CONSOL Energy Inc.
CONSOL Energy Inc.
Although essentially a coal mining company—one of the three largest in the United States—CONSOL Energy Inc. now positions itself as a multi-energy producer of coal, gas, and electricity. The Pittsburgh, Pennsylvania-based company owns some 4.3 billion tons of proven and probable coal reserves. Operating in seven states, it is the top U.S. producer of coal from underground mines, the leading operator of longwall mining systems, and the largest exporter of coal. In recent years CONSOL has taken steps to diversify, primarily through the exploitation of methane gas, a byproduct of coal mining, which the company captures and sells on the interstate pipeline system, and uses to fuel its own power generators. To support these efforts in methane gas, as well as to develop mining and pollution-control technologies, CONSOL maintains a private research and development facility. In addition, CONSOL distributes mining and industrial supplies through its Fairmont Supply subsidiary, while another subsidiary, CNX Land Resources Inc. owns timber and farming interests and is involved in commercial development projects. CONSOL is a public company; its largest shareholder is the German utility RWE AG with a stake of nearly 74 percent. In 2003 RWE announced that it was interested in selling at least a portion of its interest in the company.
Roots Stretching Back to Civil War Era
Consolidation Coal Company, the forefather of CONSOL Energy, was launched in 1860 when a number of small western Maryland mining companies merged their operations. The business was formally incorporated in 1864, and by 1927 Consol emerged as the nation's largest bituminous coal producer. In 1945 it merged with Pittsburgh Coal Company, resulting in the change of its base of operations to western Pennsylvania. Following World War II coal began to fall out of favor as a source for heating, especially in the Northeast, replaced by oil and cheap natural gas, which could now be delivered over a new nationwide pipeline system. In 1966 Continental Oil Co. (Conoco) acquired the company, a relationship that was ahead of its time. Consol was just the first of the major U.S. coal companies to be snapped up by oil interests in reaction to the emergence of OPEC in the 1970s and a dramatic increase in oil prices. Coal, which had powered the United States' rise as an industrial nation and faded in importance during the 20th century, now enjoyed a resurgence. Electricity producers signed 20-year-long contracts to ensure a steady supply of coal at a set price, which led to ramped up production in coal. By the mid-1970s Consol at its peak operated 56 mines and employed 19,000 miners, numbers that steadily receded over the next quarter of a century.
DuPont Acquisition of Consol As Part of 1981 Conoco Deal
In 1981 E.I. du Pont de Nemours & Company (DuPont) acquired Conoco Inc. and picked up the Consol business. DuPont, which split Conoco's oil and coal assets into separate subsidiaries, then sold some Pennsylvania mining interests to RWE. By the autumn of 1990 rumors were reported in the press that indicated RWE through its Rheinbraun subsidiary was interested in acquiring as much as half of Consol. Although a Rheinbraun spokesperson called such talk "fantasy," the speculation proved to be accurate. Several weeks later the two parties created a 50–50 joint venture, CONSOL Energy Inc., which was then incorporated in Delaware in January 1991. Rheinbraun contributed its 24 percent stake in two Consol mines and paid $890 million to DuPont. As a result, DuPont also was able to lower its exposure to the energy segment of its business, which in the previous year had accounted for almost half of its revenues and more than half of its net income.
For RWE, the CONSOL venture was one in a string of deals the giant German conglomerate had pulled off in recent years. They reflected a new aggressive spirit that was a major departure following decades of ultra-conservative management, during which it operated more like a public authority than a private business. Coal had been a major part of RWE business ever since it was formed in 1898 to generate electricity from coal in order to power the iron and steel industries and other companies that populated Germany's Ruhr Valley. In 1935 Germany parceled out its power market to major firms and granted RWE a virtual monopoly on electricity. Following World War II RWE grew with the recovering West German economy, emerging as the country's largest power company. With the fall of the Iron Curtain and the reunification of Germany in the 1980s, RWE faced a changed business climate, one that would increasingly require that it look beyond its home market for growth and compete on a European and global basis. A new head was installed, Friedhelm Gieske, who moved quickly to institute a policy of long-term growth, which in essence meant turning to the United States. The CONSOL joint venture was more than a mere effort at diversification: Because U.S. coal was cheaper than German coal, CONSOL represented an insurance policy to RWE, which if necessary could import American coal to fuel its German power plants.
With the rise of electricity deregulation in the 1990s, the coal industry faced a period of uncertainty as electric utilities took advantage of conditions to drive down the price of coal, which was in plentiful supply. Because it depended on utilities for 80 percent of its business, the coal industry possessed little leverage and found itself increasingly squeezed. CONSOL was fortunate to hold a number of long-term contracts that were priced well above the market rate, but they were scheduled to expire in the next few years, making it imperative that the company take steps to adjust to these new conditions. Investing in technology to keep down costs provided a much needed edge. CONSOL was especially committed to "longwall" mines, which according to a 1999 Forbes article, "Survival of the Fittest," are "straight seams that hold rectangular panels of coal, typically 1,000 feet by 10,000 feet or so and that can be mined by massive $30 million machinery systems designed to handle just this one kind of coal seam—from shaving the bitumen from the walls to loading onto conveyor belts, Consol's longwall mines cover hundreds of square miles in six states. Today, 46% of all underground coal in the U.S. is mined by longwall, and Consol produces over half of it. Consol's long-wall output is 6.5 tons per man-hour, compared with an industry average of 4.9 tons for underground mine production." In order to gain this competitive advantage, CONSOL in 1998 invested $35,000 per miner on machinery and equipment, 9 percent more than Arch Coal and 40 percent more than Peabody Group, CONSOL's leading rivals. CONSOL now operated 24 mines, compared with 56 mines in the mid-1970s, but managed to increase its output by 45 percent.
DuPont announced in April 1998 that it was adjusting its business mix to focus on its agricultural, biotechnology, and pharmaceutical business. As part of this restructuring it sold most of its holdings in CONSOL, leaving DuPont Energy with just a 6 percent interest in the coal business and RWE subsidiaries with a 94 percent share. To pay off DuPont, CONSOL took on $500 million in debt. In addition, in 1998 CONSOL paid $150 million to acquire Rochester & Pittsburgh Coal Company. To pay down some of the debt it incurred, CONSOL made a public offering of stock in April 1999, but the result was disappointing. The company had hoped to sell shares in the $18 to $21 range, which would have netted between $416 million and $479 million. With the stock market still caught up in the enthusiasm over dotcom issues, an old economy commodity such as coal received a cool reception. According to Forbes, when CONSOL's CEO conducted a road show for the offering, "investment bankers and fund managers looked at him as if he were peddling steam locomotives. Coal? Is there still a coal industry?" Indeed, the outlook for coal was not particularly bright at that moment. Warm weather resulted in a reduced demand for electricity, which hurt coal prices; the Asian economy was doing poorly; and coal was seen in a negative light by many who questioned the fuel's contribution to the greenhouse effect. When CONSOL held its offering it sold 22.6 million shares at $16 each, netting $343.5 million. At the end of the first day of trading on the New York Stock Exchange, CONSOL stock was valued at $14.25, a level at which it would remain for the next year. Because of pressure from shareholders urging increased profits, as well as to maintain competitiveness in the volatile coal industry, CONSOL took steps in early 2000 to cut costs by offering buyout packages to more than 1,000 employees in its headquarters, regional offices, and R&D facility.
Through expansion and acquisitions, CONSOL Energy has evolved from a single-fuel mining company into a multi-energy producer of coal, gas and electricity.
CONSOL also placed greater emphasis on diversification, in particular the production of natural gas, a byproduct of coal mining, and electric generation. The thrust of the methane gas business is summarized in a 2002 Pittsburgh Post-Gazette profile of the company: "Before mining, companies drill vertical wells into coal seams as a safety precaution. At one time, the gas was burned off as a dangerous derivative of mining. Now it's captured and sold on the interstate pipeline system to electric generating plants and other consumers, as is the gas that escapes when controversial long-wall mining extracts underground coal." To fortify its position in natural gas, CONSOL in 2000 acquired the southwestern Virginia methane reserves and related facilities of MCN Energy Group Inc., paying approximately $160 million. Further strengthening its holdings in this region, CONSOL in 2001 spent another $158 million to acquire coalbed methane-gas production and pipeline assets from Conoco Inc. Subsidiary CNX Ventures in 2001 formed a joint venture with Allegheny Energy Supply Company to build an 88-megawatt, coalbed-methane-fueled power generating facility, which began operating in Virginia in 2002 using methane produced by CONSOL. Other diversification efforts included CNX Land Resources Inc., involved in timber and farming, and CNX Marine Terminal Inc., a Baltimore general cargo and warehouse provider.
During this same period, CONSOL expanded its coal holdings. At the end of 2000 it acquired a 50 percent interest in Line Creek Mine, a Canadian operation, at a cost of more than $29 million. In 2001 CONSOL bought Windsor Coal Company, Southern Ohio Coal Company, and Central Ohio Coal Company from American Electric Power, followed by the $14 million purchase of a 50 percent interest in the Glennies Creek Mine, an Australian operation owned by AMCI, Inc. This property would be equipped with a longwall mining system to extract high-fluidity coking coal intended for steelmakers in the Pacific Rim region.
Strong Results in 2000–2001
In 2000 and 2001 CONSOL benefited from a spike in coal and natural gas prices, resulting in total revenues of $2.32 billion in 2000 and $2.36 billion in 2001. Net income during this period increased from $107 million in 2000 to $183.6 million in 2001. Some credit for these positive results was also due to CONSOL shutting down smaller, less efficient mines. But warmer than expected weather in the winter of 2001–2002 and the effects of an economy that lapsed into recession had an adverse impact on the balance sheet during the second half of 2001 and into 2002. Nevertheless, CONSOL was optimistic about the future. With George W. Bush assuming the presidency in 2001, CONSOL expected the new administration to be receptive to the ideas put forward by energy companies, especially fossil fuel producers. The company bolstered its one-man government affairs department by adding three more people, although management insisted that no matter who had been elected president the company needed more personnel in order to comply with regulations in new domestic and foreign markets. In truth, minor changes in government standards held the potential for significant financial rewards for heavily regulated industries including coal. By most accounts, the new administration in Washington was expected to help both the coal mining and nuclear power industries. Prospects for coal also received a boost following the California energy crisis and the resulting public perception that much more electricity needed to be generated in the United States. Because coal power plants operated around 70 percent of their rated output, they could increase production, and buy more coal, without much difficulty. Moreover, there was a chance that some utilities might construct new coal-fired plants.
In the meantime, CONSOL cut back production in 2002, achieved in large part by closing down seven mines that according to management had reached the end of their economic life. In 2002 CONSOL recorded revenues of $2.18 billion, a slight decline over the previous year, but income experienced a dramatic decline, falling to $11.7 million. In June 2003 RWE indicated that it was interested in selling some if not all of its stake in CONSOL, estimated to be worth about $1.25 billion. Whether the company would be sold, and when the economy would rebound, were unanswered questions. What was certain, however, was that CONSOL was well positioned for the long term, owning coal reserves that at current consumption rates could last for another two centuries.
- Consolidation Coal Company is formed.
- The company merges with Pittsburgh Coal Company.
- Continental Oil Company acquires Consolidation.
- DuPont acquires the company.
- CONSOL Energy is formed as a joint venture between DuPont and RWE AG.
- CONSOL goes public and begins trading on the New York Stock Exchange.
Consolidation Coal Company Inc.; CNX Ventures; Pocahontas Gas Partnership; Rochester & Pittsburgh Coal Company.
Arch Coal, Inc.; Massey Energy Company; Peabody Energy Corporation.
Androshick, Julie, "Survival of the Fittest," Forbes, September 20, 1999, p. 66.
Byrne, Harlan S., "New King Coal," Barron's, October 9, 2000, p. 23.
McKay, Jim, "German Firm to Take Control of Pennsylvania-Based Consol Energy," Pittsburgh Post-Gazette, September 18, 1998.
Reeves, Frank, "Consol Energy Boosts Natural Gas Production, Tries Power Generation," Pittsburgh Post-Gazette, April 24, 2002.
Roth, Terence, "Power House," Wall Street Journal Europe, April 8, 1991, p. 1.