We are a multi-fuel energy producer and energy services provider that primarily
serves the electric power generation industry in the United States. That industry
generates approximately two-thirds of its output by burning coal or gas, the two
fuels we produce. At December 31, 2005, we produced high-Btu bituminous coal from
17 mining complexes in the United States, including joint ventures. Coal produced
from our mines has a high-Btu content which creates more energy per unit when
burned compared to coals with lower Btu content. As a result, coals with greater
Btu content can be more efficient to use. We are the majority shareholder (81.5%)
of CNX Gas Corporation. CNX Gas produces pipeline-quality coalbed methane gas
from our coal properties in Pennsylvania, Virginia and West Virginia and conventional
gas from properties in Tennessee and Virginia. We believe that the use of coal
and gas to generate electricity will grow as demand for power increases.
Historically, we rank among the largest coal producers in the United States
based upon total revenue, net income and operating cash flow. Our production
of approximately 69 million tons of coal in 2005 accounted for approximately
6% of the total tons produced in the United States and approximately 14% of
the total tons produced east of the Mississippi River during 2005. We are one
of the premier coal producers in the United States by several measures:
• We mine more high-Btu bituminous coal than any other United States
producer;
• We are the largest coal producer east of the Mississippi River;
• We have the second largest amount of recoverable coal reserves among
United States coal producers; and
• We are the largest United States producer of coal from underground
mines.
CNX Gas also ranks as one of the largest coalbed methane gas companies in the
United States based on both their proved reserves and their current daily production.
Our position as a gas producer is highlighted by several measures:
• Our principal coalbed methane operations produce gas from coal seams
(single layers or stratum of coal) with a high gas content;
• We currently have approximately 173 million cubic feet of gross average
daily production;
• At December 31, 2005, we operated 2,073 wells connected by approximately
1,000 miles of gathering lines and associated infrastructure;
• Our facilities have the capacity to transport 250 million cubic feet
of gas per day; and
• We controlled one of the largest coalbed methane reserve bases among
publicly traded oil and gas companies in the United States with approximately
1.1 trillion cubic feet of net proved reserves of gas at December 31, 2005.
Additionally, we provide energy services, including terminal services, industrial
supply services and coal waste disposal services.
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 year ended December 31, 2005, the Northern Appalachian aggregated
segment includes the following mines: Shoemaker, Blacksville #2, Robinson Run,
McElroy, Loveridge, Bailey, Enlow Fork, Mine 84 and Mahoning Valley. For the
year ended December 31, 2005, the Central Appalachian aggregated segment includes
the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the year
ended December 31, 2005, the Metallurgical aggregated segment includes the following
mines: Buchanan, Amonate and V.P. #8. 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.
Our gas operations are primarily conducted by CNX Gas Corporation, an 81.5%
subsidiary of CONSOL Energy. CONSOL Energy primarily produces coalbed methane,
which is gas that resides in coal seams. In the eastern United States, conventional
natural gas fields typically are located in various types of sedimentary formations
at depths ranging from 2,000 to 15,000 feet. Exploration companies often put
their capital at risk by searching for gas in commercially exploitable quantities
at these depths. By contrast, gas in the coal seams that we drill or anticipate
drilling is typically in formations less than 2,500 feet deep which are usually
better defined than deeper formations. CONSOL Energy believes that this contributes
to lower exploration costs than those incurred by producers that operate in
deeper, less defined formations.
Coal is transported from CONSOL Energy’s mining complexes to customers
by means of railroad cars, river barges, trucks, conveyor belts or a combination
of these means of transportation. We employ transportation specialists who negotiate
freight and equipment agreements with various transportation suppliers, including
railroads, barge lines, terminal operators, ocean vessel brokers and trucking
companies.
CONSOL Energy enters into various physical gas supply transactions with both
gas marketers and end users for terms varying in length at both fixed and variable
prices. Reserves and production estimates are believed to be sufficient to satisfy
these obligations. In the past, other than pipeline outages related to maintenance,
we have not failed to deliver quantities required under contract. CONSOL Energy
has also entered into various gas swap transactions that qualify as financial
cash flow hedges. These gas swap transactions exist parallel to the underlying
physical transactions. These financial, as well as physical hedges represented
approximately 70% of our produced gas sales volumes.
Competition
The United States coal industry is highly competitive, with numerous producers
in all coal producing regions. CONSOL Energy competes against other large producers
and hundreds of small producers in the United States and overseas. The five
largest producers are estimated by the 2005 National Mining Association Survey
to have produced approximately 54% (based on tonnage produced) of the total
United States production in 2004. The U.S. Department of Energy reported 1,357
active coal mines in the United States in 2004, the latest year for which government
statistics are available. Demand for our coal by our principal customers is
affected by:
• the price of competing coal and alternative fuel supplies, including
nuclear, natural gas, oil and renewable energy sources, such as hydroelectric
power;
• coal quality;
• transportation costs from the mine to the customer; and
• the reliability of supply.
Continued demand for CONSOL Energy’s coal and the prices that CONSOL
Energy obtains are affected by demand for electricity, environmental and government
regulation, technological developments and the availability and price of competing
coal and alternative fuel supplies. We sell coal to foreign electricity generators
and to the more specialized metallurgical coal market, both of which are significantly
affected by international demand and competition.
Competition throughout the country is regionalized. We operate in the eastern
United States. CONSOL Energy believes that the gas market is highly fragmented
and not dominated by any single producer. We believe that several of our competitors
have devoted far greater resources than we have to gas exploration and development.
CONSOL Energy believes that competition within our market is based primarily
on price and the proximity of gas fields to customers.
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