % | ||||||
The effective tax rate for the three months ended March 31, 2009 was calculated using the annual effective rate projection on recurring earnings and includes tax liabilities related to certain discrete transactions. The effective tax rate for the three months ended March 31, 2008 was calculated using the annual effective rate projection on recurring earnings.
The total amounts of unrecognized tax benefits as of March 31, 2009 and March 31, 2008 were approximately $60,691 and $63,521, respectively. If these unrecognized tax benefits were recognized approximately $14,657 and $12,900, respectively, would affect CONSOL Energys effective tax rate. There were no additions to the liability for unrecognized tax benefits during the three months ended March 31, 2009 and March 31, 2008.
9
CONSOL Energy Inc. and its subsidiaries file income tax returns in the U.S. federal, various states, and Canadian tax jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service has issued its audit report relating to the examination of CONSOL Energys 2004 and 2005 U.S. income tax returns. The estimated Federal and state income tax deficiencies payable as a result of the changes to taxable incomes for the audit years are $12,806 and $3,008, respectively. Payment of these income tax deficiencies will have no impact on net income attributable to CONSOL Energy since the 2004 and 2005 deficiencies are the result of changes in the timing of tax deductible expenses. During the three months ended March 31, 2009, CONSOL Energy classified Federal and state unrecognized tax benefits of $12,883 and $3,008, respectively, as current liabilities relating to the 2004 and 2005 audit periods in its financial statements. The Company also classified interest expense relating to the two-year audit period of $4,206 as a current liability.
The IRS examination of the Companys 2002 and 2003 tax returns has been completed. During the three months ended March 31, 2009, CONSOL Energy paid interest of approximately $1,421 relating to the tax deficiencies for this audit period.
CONSOL Energy recognizes interest accrued related to unrecognized tax benefits in its interest expense. As of March 31, 2009 and March 31, 2008, the Company reported an accrued interest liability relating to uncertain tax positions of $9,724 and $9,297, respectively. The accrued interest liability includes $627 and $792 of interest expense that is reflected in the Companys consolidated income statements for the three months ended March 31, 2009 and March 31, 2008, respectively.
CONSOL Energy recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. As of March 31, 2009, CONSOL Energy had no accrued liability for tax penalties. As of March 31, 2008, CONSOL Energy had an accrued liability of approximately $1,200 for tax penalties.
NOTE 6INVENTORIES:
Inventory components consist of the following:
March 31, 2009 |
December 31, 2008 | |||||
Coal |
$ | 127,646 | $ | 93,875 | ||
Merchandise for resale |
59,234 | 43,074 | ||||
Supplies |
90,796 | 90,861 | ||||
Total Inventories |
$ | 277,676 | $ | 227,810 | ||
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 $10,547 and $14,716 at March 31, 2009 and December 31, 2008, respectively.
NOTE 7ACCOUNTS 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 $165,000. The facility also allows for the issuance of letters of credit against the $165,000 capacity. At March 31, 2009, there were no letters of credit outstanding against the facility.
CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and
10
without recourse, sell all of their eligible trade accounts receivable 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 reduced by the amount of accounts receivables sold to the third-party financial institutions under the program. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.
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 $935 and $1,577 for the three months ended March 31, 2009 and 2008, 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 April 2012 with the underlying liquidity agreement renewing annually each April.
At March 31, 2009 and 2008, eligible accounts receivable totaled approximately $165,000 and $144,300, respectively. There was no subordinated retained interest at March 31, 2009. The subordinated retained interest approximated $7,500 at March 31, 2008. Accounts receivable totaling $165,000 and $136,800 were removed from the Consolidated Balance Sheet at March 31, 2009 and 2008, respectively. CONSOL Energys $11,400 increase in the accounts receivable securitization program for the quarter ended March 31, 2008 is reflected in cash flows from operating activities in the Consolidated Statement of Cash Flows. There was no change in the facility usage in the three months ended March 31, 2009.
NOTE 8PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment are as follows:
March 31, 2009 |
December 31, 2008 | |||||
Coal & other plant and equipment |
$ | 4,544,827 | $ | 4,533,793 | ||
Coal properties and surface lands |
1,306,115 | 1,313,496 | ||||
Gas properties and related development |
1,468,899 | 1,379,012 | ||||
Gas gathering equipment |
765,064 | 740,396 | ||||
Airshafts |
604,235 | 615,512 | ||||
Leased coal lands |
510,865 | 502,521 | ||||
Mine development |
538,126 | 527,991 | ||||
Coal advance mining royalties |
370,131 | 365,380 | ||||
Gas advance royalties |
2,341 | 2,187 | ||||
Total property, plant and equipment |
10,110,603 | 9,980,288 | ||||
Less Accumulated depreciation, depletion and amortization |
4,269,952 | 4,214,316 | ||||
Total Net Property, Plant and Equipment |
$ | 5,840,651 | $ | 5,765,972 | ||
NOTE 9SHORT-TERM NOTES PAYABLE:
CONSOL Energy has a five-year $1,000,000 senior secured credit facility, which extends through June 2012. The facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries and collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. The Agreement does provide for the release of collateral at the request of CONSOL Energy upon achievement of certain credit ratings. Fees and interest rate spreads are based on a ratio of financial covenant
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debt to twelve-month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), measured quarterly. The facility includes a minimum interest coverage ratio covenant of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 21.95 to 1.00 at March 31, 2009. The facility also includes a maximum leverage ratio covenant of not more than 3.25 to 1.00, measured quarterly. The leverage ratio was 1.10 to 1.00 at March 31, 2009. 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 and merge with another corporation. At March 31, 2009, the $1,000,000 facility had $440,000 of borrowings outstanding and $267,136 of letters of credit outstanding, leaving $292,864 of capacity available for borrowings and the issuance of letters of credit. The facility bore a weighted average interest rate of 1.2% for the three months ended March 31, 2009.
CNX Gas has a five-year $200,000 unsecured credit agreement which extends through October 2010. The agreement contains a negative pledge provision, whereas CNX Gas assets cannot be used to secure other obligations. 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, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. The facility includes a maximum leverage ratio covenant of not more than 3.00 to 1.00, measured quarterly. The leverage ratio was 0.32 to 1.00 at March 31, 2009. The facility also includes a minimum interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 76.68 to 1.00 at March 31, 2009. At March 31, 2009, the CNX Gas credit agreement had $80,400 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $104,667 of capacity available for borrowings and the issuance of letters of credit. The facility bore a weighted average interest rate of 1.5% for the three months ended March 31, 2009.
NOTE 10COMMITMENTS 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. Our current estimates 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. However, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations or cash flows of CONSOL Energy.
On January 30, 2008, the Pennsylvania Department of Conservation and Natural Resources filed a six-count Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, asserting claims in both tort and contract against the Company for alleged damage to park property owned by the Commonwealth allegedly due to the Companys underground mining activities. The Commonwealth claims that the Companys underground longwall mining activities in the summer of 2005 in Greene County, Pennsylvania, caused cracks and seepage damage to the nearby Ryerson Park Dam. The Commonwealth demolished the Ryerson Dams spillway allegedly under its role of Parens Patrie to protect persons and property, thereby eliminating the Ryerson Park lake. The Commonwealth claims that the Company is liable for dam reconstruction costs, lake restoration costs and natural resources damages totaling $58,000. The theories of liability include general allegations of negligence, breach of contract, strict liability, nuisance, an administrative remedy claim under the Bituminous Mine Subsidence Act and a claim of fraud; the last claim seeking punitive damages. The Court, in ruling on the Companys Preliminary Objections to the Complaint, stayed the current proceedings in the state court, holding that the Commonwealth should pursue administrative agency review of the claim because full compensatory relief, if warranted, could be provided by the particular administrative agency and then the Environmental Hearing Board, if further relief was sought. Furthermore, the Court found that the Commonwealth could not recover natural resources damages under applicable law. The remainder of the Companys objections was preserved pending the outcome of the administrative proceedings. The matter is in the early stages of review by the Department of Environmental Protection (DEP). The DEP has set specific dates for the submission of materials regarding the issue of causation with August 14, 2009 being the prospective date or target date for its causation decision. The
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Company has submitted extensive material including comments from its mining expert indicating and showing that longwall mining activity did not cause damage to the dam. If the DEP determines that there is causation, a second phase will be set to determine the remedy. As to the underlying claim, the Company believes it is not responsible for the damage to the dam, that there exist numerous grounds upon which to attack the propriety of the claims, and it will vigorously defend the case. However, it is reasonably possible that the ultimate liability in the future with respect to these claims may be material to the financial position, results of operations, or cash flows of CONSOL Energy.
One of our subsidiaries, Fairmont Supply Company (Fairmont), which distributes industrial supplies, currently is named as a defendant in approximately 25,000 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, Mississippi, New Jersey 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. For the three months ended March 31, 2009 and 2008, payments by Fairmont with respect to asbestos cases have not been material. Our current estimates related to these asbestos claims, individually and in the aggregate, are immaterial to the financial position, results of operations and cash flows of CONSOL Energy. However, it is reasonably possible that payments in the future with respect to pending or future asbestos cases may be material to the financial position, results of operations or cash flows of CONSOL Energy.
Another of our subsidiaries, Island Creek Coal Company, is named in one single-plaintiff asbestos case in West Virginia in which the plaintiff claims to have been exposed to asbestos products while working at a coal mine operated by Island Creek. Discovery has been stayed until the case is set for trial. CONSOL Energy has also been sued in a single plaintiff FELA case in Pennsylvania. The Company has filed a Motion to Dismiss in that case in which it maintains that the plaintiff has failed to plead facts sufficient to satisfy jurisdictional requirements. The Company believes that it is not responsible for these claims, and it will vigorously defend these cases. However, it is reasonably possible that the ultimate liability with respect to these claims in the future may be material to the financial position, results of operations or cash flows of CONSOL Energy.
CONSOL Energy was notified in November 2004 by the United States Environmental Protection Agency (EPA) that it is a potentially responsible party (PRP) under Superfund legislation with respect to the Ward Transformer site in Wake County, North Carolina. At that time, the EPA also identified 38 other PRPs for the Ward Transformer site. On September 16, 2005, 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 December 2005, the EPA approved the PRPs work plan, and field work began the first week of January 2006. On March 12, 2007, another party joined the participating PRPs and reduced CONSOL Energys interim allocation share from 46% to 32%. Accordingly, CONSOL Energy recognized a reduction in the previously recognized liability related to this matter. In June 2008, while conducting the PCB soil excavation on the Ward property, it was determined that PCBs may have migrated onto two adjacent properties. Also, in September 2008, the EPA notified CONSOL Energy and 60 other PRPs that there were additional areas of potential contamination allegedly related to the Ward Transformer Site. Current estimates of the cost or potential range of cost for this area is not yet available.
The current estimated cost of remedial action for the area CONSOL Energy was originally named a PRP, including payment of the EPAs past and future cost, is approximately $51,500. The current estimated cost of the most likely remediation plan for the additional areas discovered is approximately $6,800, although the removal action plan is not yet approved by the EPA. There was $2,336 of expense recognized in Cost of Goods Sold and
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Other Charges for the three months ended March 31, 2009. No expense was recognized in the three months ended March 31, 2008. CONSOL Energy funded $2,000 in the three months ended March 31, 2009, to an independent trust established for this remediation. The remaining liability of $7,330 is reflected in Other Accrued Liabilities at March 31, 2009. CONSOL Energy and the other participating PRPs are investigating contribution claims against other, non-participating PRPs, and such claims will be brought to recover a share of the costs incurred. CONSOL Energys portion of probable recoveries are estimated to be $3,420. Accordingly, an asset has been included in Other Assets for these claims. CONSOL Energy expects the majority of payments related to this liability to be made over the next year. There may be some delay in negotiating settlements with other PRPs who may want settlement of all Ward-related claims. We cannot predict the ultimate outcome of this Superfund site; however, it is reasonably possible that payments in the future with respect to this lawsuit may be material to the financial position, results of operations or cash flows of CONSOL Energy.
As part of conducting mining activities at the Buchanan Mine, our subsidiary, Consolidation Coal Company (CCC), has to remove water from the mine. Several actions have arisen with respect to the removal of naturally accumulating and pumped water from the Buchanan Mine:
Yukon Pocahontas Coal Company, Buchanan Coal Company and Sayers-Pocahontas Coal Company filed an action on March 22, 2004 against CCC which is presently pending in the Circuit Court of Buchanan County, Virginia (the Yukon Action). The action is related to CCCs depositing of untreated water from its Buchanan Mine into the void spaces of nearby mines of one of our other subsidiaries, Island Creek Coal Company (ICCC). The plaintiffs are seeking to stop CCC from depositing any additional water in these areas, to require CCC to remove the water that is stored there along with any remaining impurities, to recover $300,000 of compensatory and trebled damages and to recover punitive damages. Plaintiffs have twice amended the original complaint to assert additional claims for compensatory damages to the coal and gas estates of up to $3,252,000, punitive damages in the amount of $350,000, as well as interest, costs, and attorneys fees, against CCC. Plaintiffs have also added CONSOL Energy, CNX Gas Company, LLC and ICCC as additional defendants asserting additional damage claims of $150,000 against those defendants. The Yukon group has recently filed a demand for arbitration (the 2008 Arbitration) against ICCC which makes similar claims relating to breach of the lease for water deposits and lost coal claims.
Levisa Coal Company filed an action on July 10, 2006 against CCC in the Buchanan County Circuit Court (the Levisa Action). The action is for injunctive relief and declaratory judgment and sought a court order prohibiting CCC from depositing water from its Buchanan Mine into the void spaces of ICCCs VP3 mine, part of which is under lease from Levisa Coal Company. The Plaintiff also has noted its intent to also seek an injunction requiring CCC to remove the water already deposited in the VP3 Mine. The plaintiff claims the water adversely affects its remaining coal reserves and coalbed methane production, thereby impacting the plaintiffs future royalties. In mid-November 2006, Levisa Coal Company petitioned the Circuit Court for a temporary injunction prohibiting the further depositing of water into the void spaces which, after a two-day hearing, the Buchanan County Circuit Court denied. Subsequently, the Circuit Court entered an order holding that CCC has the right to store water in the VP3 mine void based upon provisions in this lease and dismissed the action. The Supreme Court of Virginia, on appeal, disagreed with the Circuit Courts interpretation of the lease, held that CCC has no right to store water in VP3 under the lease, reversed the dismissal, and remanded the case to the Circuit Court to determine whether under equitable principles a permanent injunction should be issued. On September 18, 2008, the Virginia Supreme Court denied CCCs request for a rehearing of its June 6, 2008 decision and CCC subsequently filed a petition of certiorari with the United States Supreme Court requesting the United States Supreme Court to review and overturn the decision of the Virginia Supreme Court (CCCs Petition) . The Supreme Court of the United States directed Levisa to file a response to CCCs Petition, which response was filed on April 2, 2009. In January 2009, Levisa moved for summary judgment, requesting the issuance of a permanent injunction preventing further water storage and contending that the Supreme Court of Virginias opinion directed CCC to cease pumping. On February 10, 2009, the Circuit Court granted Levisas motion and permanently enjoined CCC from any further storage of water in VP3, which injunction was later dissolved on March 17, 2009 by the Supreme Court of Virginia on CCCs Petition. In addition, Levisa Coal Company has filed an additional motion in the original action with the Circuit Court seeking as additional relief
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that CCC disgorge profits and other monetary benefits including avoided losses generated by the operation of the Buchanan Mine from the date of the decision of the Virginia Supreme Court or alternatively since the date of its denial of CCCs rehearing request until such time as all depositing and/or storage of water in the VP3 Mine from the Buchanan Mine ceases.
On June 13, 2008 Levisa Coal Company filed a second action against CCC in the Circuit Court of Buchanan County, Virginia relating to the deposit of water by CCC into the void spaces of the VP3 mine which seeks damages of approximately $300,000, plus interest, costs and attorneys fees, which second action CCC moved to consolidate with the Levisa Action. This action was voluntarily dismissed by Levisa on or about February 10, 2009 without prejudice.
Meredith Ellis Jennings and several other individuals and entities filed an action on July 8, 2008 against CCC and CNX Gas in the Circuit Court of Buchanan County, Virginia (the Pobst/Combs Action). The plaintiffs alleged that they hold real property interests and royalty interests in gas including coalbed methane gas in and around the VP3 mine. The action, which has been voluntarily dismissed, was for injunctive relief and a court order prohibiting CCC from depositing water from its Buchanan Mine into the void spaces of the VP3 mine and requiring CCC to remove water from the void spaces of the VP3 mine.
CCC has obtained revision to its environmental permit from the Division of Mined Land Reclamation (DMLR) of the Virginia Department of Mines, Minerals and Energy (DMME) to deposit water from its Buchanan Mine into void spaces of VP3, and to permit the discharge of water into the nearby Levisa River under controlled conditions. Plaintiffs in the Yukon Action and the Levisa Action along with the Town of Grundy, Virginia, Buchanan County Board of Supervisors, and others have requested the DMME to reconsider the permit revisions issued by DMLR. Requests for temporary relief to prevent CCC from constructing and operating pursuant to the permit revisions pending a final hearing before the DMME have been rejected by the Director of the DMME. The hearing to be conducted by the Director of the DMME through a Hearing Officer appointed by the Supreme Court of Virginia has not yet been scheduled. The plaintiffs in the Yukon Action on June 13, 2006 also filed an action against the DMME in the Circuit Court of Buchanan County, Virginia seeking to enjoin DMLR and DMME from issuing the permit revisions, which were ultimately issued in September 2006 and are the subject of the administrative appeal to the Director of DMME described above. The Levisa Action plaintiff filed a nearly identical action. DMME filed demurrers, but no hearing has been conducted since the DMME issued the permit in September 2006. On December 4, 2006, both the plaintiffs in the Yukon Action and Levisa nonsuited their respective Citizen Suits.
We also believe DMME properly issued environmental permits to CCC authorizing it to deposit naturally accumulating water from the Buchanan Mine into VP3 as well as discharging water into the Levisa River under the controlled conditions established by the permits. CCC and the other named CONSOL Energy defendants in the Yukon Action, the Levisa Action and the Pobst/Combs Action deny all liability and intend to vigorously defend the actions filed against them in connection with the removal and deposit of water from the Buchanan Mine. CCC also intends to vigorously defend the environmental permits issued to it. Consequently, we have not recognized any liability related to these actions. However, if a temporary or permanent injunction were to be issued against CCC, if the environmental permits were temporarily suspended or revoked, or if damages were awarded to plaintiffs, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.
On October 24, 2006, CONSOL Energy and CCC were served with a summons in the name of the Commonwealth of Virginia with the Circuit Court of Buchanan County, Virginia regarding a special grand jury presentment in response to citizens complaints that noise resulting from the ventilation fan at the Buchanan Mine constitutes a public nuisance. CONSOL Energy and CCC deny that the operation of the ventilation fan is a public nuisance and intend to vigorously defend this proceeding. However, if the operation of the ventilation fan is ordered to be stopped, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.
15
On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against CNX Gas Company LLC and Island Creek Coal Company, a subsidiary of CONSOL Energy, in the Circuit Court for the County of Tazewell, Virginia (Case No. CL07000065-00). The lawsuit alleged that CNX Gas conspired with Island Creek and has violated the Virginia Antitrust Act and tortuously interfered with GeoMets contractual relations, prospective contracts and business expectancies. CNX Gas and Island Creek filed motions to dismiss all counts of the complaint. On December 19, 2007, the court granted CNX Gas and Island Creeks motions to dismiss all counts, with leave for GeoMet to file an amended complaint. On March 31, 2008, GeoMet filed an amended complaint. The amended complaint is again against CNX Gas and Island Creek, but it added CONSOL Energy and Cardinal States Gathering Company as additional defendants. The amended complaint restates allegations that CNX Gas, Island Creek and now CONSOL Energy and Cardinal States Gathering Company violated the Virginia Antitrust Act and tortuously interfered with GeoMets contractual relations, prospective contracts and business expectancies. The amended complaint seeks injunctive relief, compensatory damages of $385,600 and treble damages. CNX Gas continues to believe this lawsuit to be without merit and intends to vigorously defend it. CNX Gas action seeking to dismiss GeoMets complaint is pending. We cannot predict the ultimate outcome of this litigation; however, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations, or cash flows of CNX Gas.
On January 7, 2009, CNX Gas received a civil investigative demand for information and documents from the Attorney General of the Commonwealth of Virginia regarding the companys exploration, production, transportation and sale of coalbed methane gas in Virginia. According to the request, the Attorney General is investigating whether the company may have violated the Virginia Antitrust Act. The request for information does not constitute the commencement of legal proceedings and does not make any specific allegations against the company. CNX Gas does not believe that it has violated the Virginia Antitrust Act and the company intends to cooperate with the Attorney Generals investigation.
The Company is a party to a case captioned Earl Kennedy et. al v. CNX Gas and CONSOL Energy in the Court of Common Pleas of Greene County, Pennsylvania (Case No. 225 of 2007). The lawsuit alleges that CNX Gas and CONSOL Energy conspired and were unjustly enriched, trespassed, converted, and committed fraud relating to gas and other minerals allegedly belonging to Mr. Kennedy. The suit also seeks to overturn existing law as to the ownership of coalbed methane in Pennsylvania. The complaint, as amended, seeks injunctive relief, including having us be removed from the property, quiet title and compensatory damages of $20,000. CNX Gas believes this lawsuit to be without merit and intends to vigorously defend it. We cannot predict the ultimate outcome of this litigation; however, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations, or cash flows of CNX Gas.
In April 2005, Buchanan County, Virginia (through its Board of Supervisors and Commissioner of Revenue) filed a Motion for Judgment Pursuant to the Declaratory Judgment Act Virginia Code § 8.01-184 against CNX Gas Company LLC in the Circuit Court of the County of Buchanan (Case No. CL05000149-00) for the year 2002; the county has since filed and served two substantially similar cases for years 2003, 2004 and 2005. These cases have been consolidated. The complaint alleges that our calculation of the license tax on the basis of the wellhead value (sales price less post production costs) rather than the sales price is improper. For the period from 1999 through mid 2002, we paid the tax on the basis of the sales price, but we have filed a claim for a refund for these years. Since 2002, we have continued to pay Buchanan County taxes based on our method of calculating the taxes. However, we have been accruing an additional liability reflected in Other Liabilities on our balance sheet in an amount based on the difference between our calculation of the tax and Buchanan Countys calculation. We believe that this litigation will settle on terms that will not have a material adverse impact on the financial position or the results of operations of CNX Gas.
In 1999, CNX Gas was named in a suit brought by a group of royalty owners that lease gas development rights to CNX Gas in southwest Virginia. The suit alleged the underpayment of royalties to the group of royalty owners. The claim of underpayment of royalties related to the interpretation of permissible deductions from production revenues upon which royalties are calculated. The deductions at issue relate to post-production
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expenses of gathering, compression and transportation. CNX Gas was ordered to pay, and subsequently paid, damages to the group of royalty owners that brought the suit. A final payment was subsequently made to the plaintiffs to adjust all royalties owed to the plaintiffs for subsequent periods, which effectively settled this case. CNX Gas recognized an estimated liability for other similarly situated plaintiffs who could bring similar claims. This amount is included in Other Liabilities on the balance sheet and is evaluated quarterly. CNX Gas believes that the final resolution of this matter will not have a material effect on our financial position, results of operations or cash flows.
In July 2007, production at the Buchanan Mine was suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine by employees. The mine atmosphere was continually monitored to determine the impact of the roof falls on the mines ventilation system and the overall mine atmosphere. On March 17, 2008, Buchanan Mine resumed production. This incident was covered under our property and business interruption insurance policy, subject to certain deductibles. Business interruption recoveries of $50,000 were recognized as Other Income in the three months ended March 31, 2008, $42,000 in the coal segment and $8,000 in the gas segment. The total recoveries for this incident under our insurance policy were $75,000. No other insurance recoveries for this incident will be received.
On October 3, 2008 the Emergency Economic Stabilization Act of 2008 (the EESA Act) was signed into law. The EESA Act contains a section that authorizes certain coal producers and exporters who have filed a Black Lung Excise Tax (BLET) return on or after October 1, 1990, to request a refund of the BLET paid on export sales during these years. The EESA Act requires that the U.S. Treasury refund a coal producer or exporter an amount equal to the BLET erroneously paid on export sales in prior years along with interest computed at the statutory rates applicable to overpayments.
In the quarter ended December 31, 2008, CONSOL Energy filed timely claims for refunds of the BLET with the Internal Revenue Service in the amount of $26,539. In addition, the estimated interest related to the BLET refunds expected to be received was $32,444. In relation to this receivable, CONSOL Energy also recognized $3,187 of expense in the quarter ended December 31, 2008 that will be owed to third parties upon collection of the refunds. CONSOL Energy recognized an additional $352 of interest income related to these claims in the three months ended March 31, 2009. CONSOL Energy believes that it will receive refunds of BLET erroneously paid on export sales in the amounts requested in its filing with the Internal Revenue Service plus interest as required by the EESA Act prior to December 31, 2009.
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At March 31, 2009, 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 credits 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 and Duration of Commitment | |||||||||||||||
Total Amounts Committed |
Less Than 1 Year |
1-3 Years | 3-5 Years | Beyond 5 Years | |||||||||||
Letters of Credit: |
|||||||||||||||
Employee-Related |
$ | 191,685 | $ | 191,685 | $ | | $ | | $ | | |||||
Environmental |
63,502 | 63,502 | | | | ||||||||||
Gas |
14,933 | 14,781 | 152 | | | ||||||||||
Other |
11,949 | 11,949 | | | | ||||||||||
Total Letters of Credit |
282,069 | 281,917 | 152 | | | ||||||||||
Surety Bonds: |
|||||||||||||||
Employee-Related |
192,151 | 173,151 | 19,000 | | | ||||||||||
Environmental |
336,245 | 324,666 | 11,579 | | | ||||||||||
Gas |
4,711 | 4,697 | 14 | | | ||||||||||
Other |
9,975 | 9,954 | 21 | | | ||||||||||
Total Surety Bonds |
543,082 | 512,468 | 30,614 | | | ||||||||||
Guarantees: |
|||||||||||||||
Coal |
360,661 | 218,735 | 136,451 | 2,222 | 3,253 | ||||||||||
Gas |
32,808 | 29,708 | | | 3,100 | ||||||||||
Other |
252,235 | 32,488 | 59,265 | 47,535 | 112,947 | ||||||||||
Total Guarantees |
645,704 | 280,931 | 195,716 | 49,757 | 119,300 | ||||||||||
Total Commitments |
$ | 1,470,855 | $ | 1,075,316 | $ | 226,482 | $ | 49,757 | $ | 119,300 | |||||
Employee-related financial guarantees have primarily been provided to support the United Mine Workers of Americas 1992 Benefit Plan and various state workers compensation self-insurance programs. Environmental financial guarantees have primarily been provided to support various performance bonds related to reclamation and other environmental issues. Gas financial guarantees have primarily been provided to support various performance bonds related to land usage and restorative issues. Other guarantees have been extended to support insurance policies, legal matters and various other items necessary in the normal course of business. Other guarantees have also been provided to promise the full and timely payments to lessors of mining equipment and support various other items necessary in the normal course of business. Surety bonds are typically renewed each year. However, the majority of the surety bonds are non-cancelable by the issuer, most notably for employee-related and environmental obligations.
18
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, 2009, the purchase obligations for each of the next five years were as follows:
Obligations Due |
Amount | ||
Less than 1 year |
$ | 50,737 | |
1-3 years |
43,948 | ||
3-5 years |
31,977 | ||
More than 5 years |
234,480 | ||
Total purchase obligations |
$ | 361,142 | |
NOTE 11DERIVATIVES
CONSOL Energy enters into financial derivative instruments to manage our exposure to natural gas price volatility. Our derivatives are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended. We measure every derivative instrument at fair value and record them on the balance sheet as either an asset or liability. Changes in fair value of 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 fair value of the derivative are reported in other comprehensive income or loss and reclassified into earnings in the same period or periods which the forecasted transaction affects earnings. The ineffective portions of hedges are recognized in earnings in the current year. 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 fair values or cash flows of the hedge 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. All of the counterparties to CONSOL Energys natural gas derivative instruments also participate in CONSOL Energys revolving credit facility. The Company has not experienced any issues of non-performance by derivative counterparties.
CONSOL Energy has entered into forward and option contracts on various commodities to manage the price risk associated with forecasted revenues of those commodities. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted revenues of those commodities.
As of March 31, 2009, the total notional amount of the Companys outstanding natural gas forward contracts that were entered into to hedge forecasted revenues was 56.3 Bcf. The forward contracts are forecasted to settle through December 31, 2010. Over the next twelve months, $120,177 of gain is expected to be reclassified out of Other Comprehensive Income and into Earnings. No gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges.
As of March 31, 2009, the total notional amount of the Companys outstanding coal sales options was 250 tons. These coal sales options do not qualify for hedge accounting under SFAS 133. The options are expected to settle or expire over the next nine months.
19
The fair value of CONSOL Energys derivative instruments at March 31, 2009 are as follows:
Asset Derivatives |
Liability Derivatives | |||||||||
As of March 31 |
2009 |
2009 | ||||||||
Balance Sheet |
Fair Value |
Balance Sheet |
Fair Value | |||||||
Derivatives designated as hedging instruments under Statement 133 |
||||||||||
Natural Gas Price Swaps |
Prepaid Expense | $ | 199,909 | $ | | |||||
Natural Gas Price Swaps |
Other assets | 53,225 | | |||||||
Total derivatives designated as hedging instruments under Statement 133 |
$ | 253,134 | $ | | ||||||
Derivative not designated as hedging instruments under Statement 133 |
||||||||||
Coal Sales Options |
$ | | Other Liabilities | $ | 83 | |||||
Total derivatives not designated as hedging instruments under Statement 133 |
$ | | $ | 83 | ||||||
Total Derivatives |
$ | 253,134 | $ | 83 | ||||||
Derivative in Statement 133 Cash Flow Hedging Relationship |
Amount of Gain (Loss) Recognized in OCI on Derivative 2009 |
Location of |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income 2009 |
Location of |
Amount of Gain (Loss) Recognized in Income on Derivative 2009 |
|||||||||
Natural Gas Price Swaps |
$ | 78,948 | Outside Sales | $ | 50,618 | Outside Sales | $ | (375 | ) | |||||
Total |
$ | 78,948 | $ | 50,618 | $ | (375 | ) | |||||||
Derivatives not Designated as Hedging Instruments under Statement 133 |
Location
of |
Amount of Gain (Loss) Recognized in Income on Derivative 2009 | |||
Coal Sales Options |
Other Income | $ | 2,135 | ||
Total |
$ | 2,135 | |||
20
NOTE 12OTHER COMPREHENSIVE INCOME:
Total comprehensive income, net of tax, was as follows:
Treasury Rate Lock |
Change in Fair Value of Cash Flow Hedges |
Minimum Pension Liability |
Adjustments for FASB Statement No. 158 |
Accumulated Other Comprehensive Loss |
|||||||||||||||
Balance at December 31, 2008 |
$ | 263 | $ | 102,625 | $ | | $ | (564,788 | ) | $ | (461,900 | ) | |||||||
Net increase in value of cash flow hedges |
| 65,788 | | | 65,788 | ||||||||||||||
Reclassification of cash flow hedges from other comprehensive income to earnings |
| (41,868 | ) | | | (41,868 | ) | ||||||||||||
Current period change |
(20 | ) | | | 1,497 | 1,477 | |||||||||||||
Comprehensive Income |
243 | 126,545 | | (563,291 | ) | (436,503 | ) | ||||||||||||
Comprehensive income attributable to Noncontrolling Interest |
| 4,785 | | (4 | ) | 4,781 | |||||||||||||
Balance at March 31, 2009 |
$ | 243 | $ | 131,330 | $ | | $ | (563,295 | ) | $ | (431,722 | ) | |||||||
NOTE 13FAIR VALUE OF FINANCIAL INSTRUMENTS:
The financial assets (liabilities) measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at March 31, 2009 | ||||||||||
Description |
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 |
$ | | $ | 253,134 | $ | | ||||
Coal Sales Options |
$ | | $ | (83 | ) | $ | |
Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS 107) requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the SFAS 159 fair value option was not elected. The following methods and assumptions were used to estimate the fair value of those financial instruments:
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 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.
Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses, based on CONSOL Energys current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of financial instruments for which SFAS 159 was not elected are as follows:
March 31, 2009 | December 31, 2008 | |||||||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
Cash and cash equivalents |
$ | 71,555 | $ | 71,555 | $ | 138,512 | $ | 138,512 | ||||||||
Short-term notes payable |
$ | (520,400 | ) | $ | (520,400 | ) | $ | (557,700 | ) | $ | (557,700 | ) | ||||
Long-term debt |
$ | (401,250 | ) | $ | (403,940 | ) | $ | (402,287 | ) | $ | (390,278 | ) |
21
NOTE 14SEGMENT INFORMATION:
CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the three months ended March 31, 2009, the Northern Appalachian aggregated segment includes the following mines: Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork, Shoemaker and Mine 84. For the three months ended March 31, 2009, the Central Appalachian aggregated segment includes the following mines: Jones Fork, the Fola Complex and the Terry Eagle Complex. For the three months ended March 31, 2009, the Metallurgical aggregated segment includes the Buchanan and Amonate mines. The Other Coal segment includes our purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to each individual mine. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energys All Other classification is made up of the Companys terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. 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. Certain reclassifications of 2008 segment information have been made to conform to the 2009 presentation.
Industry segment results for the three months ended March 31, 2009:
Northern Appalachian |
Central Appalachian |
Metallurgical | Other Coal | Total Coal | Gas | All Other | Corporate, Adjustments & Eliminations |
Consolidated | |||||||||||||||||||||||
SalesOutside |
$ | 684,322 | $ | 74,639 | $ | 70,952 | $ | 88,323 | $ | 918,236 | $ | 161,905 | $ | 70,103 | $ | | $ | 1,150,244 | |||||||||||||
SalesGas Royalty Interests |
| | | | | 12,632 | | | 12,632 | ||||||||||||||||||||||
SalesPurchased Gas |
| | | | | 1,465 | | | 1,465 | ||||||||||||||||||||||
Freightoutside |
| | | 30,916 | 30,916 | | | 30,916 | |||||||||||||||||||||||
Intersegment transfers |
| | | | | 435 | 37,519 | (37,954 | ) | | |||||||||||||||||||||
Total Sales and Freight |
$ | 684,322 | $ | 74,639 | $ | 70,952 | $ | 119,239 | $ | 949,152 | $ | 176,437 | $ | 107,622 | $ | (37,954 | ) | $ | 1,195,257 | ||||||||||||
Earnings (Loss) Before Income Taxes |
$ | 248,330 | $ | (11,822 | ) | $ | 22,261 | $ | (43,128 | ) | $ | 215,641 | $ | 89,005 | $ | 9,003 | $ | (28,943 | ) | $ | 284,706 | (A) | |||||||||
Segment assets |
$ | 4,438,165 | $ | 2,203,067 | $ | 334,027 | $ | 432,028 | $ | 7,407,287 | (B) | ||||||||||||||||||||
Depreciation, depletion and amortization |
$ | 78,205 | $ | 22,819 | $ | 5,195 | $ | | $ | 106,219 | |||||||||||||||||||||
Capital expenditures |
$ | 160,935 | $ | 133,550 | $ | 5,075 | $ | | $ | 299,560 | |||||||||||||||||||||
(A) | Includes equity in earnings (losses) of unconsolidated affiliates of $1,428, $262 and $1,671 for Coal, Gas and All Other, respectively. |
(B) | Includes investments in unconsolidated equity affiliates of $10,093, $25,446 and $40,078 for Coal, Gas and All Other, respectively. Also included in the Coal segment is $59,354 of receivables related to the Emergency Economic Stabilization Act of 2008. |
22
Industry segment results for the three months ended March 31, 2008:
Northern Appalachian |
Central Appalachian |
Metallurgical | Other Coal | Total Coal | Gas | All Other | Corporate, Adjustments & Eliminations |
Consolidated | ||||||||||||||||||||||||
SalesOutside |
$ | 523,163 | $ | 88,926 | $ | 10,725 | $ | 65,276 | $ | 688,090 | $ | 127,399 | $ | 70,836 | $ | | $ | 886,325 | ||||||||||||||
SalesGas Royalty Interests |
| | | | | 16,504 | | | 16,504 | |||||||||||||||||||||||
SalesPurchased Gas |
| | | | | 3,539 | | | 3,539 | |||||||||||||||||||||||
Freightoutside |
| | | 44,744 | 44,744 | | | 44,744 | ||||||||||||||||||||||||
Intersegment transfers |
| | | | | 3,142 | 32,936 | (36,078 | ) | | ||||||||||||||||||||||
Total Sales and Freight |
$ | 523,163 | $ | 88,926 | $ | 10,725 | $ | 110,020 | $ | 732,834 | $ | 150,584 | $ | 103,772 | $ | (36,078 | ) | $ | 951,112 | |||||||||||||
Earnings (Loss) Before Income Taxes |
$ | 113,589 | $ | (4,531 | ) | $ | (7,853 | ) | $ | (38,009 | ) | $ | 63,196 | $ | 77,926 | $ | 2,513 | $ | (23,851 | ) | $ | 119,784 | (C) | |||||||||
Segment assets |
$ | 4,082,534 | $ | 1,454,739 | $ | 260,527 | $ | 589,971 | $ | 6,387,771 | (D) | |||||||||||||||||||||
Depreciation, depletion and amortization |
$ | 71,836 | $ | 15,945 | $ | 4,947 | $ | | $ | 92,728 | ||||||||||||||||||||||
Capital expenditures |
$ | 85,202 | $ | 86,552 | $ | 4,588 | $ | | $ | 176,342 | ||||||||||||||||||||||
(C) | Includes equity in earnings of unconsolidated affiliates of $456, $110 and $789 for Coal, Gas and All Other, respectively. |
(D) | Includes investments in unconsolidated equity affiliates of $2,975, $27,440 and $35,689 for Coal, Gas and All Other, respectively. |
Reconciliation of Segment Information to Consolidated Amounts:
Earnings Before Income Taxes:
For the Three Months Ended March 31, |
||||||||
2009 | 2008 | |||||||
Segment Earnings Before Income Taxes for total reportable business segments |
$ | 304,646 | $ | 141,122 | ||||
Segment Earnings Before Income Taxes for all other businesses |
9,003 | 2,513 | ||||||
Incentive Compensation (E) |
(8,841 | ) | (6,779 | ) | ||||
Compensation from restricted stock unit grants, stock option expense and performance share unit expense (E) |
(8,786 | ) | (4,928 | ) | ||||
Interest income (expense), net and other non-operating activity (E) |
(8,432 | ) | (12,144 | ) | ||||
Corporate Restructuring (E) |
(2,884 | ) | | |||||
Earnings Before Income Taxes |
$ | 284,706 | $ | 119,784 | ||||
Total Assets: |
March 31, | ||||||
2009 | 2008 | |||||
Segment assets for total reportable business segments |
$ | 6,641,232 | $ | 5,537,273 | ||
Segment assets for all other businesses |
334,027 | 260,527 | ||||
Items excluded from segment assets: |
||||||
Cash and other investments (E) |
71,680 | 30,805 | ||||
Deferred tax assets |
359,401 | 545,690 | ||||
Recoverable income taxes |
| 12,098 | ||||
Bond issuance costs |
947 | 1,378 | ||||
Total Consolidated Assets |
$ | 7,407,287 | $ | 6,387,771 | ||
(E) | Excludes amounts specifically related to the gas segment. |
23
NOTE 15GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:
The payment obligations under the $250,000, 7.875% per annum notes due March 1, 2012 issued by CONSOL Energy are jointly and severally, and also fully and unconditionally guaranteed by several 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, an 83.3% owned guarantor subsidiary, the remaining guarantor subsidiaries and the non-guarantor subsidiaries. CNX Gas is presented in a separate column in accordance with SEC Regulation S-X Rule 3-10. CNX Gas Corporation is a reporting company under Section 12(b) of the Securities Exchange Act of 1933, and as such, CNX Gas Corporation files its own financial statements with the Securities and Exchange Commission and those financial statements, when filed, are publicly available on Edgar. 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 100% 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, 2009:
Parent Issuer |
CNX Gas Guarantor |
Other Subsidiary Guarantors |
Non- Guarantors |
Elimination | Consolidated | |||||||||||||||||
SalesOutside |
$ | | $ | 162,340 | $ | 938,424 | $ | 50,480 | $ | (1,000 | ) | $ | 1,150,244 | |||||||||
SalesPurchased Gas |
| 1,465 | | | | 1,465 | ||||||||||||||||
SalesGas Royalty Interests |
| 12,632 | | | | 12,632 | ||||||||||||||||
FreightOutside |
| | 30,916 | | | 30,916 | ||||||||||||||||
Other Income (including equity earnings) |
214,359 | 1,947 | 12,744 | 5,962 | (211,518 | ) | 23,494 | |||||||||||||||
Total Revenue and Other Income |
214,359 | 178,384 | 982,084 | 56,442 | (212,518 | ) | 1,218,751 | |||||||||||||||
Cost of Goods Sold and Other Operating Charges |
18,496 | 33,274 | 530,487 | 47,842 | 37,875 | 667,974 | ||||||||||||||||
Purchased Gas Costs |
| 1,530 | | | | 1,530 | ||||||||||||||||
Gas Royalty Interests Costs |
| 10,601 | | | (10 | ) | 10,591 | |||||||||||||||
Related Party Activity |
547 | | 28,158 | 428 | (29,133 | ) | | |||||||||||||||
Freight Expense |
| | 30,916 | | | 30,916 | ||||||||||||||||
Selling, General and Administrative Expense |
| 19,122 | 11,369 | 325 | | 30,816 | ||||||||||||||||
Depreciation, Depletion and Amortization |
3,343 | 22,819 | 81,250 | 661 | (1,854 | ) | 106,219 | |||||||||||||||
Interest Expense |
3,825 | 1,957 | 2,812 | 4 | (86 | ) | 8,512 | |||||||||||||||
Taxes Other Than Income |
1,880 | | 75,310 | 649 | | 77,839 | ||||||||||||||||
Black Lung Excise Tax Refund |
| | (352 | ) | | | (352 | ) | ||||||||||||||
Total Costs |
28,091 | 89,303 | 759,950 | 49,909 | 6,792 | 934,045 | ||||||||||||||||
Earnings (Loss) Before Income Taxes |
186,268 | 89,081 | 222,134 | 6,533 | (219,310 | ) | 284,706 | |||||||||||||||
Income Tax Expense (Benefit) |
(9,551 | ) | 34,440 | 52,374 | 2,472 | | 79,735 | |||||||||||||||
Net Income |
195,819 | 54,641 | 169,760 | 4,061 | (219,310 | ) | 204,971 | |||||||||||||||
Less: Net Income Attributable to Noncontrolling Interest |
| 263 | (263 | ) | | (9,152 | ) | (9,152 | ) | |||||||||||||
Net Income Attributable to CONSOL Energy Inc. Shareholders |
$ | 195,819 | $ | 54,904 | $ | 169,497 | $ | 4,061 | $ | (228,462 | ) | $ | 195,819 | |||||||||
24
Balance Sheet for March 31, 2009:
Parent Issuer |
CNX Gas Guarantor |
Other Subsidiary Guarantors |
Non- Guarantors |
Elimination | Consolidated | ||||||||||||||||
Assets: |
|||||||||||||||||||||
Current Assets: |
|||||||||||||||||||||
Cash and Cash Equivalents |
$ | 66,936 | $ | 246 | $ | 2,291 | $ | 2,082 | $ | | $ | 71,555 | |||||||||
Accounts and Notes Receivable: |
|||||||||||||||||||||
Trade |
| 36,784 | 171 | 222,924 | | 259,879 | |||||||||||||||
Other |
719 | 930 | 65,585 | 4,751 | | 71,985 | |||||||||||||||
Inventories |
| 218,442 | 59,234 | | 277,676 | ||||||||||||||||
Deferred Income Taxes |
123,173 | (74,362 | ) | | | | 48,811 | ||||||||||||||
Prepaid Expenses |
31,270 | 201,717 | 34,545 | 1,560 | | 269,092 | |||||||||||||||
Total Current Assets |
222,098 | 165,315 | 321,034 | 290,551 | | 998,998 | |||||||||||||||
Property, Plant and Equipment: |
|||||||||||||||||||||
Property, Plant and Equipment |
170,424 | 2,228,279 | 7,682,611 | 29,289 | | 10,110,603 | |||||||||||||||
LessAccumulated Depreciation, Depletion and Amortization |
72,956 | 346,369 | 3,830,590 | 20,037 | | 4,269,952 | |||||||||||||||
Property, Plant and EquipmentNet |
97,468 | 1,881,910 | 3,852,021 | 9,252 | | 5,840,651 | |||||||||||||||
Other Assets: |
|||||||||||||||||||||
Deferred Income Taxes |
658,953 | (348,363 | ) | | | | 310,590 | ||||||||||||||
Investment in Affiliates |
4,080,960 | 25,466 | 834,372 | 1,102 | (4,866,263 | ) | 75,637 | ||||||||||||||
Other |
77,636 | 55,843 | 35,555 | 12,377 | | 181,411 | |||||||||||||||
Total Other Assets |
4,817,549 | (267,054 | ) | 869,927 | 13,479 | (4,866,263 | ) | 567,638 | |||||||||||||
Total Assets |
$ | 5,137,115 | $ | 1,780,171 | $ | 5,042,982 | $ | 313,282 | $ | (4,866,263 | ) | $ | 7,407,287 | ||||||||
Liabilities and Stockholders Equity: |
|||||||||||||||||||||
Current Liabilities: |
|||||||||||||||||||||
Accounts Payable |
$ | 67,437 | $ | 88,525 | $ | 99,584 | $ | 19,184 | $ | | $ | 274,730 | |||||||||
Accounts Payable (Recoverable)Related Parties |
1,927,951 | | (2,137,238 | ) | 209,287 | | | ||||||||||||||
Short-Term Notes Payable |
440,000 | 80,400 | | | | 520,400 | |||||||||||||||
Current Portion of Long-Term Debt |
409 | 8,732 | 12,492 | 412 | | 22,045 | |||||||||||||||
Accrued Income Taxes |
42,953 | (14,040 | ) | | | | 28,913 | ||||||||||||||
Other Accrued Liabilities |
434,919 | 26,951 | 42,654 | 7,288 | | 511,812 | |||||||||||||||
Total Current Liabilities |
2,913,669 | 190,568 | (1,982,508 | ) | 236,171 | | 1,357,900 | ||||||||||||||
Long-Term Debt: |
250,107 | 72,948 | 140,313 | 639 | | 464,007 | |||||||||||||||
Deferred Credits and Other Liabilities: |
|||||||||||||||||||||
Postretirement Benefits Other Than Pensions |
| 2,791 | 2,491,767 | | | 2,494,558 | |||||||||||||||
Pneumoconiosis |
| | 193,009 | | | 193,009 | |||||||||||||||
Mine Closing |
| | 418,827 | | | 418,827 | |||||||||||||||
Workers Compensation |
| | 130,345 | | | 130,345 | |||||||||||||||
Salary Retirement |
188,638 | | | | | 188,638 | |||||||||||||||
Reclamation |
| | 19,867 | | | 19,867 | |||||||||||||||
Other |
110,571 | 45,727 | 84,218 | | | 240,516 | |||||||||||||||
Total Deferred Credits and Other Liabilities |
299,209 | 48,518 | 3,338,033 | | | 3,685,760 | |||||||||||||||
Noncontrolling Interest |
| (1,445 | ) | | | 226,935 | 225,490 | ||||||||||||||
Total Consol Energy Inc. Stockholders Equity |
1,674,130 | 1,469,582 | 3,547,144 | 76,472 | (5,093,198 | ) | 1,674,130 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 5,137,115 | $ | 1,780,171 | $ | 5,042,982 | $ | 313,282 | $ | (4,866,263 | ) | $ | 7,407,287 | ||||||||
25
Income Statement for the Three Months Ended March 31, 2008:
Parent Issuer |
CNX Gas Guarantor |
Other Subsidiary Guarantors |
Non- Guarantors |
Elimination | Consolidated | |||||||||||||||||
SalesOutside |
$ | | $ | 130,541 | $ | 694,318 | $ | 65,367 | $ | (3,901 | ) | $ | 886,325 | |||||||||
SalesPurchased Gas |
| 3,539 | | | | 3,539 | ||||||||||||||||
SalesGas Royalty Interests |
| 16,504 | | | | 16,504 | ||||||||||||||||
FreightOutside |
| | 44,744 | | | 44,744 | ||||||||||||||||
Other Income (including equity earnings) |
89,140 | 10,029 | 56,201 | 9,243 | (89,994 | ) | 74,619 | |||||||||||||||
Total Revenue and Other Income |
89,140 | 160,613 | 795,263 | 74,610 | (93,895 | ) | 1,025,731 | |||||||||||||||
Cost of Goods Sold and Other Operating Charges |
13,601 | 26,817 | 515,576 | 26,320 | 54,414 | 636,728 | ||||||||||||||||
Purchased Gas Costs |
| 3,421 | | | | 3,421 | ||||||||||||||||
Gas Royalty Interests Costs |
| 16,089 | | | (15 | ) | 16,074 | |||||||||||||||
Related Party Activity |
(3,614 | ) | | 17,263 | 38,644 | (52,293 | ) | | ||||||||||||||
Freight Expense |
| | 44,744 | | | 44,744 | ||||||||||||||||
Selling, General and Administrative Expense |
| 16,093 | 11,945 | 2,432 | | 30,470 | ||||||||||||||||
Depreciation, Depletion and Amortization |
2,111 | 15,945 | 73,922 | 2,635 | (1,885 | ) | 92,728 | |||||||||||||||
Interest Expense |
8,301 | 1,472 | 268 | 135 | | 10,176 | ||||||||||||||||
Taxes Other Than Income |
1,630 | | 67,603 | 2,373 | | 71,606 | ||||||||||||||||
Total Costs |
22,029 | 79,837 | 731,321 | 72,539 | 221 | 905,947 | ||||||||||||||||
Earnings (Loss) Before Income Taxes |
67,111 | 80,776 | 63,942 | 2,071 | (94,116 | ) | 119,784 | |||||||||||||||
Income Tax Expense (Benefit) |
(7,971 | ) | 30,996 | 11,745 | 783 | | 35,553 | |||||||||||||||
Net Income |
75,082 | 49,780 | 52,197 | 1,288 | (94,116 | ) | 84,231 | |||||||||||||||
Less: Net Income Attributable to Noncontrolling Interest |
| 141 | (141 | ) | | (9,149 | ) | (9,149 | ) | |||||||||||||
Net Income Attributable to CONSOL Energy Inc. Shareholders |
$ | 75,082 | $ | 49,921 | $ | 52,056 | $ | 1,288 | $ | (103,265 | ) | $ | 75,082 | |||||||||
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Balance Sheet for December 31, 2008:
Parent Issuer |
CNX Gas Guarantor |
Other Subsidiary Guarantors |
Non- Guarantors |
Elimination | Consolidated | ||||||||||||||||
Assets: |
|||||||||||||||||||||
Current Assets: |
|||||||||||||||||||||
Cash and Cash Equivalents |
$ | 132,471 | $ | 1,926 | $ | 1,714 | $ | 2,401 | $ | | $ | 138,512 | |||||||||
Accounts and Notes Receivable: |
|||||||||||||||||||||
Trade |
| 61,764 | 35 | 159,930 | | 221,729 | |||||||||||||||
Other |
1,767 | 3,080 | 68,910 | 5,795 | | 79,552 | |||||||||||||||
Inventories |
| 184,140 | 43,670 | | 227,810 | ||||||||||||||||
Recoverable Income Taxes |
3,560 | 30,302 | | 33,862 | |||||||||||||||||
Deferred Income Taxes |
115,599 | (55,000 | ) | | | | 60,599 | ||||||||||||||
Prepaid Expenses |
23,612 | 152,786 | 40,409 | 4,943 | | 221,750 | |||||||||||||||
Total Current Assets |
277,009 | 194,858 | 295,208 | 216,739 | | 983,814 | |||||||||||||||
Property, Plant and Equipment: |
|||||||||||||||||||||
Property, Plant and Equipment |
175,027 | 2,113,570 | 7,606,735 | 84,956 | | 9,980,288 | |||||||||||||||
LessAccumulated Depreciation, Depletion and Amortization |
71,781 | 322,470 | 3,793,378 | 26,687 | | 4,214,316 | |||||||||||||||
Property, Plant and EquipmentNet |
103,246 | 1,791,100 | 3,813,357 | 58,269 | | 5,765,972 | |||||||||||||||
Other Assets: |
|||||||||||||||||||||
Deferred Income Taxes |
664,881 | (331,338 | ) | | | | 333,543 | ||||||||||||||
Investment in Affiliates |
3,734,125 | 25,204 | 930,708 | 1,102 | (4,618,143 | ) | 72,996 | ||||||||||||||
Other |
77,253 | 58,811 | 34,521 | 43,548 | | 214,133 | |||||||||||||||
Total Other Assets |
4,476,259 | (247,323 | ) | 965,229 | 44,650 | (4,618,143 | ) | 620,672 | |||||||||||||
Total Assets |
$ | 4,856,514 | $ | 1,738,635 | $ | 5,073,794 | $ | 319,658 | $ | (4,618,143 | ) | $ | 7,370,458 | ||||||||
Liabilities and Stockholders Equity: |
|||||||||||||||||||||
Current Liabilities: |
|||||||||||||||||||||
Accounts Payable |
$ | 87,734 | $ | 100,565 | $ | 159,677 | $ | 37,221 | $ | | $ | 385,197 | |||||||||
Accounts Payable (Recoverable)Related Parties |
1,853,629 | | (1,990,690 | ) | 137,061 | | | ||||||||||||||
Short-Term Notes Payable |
485,000 | 72,700 | | | | 557,700 | |||||||||||||||
Current Portion of Long-Term Debt |
1,473 | 8,462 | 12,093 | 373 | | 22,401 | |||||||||||||||
Accrued Income Taxes |
| | | | | | |||||||||||||||
Other Accrued Liabilities |
410,086 | 44,323 | 82,183 | 9,850 | | 546,442 | |||||||||||||||
Total Current Liabilities |
2,837,922 | 226,050 | (1,736,737 | ) | 184,505 | | 1,511,740 | ||||||||||||||
Long-Term Debt: |
252,145 | 74,682 | 140,956 | 568 | | 468,351 | |||||||||||||||
Deferred Credits and Other Liabilities: |
|||||||||||||||||||||
Postretirement Benefits Other Than Pensions |
| 2,728 | 2,490,616 | | | 2,493,344 | |||||||||||||||
Pneumoconiosis |
| | 190,261 | | | 190,261 | |||||||||||||||
Mine Closing |
| | 393,112 | 11,517 | | 404,629 | |||||||||||||||
Workers Compensation |
| | 128,477 | | | 128,477 | |||||||||||||||
Deferred Revenue |
| | | | | | |||||||||||||||
Salary Retirement |
194,567 | | | | | 194,567 | |||||||||||||||
Reclamation |
| | 15,363 | 22,830 | | 38,193 | |||||||||||||||
Other |
109,693 | 50,301 | 80,851 | 25,705 | | 266,550 | |||||||||||||||
Total Deferred Credits and Other Liabilities |
304,260 | 53,029 | 3,298,680 | 60,052 | | 3,716,021 | |||||||||||||||
Noncontrolling Interest |
| | | | 212,159 | 212,159 | |||||||||||||||
Total Consol Energy Inc. Stockholders Equity |
1,462,187 | 1,384,874 | 3,370,895 | 74,533 | (4,830,302 | ) | 1,462,187 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 4,856,514 | $ | 1,738,635 | $ | 5,073,794 | $ | 319,658 | $ | (4,618,143 | ) | $ | 7,370,458 | ||||||||
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Cash Flow for the Three Months Ended March 31, 2009:
Parent | CNX Gas | Guarantor | Non- Guarantor |
Elimination | Consolidated | ||||||||||||||||||
Net Cash Provided by Operating Activities |
$ | (2,583 | ) | $ | 126,437 | $ | 126,122 | $ | (196 | ) | $ | | $ | 249,780 | |||||||||
Cash Flows from Investing Activities: |
|||||||||||||||||||||||
Capital Expenditures |
$ | (29 | ) | $ | (133,550 | ) | $ | (165,981 | ) | $ | | $ | | $ | (299,560 | ) | |||||||
Investment in Equity Affiliates |
| | 720 | | | 720 | |||||||||||||||||
Other Investing Activities |
| | 43,827 | | | 43,827 | |||||||||||||||||
Net Cash Used in Investing Activities |
$ | (29 | ) | $ | (133,550 | ) | $ | (121,434 | ) | $ | | $ | | $ | (255,013 | ) | |||||||
Cash Flows from Financial Activities: |
|||||||||||||||||||||||
Dividends Paid |
$ | (18,060 | ) | $ | | $ | | $ | | $ | | $ | (18,060 | ) | |||||||||
Proceeds from Short Term Borrowing |
(45,000 | ) | 7,700 | | | | (37,300 | ) | |||||||||||||||
Other Financing Activities |
137 | (2,267 | ) | (4,111 | ) | (123 | ) | | (6,364 | ) | |||||||||||||
Net Cash Used in Financing Activities |
$ | (62,923 | ) | $ | 5,433 | $ | (4,111 | ) | $ | (123 | ) | $ | | $ | (61,724 | ) | |||||||
Cash Flow for the Three Months Ended March 31, 2008:
Parent | CNX Gas | Guarantor | Non- Guarantor |
Elimination | Consolidated | ||||||||||||||||||
Net Cash Provided by Operating Activities |
$ | (9,718 | ) | $ | 76,217 | $ | 77,120 | $ | 2,474 | $ | | $ | 146,093 | ||||||||||
Cash Flows from Investing Activities: |
|||||||||||||||||||||||
Capital Expenditures |
$ | | $ | (86,552 | ) | $ | (89,299 | ) | $ | (491 | ) | $ | | $ | (176,342 | ) | |||||||
Investment in Equity |
| 954 | 582 | | | 1,536 | |||||||||||||||||
Other Investing Activities |
| | 15,803 | | | 15,803 | |||||||||||||||||
Net Cash Used in Investing Activities |
$ | | $ | (85,598 | ) | $ | (72,914 | ) | $ | (491 | ) | | (159,003 | ) | |||||||||
Cash Flows from Financial Activities: |
|||||||||||||||||||||||
Dividends Paid |
$ | (18,255 | ) | $ | | $ | | $ | | $ | | $ | (18,255 | ) | |||||||||
Purchase of Treasury Stock |
(3 | ) | | | | | (3 | ) | |||||||||||||||
Proceeds from Short Term Borrowing |
32,500 | | | | | 32,500 | |||||||||||||||||
Other Financing Activities |
14,791 | 9,708 | (4,206 | ) | (501 | ) | | 19,792 | |||||||||||||||
Net Cash Used in Financing Activities |
$ | 29,033 | $ | 9,708 | $ | (4,206 | ) | $ | (501 | ) | $ | | $ | 34,034 | |||||||||
NOTE 16RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2009, the Financial Accounting Standards Board issued three final staff positions intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
28
Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. We do not expect this guidance to have a significant impact on CONSOL Energy.
29
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The global demand for both coal and gas has been adversely impacted by the current economic recession and has led to lower capacity utilization in the industrial production sector. CONSOL Energy believes that a reduction in electricity generation load has been the major factor year-to-date regarding the demand for steam coal and natural gas. Consequently, this has led to higher stockpiles of coal at power generators when compared to historical averages as well as elevated natural gas storage levels as the country enters the shoulder season.
Coal stockpile levels at power generators and the domestic gas storage level is impacting near-term pricing. However, we believe that the rapid response by coal and natural gas producers will bring the current oversupplied situation back to equilibrium more rapidly than in previous downturns. We believe that stockpile levels for utilities burning Northern Appalachian coals are still at significantly lower levels than those burning Powder River Basin coals. In addition, energy companies with less than stellar financial positions could find it very difficult to obtain reasonable financing terms to maintain their operations. We believe that this will impact supply and could set the stage for higher coal and natural gas prices as early as 2010.
Because of the economy, CONSOL Energy is working with some of its customers to postpone shipments where needed. We have long term relationships with our customers that we value highly, but we expect to capture the value for our shareholders in the contracts we have signed. CONSOL Energy will continue to manage production to meet expected delivery schedules in order to prevent building large coal inventory balances.
The scrubber build-out continues to occur leading to increased demand for and switching to higher sulfur, high-Btu coal, which comprise more than 80 percent of CONSOL Energys coal production. In addition, we continue to successfully develop non-conventional sources of natural gas at attractive rates of return. Finally, we have a transportation option with our inland waterways division and our terminal at the Port of Baltimore. This will likely give us the flexibility to respond to the eventual global recovery and the long-term fundamentals of rising global energy demand as developing countries strive to improve their standard of living.
In the first quarter of 2009, the U.S. Environmental Protection Agency (EPA) began to more critically review valley fill permits required for mountaintop mining and has been recommending that those permits be denied because of concerns by EPA of potential impacts to water quality in streams below valley fills. EPAs objections have effectively resulted in a hold on the issuance of permits until those concerns are addressed. Future permits required for our surface operations will likely be affected by the EPAs current position, which will likely adversely impact those operations.
30
Results of Operations
Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008
Net Income Attributable to CONSOL Energy
Net income attributable to CONSOL Energy changed primarily due to the following items (table in millions):
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Sale Outside |
$ | 1,150 | $ | 886 | $ | 264 | 29.8 | % | |||||
Sales Purchased Gas |
1 | 4 | (3 | ) | (75.0 | )% | |||||||
Sales Gas Royalty Interest |
13 | 17 | (4 | ) | (23.5 | )% | |||||||
FreightOutside |
31 | 45 | (14 | ) | (31.1 | )% | |||||||
Other Income |
24 | 74 | (50 | ) | (67.6 | )% | |||||||
Total Revenue and Other Income |
1,219 | 1,026 | 193 | 18.8 | % | ||||||||
Coal Cost of Goods Sold and Other Charges |
666 | 637 | 29 | 4.6 | % | ||||||||
Purchased Gas Costs |
2 | 3 | (1 | ) | (33.3 | )% | |||||||
Gas Royalty Interest Costs |
11 | 16 | (5 | ) | (31.3 | )% | |||||||
Total Cost of Goods Sold |
679 | 656 | 23 | 3.5 | % | ||||||||
Freight Expense |
31 | 45 | (14 | ) | (31.1 | )% | |||||||
Selling, General and Administrative Expense |
31 | 30 | 1 | 3.3 | % | ||||||||
Depreciation, Depletion and Amortization |
106 | 93 | 13 | 14.0 | % | ||||||||
Interest Expense |
9 | 10 | (1 | ) | (10.0 | )% | |||||||
Taxes Other Than Income |
78 | 72 | 6 | 8.3 | % | ||||||||
Total Costs |
934 | 906 | 28 | 3.1 | % | ||||||||
Earnings Before Income Taxes |
285 | 120 | 165 | 137.5 | % | ||||||||
Income Tax Expense |
80 | 36 | 44 | 122.2 | % | ||||||||
Net Income |
205 | 84 | 121 | 144.0 | % | ||||||||
Noncontrolling Interest |
9 | 9 | | 0.0 | % | ||||||||
Net Income Attributable to CONSOL Energy |
$ | 196 | $ | 75 | $ | 121 | 161.3 | % | |||||
Net income attributable to CONSOL Energy for the three months ended March 31, 2009 was $196 million compared to $75 million in the 2008 period. Net income attributable to CONSOL Energy for the 2009 period increased in comparison to the 2008 period primarily due to:
| Higher average coal prices received; |
| Higher gas sales volumes; |
| Cost of goods sold and other charges of $16 million incurred in the 2008 period which related to the Buchanan roof collapse event which idled the mine throughout the 2008 period; and |
| Contract buy-outs which were negotiated with customers to release tonnage under a contract resulted in $16 million of expense in the 2008 period. |
Improvements in net income attributable to CONSOL Energy were offset, in part, by the following items:
| Higher average cost of goods sold and other charges per ton sold of company coal production in the 2009 period; |
| Business interruption insurance settlement of $50 million recognized in the 2008 period related to the Buchanan roof collapse incident; and |
31
| Higher depreciation, depletion and amortization costs incurred in the 2009 period due mainly to higher gas volumes produced, higher rates per unit produced and additional assets placed in service after the 2008 period. |
Revenue
Revenue and other income increased due to the following items:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Sales: |
|||||||||||||
Produced Coal |
$ | 905 | $ | 668 | $ | 237 | 35.5 | % | |||||
Purchased Coal |
14 | 21 | (7 | ) | (33.3 | )% | |||||||
Produced Gas |
162 | 127 | 35 | 27.6 | % | ||||||||
Industrial Supplies |
50 | 45 | 5 | 11.1 | % | ||||||||
Other |
19 | 25 | (6 | ) | (24.0 | )% | |||||||
Total SalesOutside |
1,150 | 886 | 264 | 29.8 | % | ||||||||
Gas Royalty Interest |
13 | 17 | (4 | ) | (23.5 | )% | |||||||
Purchased Gas |
1 | 4 | (3 | ) | (75.0 | )% | |||||||
Freight Revenue |
31 | 45 | (14 | ) | (31.1 | )% | |||||||
Other Income |
24 | 74 | (50 | ) | (67.6 | )% | |||||||
Total Revenue and Other Income |
$ | 1,219 | $ | 1,026 | $ | 193 | 18.8 | % | |||||
The increase in company produced coal sales revenue during the 2009 period was due to the higher average price per ton sold, offset, in part, by lower sales volumes of company produced coal sold.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Produced Tons Sold (in millions) |
15.3 | 15.7 | (0.4 | ) | (2.5 | )% | |||||||
Average Sales Price Per Ton |
$ | 59.27 | $ | 42.64 | $ | 16.63 | 39.0 | % |
The increase in average sales price in the period-to-period comparison primarily reflects higher prices negotiated in previous periods when there was an increase in demand for coal. Sales of company-produced coal decreased in the current period due to a softening in the market for Central Appalachian steam coal and metallurgical grade coals. Lower volumes sold reduced sales income by approximately $17 million dollars in the period-to-period comparison.
Purchased coal sales consist of revenues from processing third-party coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased from third parties and sold directly to our customers and revenues from processing third-party coal in our preparation plants. The decrease of $7 million in company-purchased coal sales revenue was primarily due to a decrease in demand in the period-to-period comparison, offset, in part, by higher sales prices.
The increase in produced gas sales revenue in the 2009 period compared to the 2008 period was due to higher sales volumes, offset, in part, by lower average sales price per thousand cubic feet sold.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Produced Gas Sales Volumes (in billion cubic feet) |
22.0 | 15.5 | 6.5 | 41.9 | % | ||||||||
Average Sales Price Per thousand cubic feet |
$ | 7.38 | $ | 8.22 | $ | (0.84 | ) | (10.2 | )% |
Sales volumes increased as a result of additional wells coming online from our on-going drilling program. The decrease in average sales price is the result of the general market price decreases in the period-to-period
32
comparison. The general market price decline was offset, in part, by the various gas swap transactions that CNX Gas has entered. These gas swap transactions qualify as financial cash flow hedges that exist parallel to the underlying physical transactions. These financial hedges represented approximately 10.7 Bcf of our produced gas sales volumes for the three months ended March 31, 2009 at an average price of $9.85 per Mcf. In the prior year, these financial hedges represented approximately 6.1 Bcf at an average price of $8.39 per Mcf.
The $5 million increase in revenues from the sale of industrial supplies was primarily due to higher sales volumes. The higher sales volumes relates to the November 2008 acquisition of North Penn Pipe & Supply, LLC.
The $6 million decrease in other sales was attributable to decreased revenues from barge towing and terminal services. The decrease is related to lower tonnage moved by the barge towing and terminal services in the 2009 period compared to the 2008 period.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Gas Royalty Interest Sales Volumes (in billion cubic feet) |
2.2 | 1.9 | 0.3 | 15.8 | % | ||||||||
Average Sales Price Per thousand cubic feet |
$ | 5.65 | $ | 8.63 | $ | (2.98 | ) | (34.5 | )% |
Included in gas royalty interest sales volumes are the revenues related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The decrease in market prices, contractual differences among leases and the mix of average and index prices used in calculating royalties contributed to the period-to-period change.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Purchased Sales Volumes (in billion cubic feet) |
0.3 | 0.5 | (0.2 | ) | (40.0 | )% | |||||||
Average Sales Price Per thousand cubic feet |
$ | 5.75 | $ | 7.18 | $ | (1.43 | ) | (19.9 | )% |
Purchased gas sales volumes represent volumes of gas that are sold at market prices that were purchased from third-party producers, less gathering fees.
Freight revenue is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to which CONSOL Energy contractually provides transportation services. Freight revenue is the amount billed to customers for transportation costs incurred. Freight revenue has decreased $14 million in the 2009 period primarily due to fewer export sales made to customers whom CONSOL Energy pays the ocean-going freight and then passes the cost to the customer.
Other income consists of interest income, gain or loss on the disposition of assets, equity in earnings of affiliates, service income, royalty income, derivative gains and losses, rental income and miscellaneous income.
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
|||||||||||
Insurance proceeds |
$ | | $ | 50 | $ | (50 | ) | (100.0 | )% | |||||
Proceeds from relinquishments of mining rights |
| 6 | (6 | ) | (100.0 | )% | ||||||||
Gain on Sale of Assets |
2 | 7 | (5 | ) | (71.4 | )% | ||||||||
Reversal/recognition of unrealized losses on options |
2 | (9 | ) | 11 | (122.2 | )% | ||||||||
Equity in earnings of affiliates |
3 | 1 | 2 | 200.0 | % | |||||||||
Other miscellaneous |
17 | 19 | (2 | ) | (10.5 | )% | ||||||||
Total other income |
$ | 24 | $ | 74 | $ | (50 | ) | (67.6 | )% | |||||
In March 2008, CONSOL Energy received notice from its insurance carriers that $50 million would be paid as final settlement of the insurance claim related to the July 2007 Buchanan Mine incident that idled the mine.
33
The $50 million represented business interruption coverage which was recognized in other income; the coal segment recognized $42 million and the gas segment recognized $8 million. The final settlement brought the total amount recovered from insurance carriers to $75 million, the maximum allowed per covered event.
In the 2008 period, approximately $6 million was received from a third party in order for CONSOL Energy to relinquish mining certain in-place coal reserves.
Gain on sale of assets decreased $5 million in the period-to-period comparison. Gain on sale of assets changed due to various miscellaneous transactions that occurred throughout both periods, none of which were individually material.
Mark-to-market adjustments for free standing coal sales options resulted in approximately a $2 million reversal in the 2009 period of previously recognized unrealized losses. The reversal of losses was primarily due to the decrease in market price of coal at March 31, 2009 compared to March 31, 2008. These free standing coal sales options mark-to-market adjustments resulted in a $9 million unrealized loss in the 2008 period.
Equity in earnings of affiliates increased $2 million in the 2009 period due to various transactions entered into by our equity affiliates throughout both periods, none of which were individually material.
Other miscellaneous income decreased $2 million in the period-to-period comparison due to various miscellaneous transactions that occurred throughout both periods, none of which were individually material.
Costs
Cost of goods sold and other charges increased due to the following:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Cost of Goods Sold and Other Charges |
|||||||||||||
Produced Coal |
$ | 482 | $ | 441 | $ | 41 | 9.3 | % | |||||
Purchased Coal |
15 | 23 | (8 | ) | (34.8 | )% | |||||||
Produced Gas |
49 | 35 | 14 | 40.0 | % | ||||||||
Industrial Supplies |
51 | 42 | 9 | 21.4 | % | ||||||||
Closed and Idle Mines |
33 | 26 | 7 | 26.9 | % | ||||||||
Other |
36 | 70 | (34 | ) | (48.6 | )% | |||||||
Total Cost of Goods Sold and Other Charges Outside |
666 | 637 | 29 | 4.6 | % | ||||||||
Gas Royalty Interest |
11 | 16 | (5 | ) | (31.3 | )% | |||||||
Purchased Gas |
2 | 3 | (1 | ) | (33.3 | )% | |||||||
Total Cost of Goods Sold |
$ | 679 | $ | 656 | $ | 23 | 3.5 | % | |||||
Increased cost of goods sold and other charges for company-produced coal was due mainly to a higher average unit cost per ton sold, offset, in part, by lower sales volumes.
2009 Period |
2008 Period |
Variance | Percentage Change |
|||||||||
Produced Tons Sold (in millions) |
15.3 | 15.7 | (0.4 | ) | (2.5 | )% | ||||||
Average Cost of Goods Sold and Other Charges Per Ton |
$ | 31.61 | $ | 28.19 | 3.42 | 12.1 | % |
34
Average cost of goods sold and other charges increased in the period-to-period comparison primarily due to an increase in average unit costs related to the following items.
| Supply and maintenance costs have increased $1.81 per ton sold. The increase is attributable primarily to construction of additional seals used in the mining process, higher gas well plugging costs, higher roof control costs, and higher equipment maintenance costs. |
| The installation of higher grade seals and a higher number of seals being built in the 2009 period contributed to the increase in supply cost. The Mine Health and Safety Administration now requires older workings in many of CONSOL Energy mines to be sealed more quickly following the conclusion of mining than was historically the case. At several locations, the installed seals are also required to be stronger. The increase in strength of seals was required to better protect the active sections of the underground mines from explosions, fires or other situations that may occur inside the sealed areas. The installation of higher strength seals and a higher number of seals being constructed in the quarter contributed to the increase in supply costs. |
| Gas well plugging costs are expenses related to plugging abandoned gas wells which CONSOL Energy does not own that are in front of the underground mining process. These wells have to be plugged in accordance with current safety regulations in order to mine through the well. CONSOL Energy has plugged more wells in the 2009 period than in the 2008 period, which has contributed to increased supply costs. |
| Higher roof control costs are attributable to higher usage of products used in the mining process due to mining conditions and additional development work. Development work by continuous mining machines requires more roof support products than are used in the area of the mine where extraction is done using a longwall mining system. |
| Higher equipment maintenance costs are also attributable to the AMVEST location incurring high maintenance costs in order to keep the surface equipment working. |
| Labor costs have increased $0.66 per ton sold due to the effects of wage increases at the union and non-union mines from labor contracts which began in 2007. These contracts call for specified hourly wage increases in each year of the contract. Labor costs also increased due to the higher average number of employees in the 2009 period compared to the 2008 period reflecting the utilization of new work schedules that require more manpower. Labor costs were also higher in the period-to-period comparison due to additional overtime hours being paid in 2009. |
| Contract mining fees have increased $0.34 per ton sold primarily due to higher rates paid to the contractors in the period-to-period comparison. The increase in rates was offset, in part, by lower volumes of tons produced by contractors in the 2009 period. |
| Power costs have increased $0.28 per ton sold due primarily to various rate increases that occurred throughout our operations. |
| Other post employment benefit costs have increased $0.25 per ton sold primarily due to a change in the plans participation which as of January 1, 2009 included approximately 500 additional employees. These employees were part of the AMVEST acquisition which originally did not participate in the CONSOL Energy Other Post Employment Benefit plan. These increases were offset, in part, by a reduction in the discount rate used to calculate the net periodic benefit costs. The weighted average discount rate for the 2009 period was 6.20% and was 6.63% in the 2008 period. |
| In-transit costs have increased $0.14 per ton sold. In-transit costs result from the need to move coal from the point of extraction to the preparation plant in order to be processed for sale. These costs have increased due primarily to increased trucking expenses related to several locations in the current period operating in areas further away from the preparation plants. |
| Various other costs decreased $0.06 per ton sold due to various items that occurred throughout both periods, none of which were individually material. |
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Purchased coal cost of goods sold consists of costs from processing purchased coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased and sold directly to the customer and costs for processing third party coal in our preparation plants. The decrease of $8 million in purchased coal cost of goods sold and other charges in the 2009 period was primarily due to lower volumes purchased.
Gas cost of goods sold and other charges increased due primarily to a 41.9% increase in volumes of produced gas sold.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Produced Gas Sales Volumes (in billion cubic feet) |
22.0 | 15.5 | 6.5 | 41.9 | % | ||||||||
Average Cost Per thousand cubic feet |
$ | 2.23 | $ | 2.24 | $ | (0.01 | ) | (0.4 | )% |
Average costs per unit decreased in the 2009 period as a result of several factors.
| Compression costs, rental charges and gob well collection costs were $0.06 lower per thousand cubic feet per unit sold. Dollars spent for these items have remained consistent in the period-to-period comparison; therefore, additional volumes gathered and transported have lowered the related unit costs for these components. |
| Other costs decreased $0.09 per thousand cubic feet for various items that occurred throughout both periods, none of which were individually material. |
These decreases in costs were offset, in part, by the following items:
| Firm transportation costs have increased $0.10 per thousand cubic feet due to acquiring additional capacity in the Northern Appalachian region. |
| CNX Gas has incurred approximately $.04 per thousand cubic feet of costs related to idling various drilling rigs throughout the company. Some of the drilling contracts that CNX Gas is party to require various minimums to be paid when drill rigs are not being used. The CNX Gas drilling program has been slowed down pending a change in the economic environment. These charges resulted in an increase to costs. |
Industrial supplies cost of goods sold increased $9 million primarily due to adjustments in the last-in-first-out inventory values related to changes in inventory volumes in the period-to-period comparison. Changes in industrial supplies cost of goods sold also relates to increased sales volumes as a result of the November 2008 acquisition of North Penn Pipe Supply, LLC.
Closed and idle mine cost of goods sold increased approximately $7 million in the 2009 period compared to the 2008 period. This increase was primarily due to the idled Shoemaker Mine incurring additional expenses in the current period related to continuing to maintain the mine in an idled status. Increased expenses were primarily associated with higher employee counts and increased repairs and maintenance expense in the period-to-period comparison. Closed and idle mine cost of goods sold were also higher due to perpetual water treatment costs related to additional estimated gallons of water to be treated, coupled with increased costs related to water quality changes.
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Other cost of goods sold decreased due to the following items:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Buchanan roof collapse |
$ | | $ | 16 | $ | (16 | ) | (100.0 | )% | ||||
Contract buyouts |
| 16 | (16 | ) | (100.0 | )% | |||||||
Terminal/River operations |
15 | 21 | (6 | ) | (28.6 | )% | |||||||
Stock-based compensation |
6 | 7 | (1 | ) | (14.3 | )% | |||||||
Incentive compensation |
12 | 8 | 4 | 50.0 | % | ||||||||
Severance pay |
3 | | 3 | 100.0 | % | ||||||||
Miscellaneous other |
| 2 | (2 | ) | (100.0 | )% | |||||||
Other cost of goods sold and other charges |
$ | 36 | $ | 70 | $ | (34 | ) | (48.6 | )% | ||||
In July 2007, production at the Buchanan Mine was suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine. In 2008, we incurred approximately $16 million of cost of goods sold and other charges related to the Buchanan Mine event. The mine resumed longwall production on March 17, 2008.
In the three months ended March 31, 2008, CONSOL Energy agreed to buy out sales contracts with several customers in order to release tons committed under lower priced contracts for sale to other customers at higher prices. No such agreements were made in the 2009 period.
Terminal/River operation charges have decreased approximately $6 million in the period-to-period comparison due to lower tonnage moved and lower employee counts throughout the 2009 period.
Stock-based compensation expense decreased $1 million in the period-to-period comparison primarily due to changes in the value of the CNX Gas performance share units relative to the predetermined peer group.
The incentive compensation program is designed to increase compensation to eligible employees when CONSOL Energy reaches predetermined production, safety and cost targets and the employees reach predetermined performance targets. Incentive compensation expense increased $4 million due to exceeding the predetermined targets in the 2009 period.
Severance pay relates to the administrative staff reductions in force which occurred due to the economic environment in which we operate.
Miscellaneous other cost of goods sold and other charges decreased $2 million due to various transactions, none of which were individually material.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Gas Royalty Interest Sales Volumes (in billion cubic feet) |
2.2 | 1.9 | 0.3 | 15.8 | % | ||||||||
Average Cost Per thousand cubic feet |
$ | 4.73 | $ | 8.40 | $ | (3.67 | ) | (43.7 | )% |
Included in gas royalty interest costs are the expenses related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The increase in volumes and the decrease in price relates to the volatility and contractual differences among leases, as well as the mix of average and index prices used in calculating royalties.
2009 Period |
2008 Period |
Variance | Percentage Change |
||||||||||
Purchased Sales Volumes (in billion cubic feet) |
0.3 | 0.5 | (0.2 | ) | (40.0 | )% | |||||||
Average Cost Per thousand cubic feet |
$ | 4.42 | $ | 7.09 | $ | (2.67 | ) | (37.7 | )% |
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Purchased gas costs represent volumes of gas purchased from third party producers that we sell at market prices. The increase in cost of goods sold and other charges related to purchased gas represents overall price changes and contractual differences among customers in the period-to-period comparison.
Freight expense is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to whom CONSOL Energy contractually provides transportation. Freight expense is billed to customers and the revenue from such billing equals the transportation expense. Freight expense has decreased in the 2009 period primarily due to fewer export sales made to customers whom CONSOL Energy pays the ocean-going freight and then passes the cost to the customer.
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Freight expense |
$ | 31 | $ | 45 | $ | (14 | ) | (31.1 | )% |
Selling, general and administrative costs have increased due to the following items:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Wages, salaries and related benefits |
$ | 15 | $ | 15 | $ | | | ||||||
Rentals |
2 | 1 | 1 | 100.0 | % | ||||||||
Advertising and promotion |
2 | 1 | 1 | 100.0 | % | ||||||||
Association/charitable contributions |
1 | 2 | (1 | ) | (50.0 | )% | |||||||
Professional, consulting and other purchased services |
7 | 8 | (1 | ) | (12.5 | )% | |||||||
Other |
4 | 3 | 1 | 33.3 | % | ||||||||
Total Selling, General and Administrative |
$ | 31 | $ | 30 | $ | 1 | 3.3 | % | |||||
Wages and salaries have remained consistent in the period-to-period comparison.
Rentals have increased primarily due to rent expense related to the new CEI headquarters.
Advertising and promotion expenses increased $1 million due to additional advertising campaigns entered into in the 2009 period.
Association assessments and charitable contributions have decreased $1 million in the period-to-period comparison due to the timing of various items throughout both periods, none of which were individually material.
Costs of professional, consulting and other purchased services were lower in the 2009 period compared to the 2008 period due to the completion of various projects in prior periods, none of which were individually material.
Other selling, general and administrative costs increased $1 million due to various transactions that occurred throughout both periods, none of which were individually material.
Depreciation, depletion and amortization increased due to the following items:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
|||||||||
Coal |
$ | 77 | $ | 72 | $ | 5 | 6.9 | % | ||||
Gas: |
||||||||||||
Production |
18 | 11 | 7 | 63.6 | % | |||||||
Gathering |
5 | 5 | | | ||||||||
Total Gas |
23 | 16 | 7 | 43.8 | % | |||||||
Other |
6 | 5 | 1 | 20.0 | % | |||||||
Total Depreciation, Depletion and Amortization |
$ | 106 | $ | 93 | $ | 13 | 14.0 | % | ||||
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The increase in coal depreciation, depletion and amortization was primarily attributable to assets placed in service after the 2008 period.
The increase in gas production related depreciation, depletion and amortization was primarily due to increased production combined with an increase in units of production rates in the period-to-period comparison. These rates, which are recalculated annually, increased due to the higher proportion of capital assets placed in service versus the proportion of proved developed reserve additions. Rates are generally calculated using the net book value of assets at the end of the year divided by either proved or proved developed reserves. Gathering depreciation, depletion and amortization is recorded on the straight-line method and remained consistent in the period-to-period comparison.
Other depreciation increased $1 million in the period-to-period comparison due to various assets being placed in service after the 2008 period, none of which were individually material.
Interest expense decreased in the 2009 period compared to the 2008 period due to the following items:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||||
Revolver |
$ | 2 | $ | 3 | $ | (1 | ) | (33.3 | )% | ||||||
Capitalized lease |
2 | 2 | | | |||||||||||
Interest on unrecognized tax benefits |
1 | 1 | | | |||||||||||
Long-term secured notes |
7 | 7 | | | |||||||||||
Other |
(3 | ) | (3 | ) | | | |||||||||
Total Interest Expense |
$ | 9 | $ | 10 | $ | (1 | ) | (10.0 | )% | ||||||
Revolver interest expense is related to the amounts drawn on the credit facility. The decrease is related to lower interest rates on the facility in the 2009 compared to 2008, offset, in part, by higher average amounts drawn in 2009.
Interest expense relate to capitalized leases, unrecognized tax benefits, long-term secured notes and other items remained consistent in the period-to-period comparison.
Taxes other than income increased primarily due to the following items:
2009 Period |
2008 Period |
Dollar Variance |
Percentage Change |
||||||||||
Production taxes: |
|||||||||||||
Coal |
$ | 49 | $ | 41 | $ | 8 | 19.5 | % | |||||
Gas |
1 | 4 | (3 | ) | (75.0 | )% | |||||||
Total Production Taxes |
50 | 45 | 5 | 11.1 | % | ||||||||
Other taxes: |
|||||||||||||
Coal |
23 | 23 | | | |||||||||
Gas |
2 | 1 | 1 | 100.0 | % | ||||||||
Other |
3 | 3 | | | |||||||||
Total Other Taxes |
28 | 27 | 1 | 3.7 | % | ||||||||
Total Taxes Other Than Income |
$ | 78 | $ | 72 | $ | 6 | 8.3 | % | |||||
Increased coal production taxes are primarily due to higher severance taxes, reclamation fee taxes and black lung excise taxes attributable to the increase in average sales price for produced coal. These improvements were offset, in part, by lower coal production volumes in the period-to-period comparison.
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Gas production taxes decreased $3 million due to lower severance taxes attributable to an adjustment related to a revised estimate of pending litigation. Gas severance taxes also decreased due to the lower average sales prices for gas, offset, in part, by higher gas sales volumes.
Other coal taxes remained consistent in the period-to-period comparison.
Other gas taxes increased $1 million in the period-to-period comparison due to various transactions that occurred throughout both periods, none of which were individually material.
Other taxes have remained consistent in the period-to-period comparison.
Black Lung Excise Tax Refund has increased $352 thousand in the 2009 period due to additional interest earned on the claims made in 2008 which have not yet been received. CONSOL Energy expects to receive the principal claim and related interest, a total of $56 million net of amounts owed to third parties before the end of 2009.
Income Taxes
2009 Period |
2008 Period |
Variance | Percentage Change |
|||||||||||||
Earnings Before Income Taxes |
$ | 285 | $ | 120 | $ | 165 | $ | 137.5 | % | |||||||
Tax Expense |
$ | 80 | $ | 36 | $ | 44 | $ | 122.2 | % | |||||||
Effective Income Tax Rate |
28.0 | % | 29.7 | % | (1.7 | )% |
CONSOL Energys effective tax is sensitive to changes to the relationship between pre-tax earnings and percentage depletion. The proportion of coal pre-tax earnings and gas pre-tax earnings also impacts the benefit of percentage depletion on the effective tax rate. See Note 5Income Taxes in Item 1, Condensed Consolidated Financial Statements of this Form 10-Q.
Noncontrolling Interest
Noncontrolling interest represents 16.7% of CNX Gas net income which CONSOL Energy does not own.
Liquidity and Capital Resources
CONSOL Energy generally has satisfied our working capital requirements and funded our capital expenditures and debt service obligations with cash generated from operations and proceeds from borrowings. We utilize a $1 billion senior secured credit facility which expires in 2012. The facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries and collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. The agreement provides for the release of collateral at the request of CONSOL Energy upon the achievement of certain credit ratings. 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 (EBITDA), measured quarterly. The facility includes a minimum interest coverage ratio covenant of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 21.95 to 1.00 at March 31, 2009. The facility also includes a maximum leverage ratio covenant of not more than 3.25 to 1.00, measured quarterly. The leverage ratio was 1.10 to 1.00 at March 31, 2009. 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 and merge with another corporation. At March 31, 2009, the facility had approximately $440 million drawn and $267 million of letters of credit outstanding, leaving $293 million of unused capacity. From time to time, CONSOL Energy is required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies statutes and regulations. We sometimes use letters of credit to satisfy these requirements and these letters of credit reduce our borrowing facility capacity.
40
Pennsylvania Department of Environmental Protection (PA DEP) and CONSOL Energy have been negotiating a Consent Order and Agreement (the Agreement) that addresses financial assurance required by the State for CONSOL Energys Pennsylvania mine water treatment facilities. The Agreement requires the company to post approximately $34 million of financial assurance over a 10-year time frame as follows; 25% of the total required by June 15, 2009, and 10% of balance by June 15 of each year from 2010 through 2019. CONSOL Energy plans to use its revolving credit facility to satisfy these requirements.
CONSOL Energy and certain of our U.S. subsidiaries also participate in a receivables securitization facility for the sale on a continuous basis of eligible trade accounts receivable that will provide, on a revolving basis, up to $165 million of short-term funding or letters of credit. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary, for the sole purpose of buying and selling 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. CNX Funding Corporation then sells, on a revolving basis, an undivided percentage interest in the pool of eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the trade receivables. CONSOL Energy has agreed to continue servicing the sold receivables for the financial institutions for a fee based upon market rates for similar services. The cost of funds is consistent with commercial paper rates plus a charge for administrative services paid to the financial institutions. At March 31, 2009, eligible accounts receivable totaled approximately $165 million. There was no subordinated retained interest at March 31, 2009. Accounts receivable totaling $165 million were removed from the consolidated balance sheet at March 31, 2009. There were no letters of credit outstanding against the facility at March 31, 2009.
CNX Gas, an 83.3% consolidated subsidiary of CONSOL Energy, utilizes a revolving credit facility providing an initial aggregate outstanding principal amount of up to $200 million, including borrowings and letters of credit, which expires in 2010. CNX Gas can request an increase in the aggregate outstanding principal amount to $300 million. The agreement contains a negative pledge provision, whereas CNX Gas assets cannot be used to secure other obligations. 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, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. This facility includes a leverage ratio covenant of not more than 3.00 to 1.00, measured quarterly. This ratio was 0.32 to 1.00 at March 31, 2009. The facility also includes an interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 76.68 to 1.00 at March 31, 2009. At March 31, 2009, this facility had approximately $15 million of letters of credit issued and had approximately $80 million of outstanding borrowings, leaving approximately $105 million of unused capacity. As a result of the credit agreement, CNX Gas and their subsidiaries executed a Supplemental Indenture on October 21, 2005, guaranteeing CONSOL Energys 7.875% bonds.
Currently, there is an unprecedented uncertainty in the financial markets. The uncertainty in the markets brings additional potential risks to CONSOL Energy. The risks include additional declines in our stock price, less availability and higher costs of additional credit, potential counterparty defaults, and further commercial bank failures. Although the majority of the financial institutions in our bank group appear to be strong, there are some that have been and could be considered take-over candidates. We have no indication that any such transactions would impact our current credit facility; however, the possibility does exist. Financial market disruptions may impact our collection of trade receivables. The credit worthiness of our customers is constantly monitored by CONSOL Energy. We believe that our current group of customers are sound and represent no abnormal business risk.
CONSOL Energy believes that cash generated from operations and our borrowing capacity will be sufficient to meet our working capital requirements, anticipated capital expenditures (other than major acquisitions), scheduled debt payments, anticipated dividend payments and to provide required letters of credit. Nevertheless, the ability of CONSOL Energy to satisfy our working capital requirements, debt service obligations, to fund planned capital expenditures or pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the coal and gas industries and other financial and business factors, some of which are beyond CONSOL Energys control.
41
In order to manage the market risk exposure of volatile natural gas prices in the future, CONSOL Energy enters into various physical gas supply transactions with both gas marketers and end users for terms varying in length. CONSOL Energy has also entered into various gas swap transactions that qualify as financial cash flow hedges, which exist parallel to the underlying physical transactions. The fair value of these contracts was an asset of $253 million at March 31, 2009. The ineffective portion of these contracts was insignificant to earnings in the three months ended March 31, 2009. Hedge counterparties consist of commercial banks who participate in the revolving credit facility. No issues related to our hedge agreements have been encountered to date.
CONSOL Energy frequently evaluates potential acquisitions. CONSOL Energy has funded acquisitions primarily with cash generated from operations and a variety of other sources, depending on the size of the transaction, including debt financing. There can be no assurance that additional capital resources, including debt financing, will be available to CONSOL Energy on terms which CONSOL Energy finds acceptable, or at all.
Cash Flows (in millions)
2009 Period |
2008 Period |
Change | ||||||||||
Cash flows from operating activities |
$ | 250 | $ | 146 | $ | 104 | ||||||
Cash used in investing activities |
$ | (255 | ) | $ | (159 | ) | $ | (96 | ) | |||
Cash provided by (used in) financing activities |
$ | (62 | ) | $ | 34 | $ | (96 | ) |
Cash flows from operating activities changed primarily due to the following items:
| Operating cash flow increased in 2009 due to higher net income attributable to CONSOL Energy in the period-to-period comparison, as well as various other changes in operating assets, operating liabilities, other assets and other liabilities which occurred throughout both years. |
| Operating cash flows were lower in 2009 due to no proceeds being received from the accounts receivable securitization program. In the 2008 period, $11 million of proceeds were received from the accounts receivable securitization program. |
| Operating cash flows were lower in 2009 by approximately $12 million due to coal inventories. Coal inventories increased 651 thousand tons in 2009. Coal inventories increased 445 thousand tons in 2008. |
Net cash used in investing activities changed primarily due to the following items:
| Total capital expenditures increased $124 million to $300 million in 2009 compared to $176 million in 2008. Capital expenditures for the gas segment increased $47 million due to the drilling program and various acquisitions of gas rights. Capital expenditures for coal and other activities increased $77 million due to various projects including the continued work at Shoemaker to replace the track haulage with belt haulage, the face extension work at Bailey, the purchase of longwall shields which were sold and leased back, and the Buchanan water handling system. |
| Proceeds from the sale of assets were $44 million in 2009 compared to $16 million in 2008. Proceeds in 2009 were primarily related to the sale leaseback of various mining equipment as discussed in Note 2Acquisitions and Dispositions to the Consolidated Financial Statements. |
Net cash provided by (used in) financing activities changed primarily due to the following items:
| In 2009, CONSOL Energy repaid borrowings of approximately $45 million from the revolving credit facility. In 2008, CONSOL Energy received approximately $33 million of proceeds from this facility. In 2009, CONSOL Energys 83.3% owned subsidiary, CNX Gas, received proceeds of approximately $8 million from its revolving credit facility. There was no activity under the CNX Gas revolving credit facility in the 2008 period. |
42
| CONSOL Energys variable interest entity repaid principal on its outstanding debt of $1 million in the 2009 period. The variable interest entity received approximately $10 million of proceeds from this debt in the 2008 period. |
The following is a summary of our significant contractual obligations at March 31, 2009 (in thousands):
Payments Due | |||||||||||||||
Within 1 Year |
2-3 Years | 4-5 Years | After 5 Years |
Total | |||||||||||
Short-term Notes Payable |
$ | 520,400 | $ | | $ | | $ | | $ | 520,400 | |||||
Purchase Order Firm Commitments |
31,328 | 8,295 |