| CONSOL ENERGY INC Item 1A Risk Factors |
| Investment in our securities is subject to various risks, including risks and uncertainties inherent in our business |
| The following sets forth factors related to our business, operations, financial position or future financial performance or cash flows which could cause an investment in our securities to decline and result in a loss |
| Disruption of rail, barge and other systems that deliver CONSOL Energy’s coal, or of pipeline systems that deliver CONSOL Energy’s gas, or an increase in transportation costs for either product could make CONSOL Energy’s coal or gas less competitive |
| Coal producers depend upon rail, barge, trucking, overland conveyor and other systems to provide access to markets |
| Disruption of transportation services because of weather-related problems, strikes, lock-outs, break-downs of locks and damns or other events could temporarily impair our ability to supply coal to customers and adversely affect our profitability |
| Transportation costs represent a significant portion of the delivered cost of coal and, as a result, the cost of delivery is a critical factor in a customer’s purchasing decision |
| Increases in transportation costs could make our coal less competitive |
| The marketability of CONSOL Energy’s gas production partly depends on the availability, proximity and capacity of pipeline systems owned by third parties |
| Changes in access to pipelines or increased costs of procuring transportation on pipeline systems could adversely affect our operations |
| We require a skilled workforce to run our business |
| If we cannot hire qualified people to meet replacement or expansion needs, we may not be able to achieve planned results |
| Fifty-five percent of our workforce is 50 years of age or older |
| Based on our experience, we expect a high percentage of our employees to retire between now and the end of the decade |
| This will require us to conduct an expanded and sustained effort to recruit new employees to replace those who retire and to fill new jobs as we grow our business |
| Some areas of Appalachia, most notably in eastern Kentucky, currently have a shortage of skilled labor |
| Because we have operations in this area, the shortage could make it more difficult to meet our manpower needs and therefore, our results may be adversely affected |
| Coal mining is subject to conditions or events beyond CONSOL Energy’s control, which could cause our financial results to deteriorate |
| CONSOL Energy’s coal mining operations are predominantly underground mines |
| These mines are subject to conditions or events beyond CONSOL Energy’s control that could disrupt operations, affect production and affect the cost of mining at particular mines for varying lengths of time |
| These conditions or events may have a significant impact on our operating results |
| Conditions or events have included: • variations in thickness of the layer, or seam, of coal; • amounts of rock and other natural materials intruding into the coal seam and other geological conditions that could affect the stability of the roof and the side walls of the mine; • equipment failures or repair; • fires and other accidents; and • weather conditions |
| 33 ______________________________________________________________________ [55]Table of Contents CONSOL Energy faces uncertainties in estimating our economically recoverable coal reserves, and inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs and decreased profitability |
| There are uncertainties inherent in estimating quantities and values of economically recoverable coal reserves, including many factors beyond our control |
| As a result, estimates of economically recoverable coal reserves are by their nature uncertain |
| Information about our reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our staff |
| None of our coal reserve estimates have been reviewed by independent experts |
| Some of the factors and assumptions which impact economically recoverable reserve estimates include: • geological conditions; • historical production from the area compared with production from other producing areas; • the assumed effects of regulations and taxes by governmental agencies; • assumptions governing future prices; and • future operating costs, including cost of materials |
| Each of these factors may in fact vary considerably from the assumptions used in estimating reserves |
| For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially |
| Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and these variances may be material |
| As a result, our estimates may not accurately reflect our actual reserves |
| CONSOL Energy faces uncertainties in estimating proven recoverable gas reserves, and inaccuracies in our estimates could result in lower than expected reserve quantities and a lower present value of our reserves |
| Natural gas reserve engineering requires subjective estimates of underground accumulations of natural gas and assumptions concerning future natural gas prices, production levels, and operating and development costs |
| As a result, estimated quantities of proved reserves and projections of future production rates and time of development expenditures may be incorrect |
| We have in the past retained the services of independent petroleum engineers to prepare reports of our proved reserves |
| Over time, material changes to reserve estimates may be made, taking into account the results of actual drilling, testing, and production |
| Also, we make certain assumptions regarding future natural gas prices, production levels, and operating and development costs that may prove incorrect |
| Any significant variance from these assumptions to actual figures could greatly affect our estimates of our reserves, the economically recoverable quantities of natural gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery, and estimates of the future net cash flows |
| Numerous changes over time to the assumptions on which our reserve estimates are based, as described above, often result in the actual quantities of gas we ultimately recover being different from reserve estimates |
| The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated natural gas reserves |
| We base the estimated discounted future net cash flows from our proved reserves on prices and costs |
| However, actual future net cash flows from our gas and oil properties also will be affected by factors such as: • geological conditions; • changes in governmental regulations and taxation; • assumptions governing future prices; • the amount and timing of actual production; 34 ______________________________________________________________________ [56]Table of Contents • future operating costs, including costs of materials; and • capital costs of drilling new wells |
| The timing of both our production and our incurrence of expenses in connection with the development and production of natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value |
| In addition, the 10prca discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the natural gas and oil industry in general |
| The exploration for, and production of, gas is an uncertain process with many risks |
| The exploration for and production of gas involves risks |
| The cost of drilling, completing and operating wells for coalbed methane or other gas is often uncertain, and a number of factors can delay or prevent drilling operations or production, including: • unexpected drilling conditions; • shortages or delays in the availability of drilling rigs and the delivery of equipment; • pressure or irregularities in formations; • equipment failures or repairs; • fires or other accidents; • adverse weather conditions; • water in the coal beds and nearby geological strata; • pipeline ruptures or spills; and • inadequate pipeline capacity to transport gas |
| Our future drilling activities may not be successful, and we cannot be sure that our drilling success rates will not decline |
| Unsuccessful drilling activities could result in higher costs without any corresponding revenues |
| Also, we may not be able to obtain any options or lease rights in potential drilling locations that we identify which, among other things, could prevent us from producing gas at potential drilling locations |
| CONSOL Energy must obtain governmental permits and approvals for mining and drilling operations, which can be a costly and time consuming process and which can result in restrictions on our operations |
| Regulatory authorities exercise considerable discretion in the timing and scope of permit issuance |
| Requirements imposed by these authorities may be costly and time consuming and may result in delays in the commencement or continuation of exploration or production operations |
| For example, CONSOL Energy often is required to prepare and present to federal, state and local authorities data pertaining to the effect or impact that proposed exploration for or production of coal may have on the environment |
| Further, the public may comment on and otherwise engage in the permitting process, including through intervention in the courts |
| Accordingly, the permits CONSOL Energy needs may not be issued, or if issued, may not be issued in a timely fashion, or may involve requirements which restrict our ability to conduct our mining or gas operations or to do so profitably |
| Competition within the coal and within the gas industry may adversely affect our ability to sell our products, or a loss of our competitive position because of overcapacity in these industries could adversely affect pricing which could impair our profitability |
| CONSOL Energy competes with coal producers in various regions of the United States and with some foreign coal producers for domestic sales primarily to power generators |
| CONSOL Energy also competes with 35 ______________________________________________________________________ [57]Table of Contents both domestic and foreign coal producers for sales in international markets |
| Demand for our coal by our principal customers is affected by the delivered price of competing coals, other fuel supplies and alternative generating sources, including nuclear, natural gas, oil and renewable energy sources, such as hydroelectric power |
| CONSOL Energy sells coal to foreign electricity generators and to the more specialized metallurgical coal market, both of which are significantly affected by international demand and competition |
| During the mid-1970s and early 1980s, a growing coal market and increased demand for coal attracted new investors to the coal industry, spurred the development of new mines and resulted in added production capacity throughout the industry, all of which led to increased competition and lower coal prices |
| Recent increases in coal prices could encourage the development of expanded capacity by new or existing coal producers |
| Any resulting overcapacity could reduce coal prices and therefore reduce our revenues |
| We compete against many gas producers who are larger and better financed than we are |
| If demand for gas falls or prices are lower, we may not be able to compete profitably against these larger competitors |
| For example, in 2002, gas prices were much lower than current prices because mild weather conditions reduced demand and led to oversupply of natural gas |
| A significant extended decline in the prices CONSOL Energy receives for our coal and gas could adversely affect our operating results and cash flows |
| CONSOL Energy’s results of operations are highly dependent upon the prices we receive for our coal and gas, which are closely linked to consumption patterns of the electric generation industry and certain industrial and residential patterns where gas is the principal fuel |
| Extended or substantial price declines for coal or gas would adversely affect our operating results for future periods and our ability to generate cash flows necessary to improve productivity and expand operations |
| We expect to be significantly less hedged for gas price fluctuations in 2006 than we have been in the past |
| Prices of coal and gas may fluctuate widely due to factors beyond our control such as overall domestic and global economic condition; the consumption pattern of industrial consumers, electricity generators and residential users; technological advances affecting energy consumption; domestic and foreign government regulations; price and availability of alternative fuels; price of foreign imports and weather conditions |
| For example, in 2002, demand for coal and natural gas decreased because of the warm winters in the northeastern United States |
| This resulted in increased inventories that caused prices to decrease |
| CONSOL Energy may not be able to produce sufficient amounts of coal to fulfill our customers’ requirements, which could harm our relationships with customers |
| CONSOL Energy may not be able to produce sufficient amounts of coal to meet customer demand, including amounts that we are required to deliver under long-term contracts |
| CONSOL Energy’s inability to satisfy contractual obligations could result in our customers initiating claims against us |
| Unless we replace our natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition, results of operations and cash flows |
| Producing natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors |
| Because total estimated proved reserves include our proved undeveloped reserves at December 31, 2005, production is expected to decline even if those proved undeveloped reserves are developed and the wells produce as expected |
| The rate of decline will change if production from our existing wells declines in a different manner than we have estimated and can change under other circumstances |
| Thus, our future natural gas reserves and production and, therefore, our cash flow and income are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves |
| Thus, we may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs |
| 36 ______________________________________________________________________ [58]Table of Contents We may incur additional costs to produce gas because our chain of title work for gas rights in some of our properties may be inadequate or incomplete |
| Some of the gas rights we believe we control are in areas where we have not yet done any exploratory or production drilling |
| We acquired these properties primarily for the coal rights, and, in many cases were acquired years ago |
| While chain of title work for the coal estate was generally fully developed, in many cases, the gas estate title work is less robust |
| Our practice is to review gas estate title work when we consider exploratory or production drilling and to obtain any additional rights needed to perfect our ownership for production purposes of the gas estate |
| In addition, the steps needed to perfect our ownership varies from state to state and some states permit us to produce the gas without perfected ownership under forced pooling arrangements while other states do not permit this |
| In addition, although we believe we have the right to extract and produce coalbed methane (CBM) from locations where we possess rights to coal, in some cases we may not possess these rights |
| If we are unable in such cases to obtain those rights from their owners, we will not enjoy the rights to develop the CBM with our mining of coal as provided in the Master Cooperation and Safety Agreement |
| Our failure to obtain these rights may adversely impact our ability in the future to increase production and reserve |
| For example, we have substantial acreage in West Virginia for which we have not reviewed the title to determine what, if any, additional rights would be needed to produce CBM from those locations or the feasibility of obtaining those rights |
| We need to use unproven technologies to extract coalbed methane on some of our properties |
| Our ability to extract gas in coal seams with lower gas content per ton of coal such as the Pittsburgh #8 seam requires the use of advanced technologies that are still being developed and tested |
| Horizontal drilling is the advanced technology currently being used |
| This technique, applied in coal seams requires a well design that promotes simultaneous production of water and methane without significant back-pressure, a well that can be subsequently mined through without jeopardizing mine safety and a well that will ensure wellbore integrity throughout its projected life |
| Currently the vast majority of our gas producing properties are located in two counties in southwestern Virginia, making us vulnerable to risks associated with having our gas production concentrated in one area |
| The vast majority of our gas producing properties are geographically concentrated in two counties in Virginia |
| As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of gas production from these wells caused by significant governmental regulation, transportation capacity constraints, curtailment of production, natural disasters or interruption of transportation of natural gas produced from the wells in this basin or other events which impact this area |
| We do not insure against all potential operating risks |
| We may incur losses and be subject to liability claims as a result of our operations |
| We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business |
| For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented |
| As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage |
| As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all |
| Although we maintain insurance at levels we believe are appropriate and consistent with industry practice, we are not fully insured against all risks, including drilling and completion risks that are generally not recoverable from third parties or insurance |
| In addition, pollution and environmental risks generally are not fully insurable |
| Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition, results of operations and cash flows |
| 37 ______________________________________________________________________ [59]Table of Contents Other persons could have ownership rights in our advanced gas extraction techniques which could force us to cease using those techniques or pay royalties |
| Although we believe that we hold sufficient rights to all of our advanced gas extraction techniques, other persons could contest our rights and claim ownership of one or more of our advanced techniques for extracting coalbed methane |
| For example, a third party recently asserted that several of our drilling techniques infringed several patents held by that person |
| A successful challenge to one or more of our advanced extraction techniques could adversely impact our financial performance and results of operation |
| We might have to pay a royalty which would increase our production costs or cease using that technique which could raise our production costs or decrease our production of coalbed methane |
| In addition, we could incur substantial costs in defending patent infringement claims, obtaining patent licenses, engaging in interference and opposition proceedings or other challenges to our patent rights or intellectual property rights made by third parties or in bring such proceedings |
| If customers do not extend existing contracts or enter into new long-term contracts for coal, the stability and profitability of CONSOL Energy’s operations could be affected |
| During the year ended December 31, 2005, approximately 91prca of the coal CONSOL Energy produced was sold under long-term contracts (contracts with terms of one year or more) |
| If a substantial portion of CONSOL Energy’s long-term contracts are modified or terminated or if force majeure are exercised, CONSOL Energy would be adversely affected if we are unable to replace the contracts or if new contracts were not at the same level of profitability |
| The profitability of our long-term coal supply contracts depends on a variety of factors, which vary from contract to contract and fluctuate during the contract term, and includes our production costs and other factors |
| Price changes, if any, provided in long-term supply contracts are not intended to reflect our cost increases, and therefore increases in our costs may reduce our profit margins |
| In addition, in periods of declining market prices, provisions for adjustment or renegotiation of prices and other provisions may increase our exposure to short-term coal price volatility |
| As a result, CONSOL Energy may not be able to obtain long-term agreements at favorable prices (compared to either market conditions, as they may change from time to time, or our cost structure) and long-term contracts may not contribute to our profitability |
| The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues |
| For the year ended December 31, 2005, we derived approximately 25prca of our total revenues from sales to our three largest customers |
| At December 31, 2005, we had approximately 11 coal and gas supply agreements with these customers that expire at various times from 2006 to 2022 |
| We are currently discussing the extension of existing agreements or entering into new long-term agreements with some of these customers, but these negotiations may not be successful and those customers may not continue to purchase coal and gas from us under long-term coal supply agreements |
| If any one of these three customers were to significantly reduce their purchases of coal from us, or if we were unable to sell coal to them on terms as favorable to us as the terms under our current agreements, our financial condition and results of operations could suffer materially |
| Our ability to collect payments from our customers could be impaired if their creditworthiness declines |
| Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers |
| Our customer base has changed with deregulation as some utilities sold their power plants to their non-regulated affiliates or third parties |
| These new power plant owners may have credit ratings that are below investment grade |
| In addition, the creditworthiness of certain of our customers and trading counterparties has deteriorated over the last few years due to lower than anticipated demand for energy and volatility |
| If the creditworthiness of our customers declines significantly, our dlra125 million accounts receivable securitization program and our business could be adversely affected |
| 38 ______________________________________________________________________ [60]Table of Contents The characteristics of coal may make it difficult for coal users to comply with various environmental standards, which are continually under review by international, federal and state agencies, related to coal combustion |
| As a result, they may switch to other fuels, which would affect the volume of CONSOL Energy’s sales |
| Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned |
| Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, the volume of our coal sales and price |
| Stricter regulations could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future |
| For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users will need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), or switch to other fuels |
| Each option has limitations |
| Lower sulfur coal may be more costly to purchase on an energy basis than higher sulfur coal depending on mining and transportation costs |
| The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines |
| Switching to other fuels may require expensive modification of existing plants |
| Because higher sulfur coal currently accounts for a significant portion of our sales, the extent to which power generators switch to alternative fuel could materially affect us if we cannot offset the cost of sulfur removal by lowering the delivered costs of our higher sulfur coals on an energy equivalent basis |
| Proposed reductions in emissions of mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels |
| For example, in 2005 the Environmental Protection Agency proposed separate regulations to establish mercury emission limits nationwide and to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxides and nitrogen oxides through the eastern United States |
| The Environmental Protection Agency continues to require reduction of nitrogen oxide emissions in 22 eastern states and the District of Columbia and will require reduction of particulate matter emissions over the next several years for areas that do not meet air quality standards for fine particulates |
| In addition, Congress and several states are now considering legislation to further control air emissions of multiple pollutants from electric generating facilities and other large emitters |
| These new and proposed reductions will make it more costly to operate coal-fired plants and could make coal a less attractive fuel alternative to the planning and building of utility power plants in the future |
| To the extent that any new or proposed requirements affect our customers, this could adversely affect our operations and results |
| Also, numerous proposals have been made at the international, national and state levels that are intended to limit or capture emissions of greenhouse gases, such as carbon dioxide |
| If comprehensive legislation focusing on greenhouse gas emissions is enacted by the United States or individual states, it could have the effect of restricting the use of coal |
| Other efforts to reduce emissions of greenhouse gases also may affect the use of fossil fuels, particularly coal, as an energy source |
| Government laws, regulations and other legal requirements relating to protection of the environment and health as well as safety matters increase our costs of doing business for active operations, both coal and gas, and may restrict our operations |
| We are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local, as well as foreign authorities relating to protection of the environment and health as well as safety matters, including those legal requirements that govern discharges of substances into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, groundwater quality and availability, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the installation of various safety equipment in our mines, and control of surface subsidence from underground mining |
| Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations and competitive position |
| In addition, we could 39 ______________________________________________________________________ [61]Table of Contents incur substantial costs, including clean up costs, fines and civil or criminal sanctions and third party damage claims for personal injury, property damage, wrongful death, or exposure to hazardous substances, as a result of violations of or liabilities under environmental, health or safety laws |
| For example, the federal Clean Water Act and corresponding state laws affect coal mining operations by imposing restrictions on discharges into regulated waters or precluding mining that might impact regulated waters |
| Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters |
| New requirements under the Clean Water Act and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results or may prevent us from being able to mine portions of our reserves |
| In addition, CONSOL Energy incurs and will continue to incur significant costs associated with the investigation and remediation of environmental contamination under the federal Comprehensive Environmental Response, Compensation, and Liability Act or the Superfund and similar state statutes and has been named as a potentially responsible party at Superfund sites in the past |
| CONSOL Energy has reclamation and mine closure obligations |
| If the assumptions underlying our accruals are materially inaccurate, we could be required to expend greater amounts than anticipated |
| The Surface Mining Control and Reclamation Act establishes operational, reclamation and closure standards for all aspects of surface mining as well as most aspects of deep mining |
| CONSOL Energy accrues for the costs of current mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary |
| Estimates of our total reclamation and mine-closing liabilities, which are based upon permit requirements and our experience |
| The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates |
| Furthermore, these obligations are unfunded |
| If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected |
| The coal beds from which we produce methane gas frequently contain water that may hamper our ability to produce gas in commercial quantities |
| Coal beds frequently contain water that must be removed in order for the gas to detach from the coal and flow to the well bore |
| Our ability to remove and dispose of sufficient quantities of water from the coal seam will determine whether or not we can produce gas in commercial quantities |
| The cost of water disposal may affect our profitability |
| CONSOL Energy has obligations for long-term employee benefits for which we accrue based upon assumptions which, if inaccurate, could result in CONSOL Energy being required to expense greater amounts than anticipated |
| CONSOL Energy provides various long-term employee benefits to inactive and retired employees |
| We accrue amounts for these obligations |
| At December 31, 2005, the current and non-current portions of these obligations included: • post retirement medical and life insurance (dlra1dtta7 billion); • coal workers’ black lung benefits (dlra423 million); • salaried retirement benefits (dlra86 million); and • workers’ compensation (dlra198 million) |
| However, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated |
| These obligations are unfunded, except for salaried retirement benefits, of which approximately 66prca 40 ______________________________________________________________________ [62]Table of Contents was funded at December 31, 2005 |
| In addition, several states in which we operate consider changes in workers’ compensation and black lung laws from time to time |
| Such changes, if enacted, could increase our benefit expense |
| Due to our participation in multi-employer pension plans, we may have exposure under those plans that extend beyond what our obligation would be with respect to our employees |
| We contribute to two multi-employer defined benefit pension plans administered by the UMWA In the event of a partial or complete withdrawal by us from any plan which is underfunded, we would be liable for a proportionate share of such plan’s unfunded vested benefits |
| Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent liability in the case of a full withdrawal or termination could be material to our financial position and results of operations |
| In the event that any other contributing employer withdraws from any plan which is underfunded, and such employer (or any member in its controlled group) cannot satisfy their obligations under the plan at the time of withdrawal, then we, along with the other remaining contributing employers, would be liable for our proportionate share of such plan’s unfunded vested benefits |
| In addition, if a multi-employer plan fails to satisfy the minimum funding requirements, the Internal Revenue Service, pursuant to Section 4971 of the Internal Revenue Code (the “Code”) will impose an excise tax of 5prca on the amount of the accumulated funding deficiency |
| Under Section 413(c)(5) of the Code, the liability of each contributing employer, including us, will be determined in part by each employer’s additional contributions in order to reduce the deficiency to zero, which may, along with the payment of the excise tax, have a material adverse impact on our financial results |
| If lump sum payments made to retiring salaried employees pursuant to CONSOL Energy’s defined benefit pension plan exceed the total of the service cost and the interest cost in a plan year, CONSOL Energy would need to make an adjustment to operating results equaling the unrecognized actuarial gain or loss resulting from each individual who received a lump sum payment in that year, which may result in an adjustment that could materially reduce operating results |
| CONSOL Energy’s defined benefit pension plan for salaried employees allows such employees to receive a lump-sum distribution in lieu of annual payments when they retire from CONSOL Energy |
| Statement of Financial Accounting Standards Nodtta 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans for the Terminations Benefits”, requires that if the lump-sum distributions made for a plan year, which for CONSOL Energy is October 1 to September 30, exceed the total of the service cost and interest cost for the plan year, CONSOL Energy would need to recognize for that year’s results of operations an adjustment equaling the unrecognized actuarial gain or loss resulting from each individual who received a lump sum in that year |
| If lump sum payments exceed the total of the service cost and the interest cost, the adjustment could materially reduce operating results |
| Fairmont Supply Company, a subsidiary of CONSOL Energy, is a co-defendant in various asbestos litigation cases which could result in making payments in the future that are material |
| One of CONSOL Energy’s subsidiaries, Fairmont Supply Company, which distributes industrial supplies, currently is named as a defendant in approximately 26cmam300 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, New Jersey, Michigan and Mississippi |
| 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 41 ______________________________________________________________________ [63]Table of Contents 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 |
| To date, payments by Fairmont with respect to asbestos cases have not been material |
| However, there cannot be any assurance that payments in the future with respect to pending or future asbestos cases will not be material to our financial position, results of operations or cash flows of CONSOL Energy |
| Various federal or state laws and regulations require CONSOL Energy to obtain surety bonds or to provide other assurance of payment for certain of our long-term liabilities including mine closure or reclamation costs, workers’ compensation and other post employment benefits |
| Federal and state laws and regulations require us to obtain surety bonds or provide other assurances to secure payment of certain long-term obligations including mine closure or reclamation costs, water treatment costs, federal and state workers’ compensation costs, and other miscellaneous obligations |
| The requirements and amounts of security are not fixed and can vary from year to year |
| It has become increasingly difficult for us to secure new surety bonds or renew such bonds without posting collateral |
| CONSOL Energy has satisfied our obligations under these statutes and regulations by providing letters of credit or other assurances of payment |
| The issuance of letters of credit under our bank credit facility reduces amounts that we can borrow under our bank credit facility for other purposes |
| CONSOL Energy’s rights plan may have anti-takeover effects that could prevent a change of control |
| On December 19, 2003, CONSOL Energy adopted a rights plan which, in certain circumstances, including a person or group acquiring, or the commencement of a tender or exchange offer that would result in a person or group acquiring, beneficial ownership of more than 15prca of the outstanding shares of CONSOL Energy common stock, would entitle each right holder to receive, upon exercise of the right, shares of CONSOL Energy common stock having a value equal to twice the right exercise price |
| For example, at an exercise price of dlra80 per right, each right not otherwise voided would entitle its holders to purchase dlra160 worth of shares of CONSOL Energy common stock for dlra80 |
| Assuming that shares of CONSOL Energy common stock had a per share value of dlra16 at such time, the holder of each right would be entitled to purchase ten shares of CONSOL Energy common stock for dlra80, or a price of dlra8 per share, one half its then market price |
| This and other provisions of CONSOL Energy’s rights plan could make it more difficult for a third party to acquire CONSOL Energy, which could hinder stockholders’ ability to receive a premium for CONSOL Energy stock over the prevailing market prices |