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CNX Gas 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2008

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: 001-32723

 

 

CNX GAS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   20-3170639

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5 Penn Center West, Suite 401

Pittsburgh, PA 15276

(412) 200-6700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    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  þ    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller Reporting Company  ¨

(Do not check if 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  þ

The number of shares of the registrant’s common stock outstanding as of October 17, 2008 is 150,971,636 shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

 

         Page

ITEM 1.

 

CONDENSED FINANCIAL STATEMENTS

  
 

Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007

   1
 

Consolidated Balance Sheets at September 30, 2008 and December 31, 2007

   2
 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2008

   4
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007

   5
 

Notes to Unaudited Consolidated Financial Statements

   6

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   18

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   34

ITEM 4.

 

CONTROLS AND PROCEDURES

   35

PART II—OTHER INFORMATION

 

ITEM 1.

 

LEGAL PROCEEDINGS

   36

ITEM 1A.

 

RISK FACTORS

   36

ITEM 6.

 

EXHIBITS

   38


Table of Contents

PART I

FINANCIAL INFORMATION

 

ITEM 1. CONDENSED FINANCIAL STATEMENTS

CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
   2008     2007     2008     2007

Revenue and Other Income:

        

Outside Sales

   $ 188,612     $ 96,222     $ 494,624     $ 306,615

Related Party Sales

     2,587       2,379       8,035       6,980

Royalty Interest Gas Sales

     22,902       10,175       61,921       36,841

Purchased Gas Sales

     1,674       821       6,860       3,297

Other Income

     1,172       1,134       11,929       6,005
                              

Total Revenue and Other Income

     216,947       110,731       583,369       359,738

Costs and Expenses:

        

Lifting Costs

     20,709       8,588       50,176       25,617

Gathering and Compression Costs

     23,642       15,283       59,034       46,593

Royalty Interest Gas Costs

     21,055       8,543       59,057       31,736

Purchased Gas Costs

     1,664       495       6,607       2,987

Other

     872       (437 )     1,679       1,558

General and Administrative

     13,527       12,793       50,701       39,069

Depreciation, Depletion and Amortization

     17,803       12,248       50,340       36,325

Interest Expense

     2,412       1,221       5,567       3,686
                              

Total Costs and Expenses

     101,684       58,734       283,161       187,571
                              

Earnings Before Income Taxes and Minority Interest

     115,263       51,997       300,208       172,167

Minority Interest

     (312 )     —         (670 )     —  
                              

Earnings Before Income Taxes

     115,575       51,997       300,878       172,167

Income Taxes

     48,160       20,701       119,287       66,387
                              

Net Income

   $ 67,415     $ 31,296     $ 181,591     $ 105,780
                              

Earnings Per Share:

        

Basic

   $ 0.45     $ 0.21     $ 1.20     $ 0.70
                              

Dilutive

   $ 0.45     $ 0.21     $ 1.20     $ 0.70
                              

Weighted Average Number of Common Shares Outstanding:

        

Basic

     150,939,418       150,895,233       150,956,753       150,877,067
                              

Dilutive

     151,292,158       151,149,432       151,366,746       151,103,827
                              

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

 

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CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     (Unaudited)
September 30,
2008
   December 31,
2007

ASSETS

     

Current Assets:

     

Cash and Cash Equivalents

   $ 3,116    $ 32,048

Accounts and Notes Receivable:

     

Trade

     64,356      38,680

Related Parties

     830      1,022

Other Receivables

     6,624      1,406

Recoverable Income Taxes

     —        972

Derivatives

     77,756      10,711

Other

     1,876      3,148
             

Total Current Assets

     154,558      87,987

Property, Plant and Equipment:

     

Property, Plant and Equipment

     1,943,084      1,509,060

Less—Accumulated Depreciation, Depletion and Amortization

     301,790      254,154
             

Total Property, Plant and Equipment—Net

     1,641,294      1,254,906

Other Assets:

     

Investment in Affiliates

     25,005      28,284

Derivatives

     29,238      —  

Other

     4,802      9,526
             

Total Other Assets

     59,045      37,810
             

TOTAL ASSETS

   $ 1,854,897    $ 1,380,703
             

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

 

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Table of Contents

CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     (Unaudited)
September 30,
2008
    December 31,
2007

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts Payable

   $ 69,101     $ 30,263

Accrued Royalties

     22,100       12,896

Accrued Severance Taxes

     4,755       2,620

Short-Term Notes Payable

     58,200       —  

Deferred Income Taxes

     28,203       1,269

Accrued Income Taxes

     4,219       —  

Current Portion of Long-Term Debt

     7,563       5,819

Other Current Liabilities

     15,443       9,817
              

Total Current Liabilities

     209,584       62,684

Long-Term Debt:

    

Long-Term Debt

     16,430       5,799

Capital Lease Obligations

     58,935       61,150
              

Total Long-Term Debt

     75,365       66,949

Deferred Credits and Other Liabilities:

    

Derivatives

     —         1,092

Deferred Income Taxes

     259,826       188,415

Asset Retirement Obligations

     7,207       3,981

Postretirement Benefits Other Than Pensions

     2,896       2,700

Other

     33,642       30,965
              

Total Deferred Credits and Other Liabilities

     303,571       227,153

Minority Interest

     (1,306 )     680
              

Total Liabilities and Minority Interest

     587,214       357,466

Stockholders’ Equity:

    

Common Stock, $.01 par value; 200,000,000 Shares Authorized, 150,971,636 Issued and Outstanding at September 30, 2008 and 150,915,198 Issued and Outstanding at December 31, 2007

     1,510       1,509

Capital in Excess of Par Value

     788,782       785,575

Retained Earnings

     411,473       229,962

Other Comprehensive Income

     65,918       6,191
              

Total Stockholders’ Equity

     1,267,683       1,023,237
              

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,854,897     $ 1,380,703
              

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

 

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CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

 

     Common
Stock
   Capital in
Excess of
Par Value
   Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance—December 31, 2007

   $ 1,509    $ 785,575    $ 229,962     $ 6,191     $ 1,023,237  
                                      

(Unaudited)

            

Net Income

     —        —        181,591       —         181,591  

Gas Cash Flow Hedge (Net of ($36,962) tax)

     —        —        —         59,809       59,809  

Amortization of Prior Service Costs and Actuarial Losses (Net of $38 Tax)

     —        —        —         (62 )     (62 )
                                      

Comprehensive Income

     —        —        181,591       59,747       241,338  

Issuance of Common Stock

     1      —        —         —         1  

Cumulative Effect of FAS 158 Measurement Adoption (Net of $64 tax)

     —        —        (80 )     (20 )     (100 )

Stock Options Exercised

     —        488      —         —         488  

Tax Benefit from Stock Based Compensation

     —        184      —         —         184  

Amortization of Stock Based Compensation Awards

     —        2,535      —         —         2,535  
                                      

Balance—September 30, 2008

   $  1,510    $  788,782    $ 411,473     $ 65,918     $ 1,267,683  

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

 

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CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     For the Nine Months Ended
September 30,
 
       2008             2007      

Operating Activities:

    

Net Income

   $ 181,591     $ 105,780  

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

    

Depreciation, Depletion and Amortization

     50,340       36,325  

Stock-based Compensation

     2,535       2,417  

Change in Minority Interest

     (1,670 )     —    

Deferred Income Taxes

     59,908       52,121  

Equity in Earnings of Affiliates

     (352 )     (1,330 )

Changes in Operating Assets:

    

Accounts Receivable

     (27,925 )     15,758  

Related Party Receivable

     192       2,745  

Other Current Assets

     537       1,353  

Changes in Other Assets

     4,243       2,131  

Changes in Operating Liabilities:

    

Accounts Payable

     12,823       (7,190 )

Related Party Liability

     —         152  

Income Taxes

     6,006       (771 )

Other Current Liabilities

     16,877       (332 )

Changes in Other Liabilities

     1,580       3,170  

Other

     234       (1,254 )
                

Net Cash Provided by Operating Activities

     306,919       211,075  
                

Investing Activities:

    

Capital Expenditures

     (370,180 )     (203,967 )

Acquisition of Knox Energy

     (36,000 )     —    

Acquisition of Mineral Rights

     —         (61,149 )

Investment in Equity Affiliates

     1,081       (2,259 )

Proceeds From Sales of Assets

     450       187  
                

Net Cash Used in Investing Activities

     (404,649 )     (267,188 )
                

Financing Activities:

    

Capital Lease Payments

     (2,058 )     (1,912 )

Proceeds from Variable Interest Entity Debt

     11,984       9,000  

Proceeds from Short-Term Borrowings

     58,200       —    

Exercise of Stock Options

     488       220  

Tax Benefit from Stock Based Compensation

     184       35  
                

Net Cash Provided by Financing Activities

     68,798       7,343  
                

Net Decrease in Cash and Cash Equivalents

     (28,932 )     (48,770 )

Cash and Cash Equivalents at Beginning of Period

     32,048       107,173  
                

Cash and Cash Equivalents at End of Period

   $ 3,116     $ 58,403  
                

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

 

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CNX GAS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Note 1—Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2007 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, 2007 included in CNX Gas’ Form 10-K.

Certain reclassifications of 2007 data have been made to conform to the three and nine months ended September 30, 2008 classifications. The reclassifications include classifying equity in earnings of affiliates in other income which was previously reported in other costs and expenses.

Basic earnings per share are computed by dividing net income 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, “Share-Based Payment” (SFAS 123R). The number of additional shares is calculated by assuming that restricted stock 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 20,175 shares and 491,056 shares of common stock were outstanding for the three month period ended September 30, 2008 and 2007, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Options to purchase 6,425 shares and 493,815 shares of common stock were outstanding for the nine month period ended September 30, 2008 and 2007, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Additionally, 4,098 shares of outstanding restricted stock units for the nine month period ending September 30, 2007 were not included in the computation of dilutive earnings per share because the effect would be antidilutive.

There were 781 options and 4,031 options exercised during the three months ended September 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during both the three months ended September 30, 2008 and 2007 was $16.00. There were 18,079 shares and 13,337 shares of options exercised during the nine months ended September 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the nine months ended September 30, 2008 and 2007 was $16.16 and $16.51, respectively.

 

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The computations for basic and dilutive earnings per share from continuing operations are as follows:

 

     Three Months Ended September 30,    Nine Months Ended September 30,
             2008                        2007                        2008                        2007          

Net Income

   $ 67,415    $ 31,296    $ 181,591    $ 105,780
                           

Average shares of common stock outstanding:

           

Basic

     150,939,418      150,895,233      150,956,753      150,877,067

Effect of stock options

     352,740      254,199      409,993      226,760
                           

Diluted

     151,292,158      151,149,432      151,366,746      151,103,827
                           

Earnings per share:

           

Basic

   $ 0.45    $ 0.21    $ 1.20    $ 0.70
                           

Diluted

   $ 0.45    $ 0.21    $ 1.20    $ 0.70
                           

Note 2—Significant Acquisitions:

In July 2008, 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 property, plant, and equipment. The sales agreement called for the transfer of approximately 5,600 leased acres and 30 oil and gas wells. This acquisition enhanced our acreage position in Northern Appalachia. The pro forma results for this acquisition were not significant to CNX Gas’ financial results.

In June 2008, CNX Gas completed the acquisition of the remaining 50% interest in Knox Energy, LLC 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 remaining interest, Knox Energy, LLC had been proportionately consolidated into CNX Gas’ financial statements. Knox Energy, LLC is a natural gas production company with operations in Tennessee. The pro forma results for this acquisition were not significant to CNX Gas’ financial results.

In June 2007, CNX Gas entered into a three-way transaction with Peabody Energy and our majority shareholder, CONSOL Energy Inc. (CONSOL or CONSOL Energy), to acquire certain oil and gas, coalbed methane and other gas interests. Pursuant to the transaction, CNX Gas acquired certain coal assets from CONSOL for $45,000 cash plus a future payment with an estimated present value of $6,938, which we approximate to be the fair value of the assets. CNX Gas then exchanged those assets plus $15,000 cash for Peabody’s oil and gas, coalbed methane, and other gas rights to approximately 985,000 acres, including 603,000 acres in the Illinois Basin, 2,000 acres in Central Appalachia, 151,000 acres in Northern Appalachia, 171,000 acres in the San Juan Basin, 47,000 acres in the Powder River Basin, and 11,000 acres in the Rockies. Also included were $1,149 of miscellaneous acquisition costs. Subsequent to September 30, 2007, $628 of additional acquisition costs were paid. This acreage has no proved gas reserves.

 

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Note 3—Pension and Other Postretirement Benefits:

The components of net periodic benefit costs are as follows:

 

     Pension Benefits     Other Benefits  
   Three Months Ended
September 30,
    Nine Months Ended
September 30,
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2008             2007             2008             2007             2008             2007             2008             2007      

Services cost

   $ 81     $ 65     $ 242     $ 195     $ 33     $ 31     $ 99     $ 93  

Interest costs

     10       3       30       9       45       35       137       105  

Expected return on assets

     (6 )     —         (18 )     1       —         —         —         —    

Amortization of prior service costs credit

     —         —         —         —         (43 )     (43 )     (129 )     (129 )

Amortization of (gain) loss

     —         (6 )     —         (18 )     9       5       27       15  
                                                                

Benefit costs

   $ 85     $ 62     $ 254     $ 187     $ 44     $ 28     $ 134     $ 84  
                                                                

CNX Gas adopted the measurement provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158), on January 1, 2008. As a result of this adoption, the Company recognized an increase of $85 and $79 in the liabilities for pension and other postretirement benefits, respectively. These increases were accounted for as a reduction in the January 1, 2008 balance of retained earnings.

For the three and nine months ended September 30, 2008, there were $332 and $458 in contributions made to the pension plan. CNX Gas presently anticipates contributing a total of approximately $525 to the pension trust in 2008.

CNX Gas does not expect to contribute to the other postretirement benefits plan in 2008. We intend to pay benefit claims as they become due. For the three and nine months ended September 30, 2008, $38 and $115 of post employment benefits have been paid.

Note 4—Income Taxes:

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

 

     For the Nine Months Ended September 30  
   2008     2007  
     Amount     Percent     Amount     Percent  

Statutory U.S. federal income tax rate

   $ 105,307     35.0 %   $ 60,258     35.0 %

Net Effect of state tax

     16,278     5.4       7,145     4.1  

Other

     (2,298 )   (0.8 )     (1,016 )   (0.5 )
                            

Income Tax Expense / Effective Rate

   $ 119,287     39.6 %   $ 66,387     38.6 %
                            

CNX Gas adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an increase of $53 in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

The total amounts of unrecognized tax benefits as of September 30, 2008 and September 30, 2007 were approximately $5,545 and $3,116, respectively. If these unrecognized tax benefits were recognized, there would be no affect on CNX Gas’ effective tax rate.

 

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CNX Gas is included in the consolidated federal tax return of CONSOL Energy Inc. Income taxes for financial statement purposes are calculated as if CNX Gas files a tax return on a separate company basis. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (IRS) is in the process of concluding its examination of CONSOL Energy’s U.S. 2004 and 2005 income tax returns. Within the next twelve months, CONSOL Energy expects to conclude this examination and remit payment of the resulting tax deficiencies, if any, to federal and state taxing authorities. The IRS, to date, has not proposed any significant changes relating to tax positions taken by CNX Gas as part of its inclusion in the consolidated tax returns filed by CONSOL Energy for the two-year period.

CNX Gas recognizes interest expense accrued related to unrecognized tax benefits as a component of interest expense. As of September 30, 2008 and September 30, 2007, the Company had accrued interest of approximately $427 and $150, respectively, for interest related to uncertain tax positions. The accrued liabilities for the nine months ended September 30, 2008 and 2007 include $245 and $57, respectively, of interest expense recorded in the Company’s statements of operations related to unrecognized tax benefits.

CNX Gas recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. As of September 30, 2008 and September 30, 2007, no penalties relating to the Company’s unrecognized tax benefits have been accrued.

Note 5—Property, Plant and Equipment:

 

     September 30,
2008
    December 31,
2007
 

Leasehold Improvements

   $ 1,497     $ 1,351  

Proved Properties

     242,522       125,118  

Unproved Properties

     75,572       81,078  

Wells and Related Equipment

     202,380       166,468  

Intangible Drilling

     704,459       531,098  

Gathering Assets

     705,990       596,171  

Asset Retirement Obligations

     3,629       1,035  

Capitalized Internal Software

     7,035       6,741  
                

Total Property, Plant and Equipment

     1,943,084       1,509,060  

Amortization

     (301,790 )     (254,154 )
                

Property and Equipment, net

   $ 1,641,294     $ 1,254,906  
                

Note 6—Short-Term Notes Payable:

In October 2005, CNX Gas entered into a five-year $200,000 unsecured credit agreement. The agreement contains a negative pledge provision, whereby 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 September 30, 2008. The facility also includes a minimum interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 76.43 to 1.00 at September 30, 2008. At September 30, 2008, the CNX Gas credit agreement had $58,200 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $126,867 of capacity available for borrowings and the issuance of letters of credit.

 

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Note 7—Commitments and Contingent Liabilities:

CNX Gas is subject to various pending and threatened lawsuits and claims arising in the ordinary course of its 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 CNX Gas. 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.

CNX Gas is a party to a case captioned GeoMet Operating Company, Inc. and Pocahontas Mining Limited Liability Company v. CNX Gas Company LLC in the Circuit Court for Buchanan County, Virginia (Case No. 337-06), filed in 2006. CNX Gas has a coal seam gas lease with Pocahontas Mining in southwest Virginia and southern West Virginia. With the agreement of Pocahontas Mining, GeoMet constructed a pipeline on the property. CNX Gas sought a judicial determination that, under the terms of the lease, CNX Gas has the exclusive right to construct and operate pipelines on the property. On May 23, 2007, the circuit court entered an order granting CNX Gas’ motion for summary judgment against GeoMet and Pocahontas Mining. The order provided that CNX Gas has exclusive rights to construct and operate pipelines on the property and prohibited GeoMet from owning, operating or maintaining its pipeline on the property. GeoMet filed an appeal to the Virginia Supreme Court which, on September 12, 2008, reversed the Circuit Court’s decision, holding that CNX Gas’ right to construct and operate pipelines on the property is not an exclusive right, but that Pocahontas Mining and GeoMet may not use the property in a manner that affects CNX Gas’ exercise of its stated lease rights or causes CNX Gas to suffer any inconvenience or other difficulty in its exercise of those rights. The Supreme Court remanded the case to the Circuit Court for further proceedings consistent with its decision. We do not believe that CNX Gas has any exposure for damages in this matter.

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 GeoMet’s 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 Creek’s 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 GeoMet’s 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 GeoMet’s 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.

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. 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 County’s calculation. We believe that we have calculated the tax correctly and in accordance with the applicable rules and regulations of Buchanan County and

 

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intend to vigorously defend our position. 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 2004, Yukon Pocahontas Coal Company, Buchanan Coal Company and Sayers-Pocahontas Coal Company filed a complaint against Consolidation Coal Company (“CCC”), a subsidiary of CONSOL Energy in the Circuit Court of Buchanan County, Virginia, seeking damages and injunctive relief in connection with the deposit of untreated water from mining activities at CCC’s Buchanan Mine into nearby void spaces in the mine of one of CONSOL Energy’s other subsidiaries, Island Creek Coal Company (“ICCC”). CCC believes that it had, and continues to have, the right to store water in these void areas. On September 21, 2006, the plaintiffs filed an amended complaint in the Circuit Court of Buchanan County, Virginia (Case No. CL04-91) which, among other things, added CONSOL Energy, ICCC and CNX Gas Company LLC as additional defendants. The amended complaint alleges, among other things, that CNX Gas, as lessee and operator under certain coalbed methane gas leases from plaintiffs, had a duty to prevent CCC from depositing water into the mine voids and failed to do so. The proposed amended complaint seeks $150,000 in damages from the additional defendants, plus costs, interest and attorneys’ fees. CNX Gas denies that it has any liability in this matter and intends to vigorously defend this action. 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 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 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.

At September 30, 2007, CNX Gas has provided financial guarantees and letters of credit to certain third parties as described by major category in the following table. These amounts represent the maximum potential total of future payments that we could be required to make under these instruments. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credit are recorded as liabilities in the financial statements. CNX Gas management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition.

 

     Total
Amounts
Committed
   Less
Than

1 Year
   1-3
Years
   3-5
Years
   Beyond
5 years

Letters of Credit

   $ 14,933    $ 14,913    $ 20    $ —      $ —  

Surety Bonds:

              

Environmental

   $ 1,634    $ 1,634    $ —      $ —      $ —  

Other

     2,313      2,263      50      —        —  
                                  

Total Surety Bonds

   $ 3,947    $ 3,897    $ 50    $ —      $ —  

Other:

              

Guarantees

   $ 34,172    $ 34,172    $ —      $ —      $ —  
                                  

Total Commitments

   $ 53,052    $ 52,982    $ 70    $ —      $ —  
                                  

 

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Financial guarantees have primarily been provided to support various performance bonds related to land usage, pipeline usage and restorative issues. Other contingent liabilities have been extended to support insurance policies, legal matters and other items necessary in the normal course of business. CNX Gas has also provided financial guarantees for the purchase and delivery of gas to various counterparties.

As previously disclosed in the notes to our audited consolidated financial statements for the year ended December 31, 2007, CONSOL Energy has also provided certain parental guarantees related to activity associated with CNX Gas. CNX Gas anticipates that these parental guarantees will be transferred from CONSOL Energy to CNX Gas over time. CNX Gas management believes these parental guarantees will also expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition.

Note 8—Comprehensive Income:

Total comprehensive income, net of tax, was as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
   2008     2007     2008     2007  

Net Income

   $ 67,415     $ 31,296     $ 181,591     $ 105,780  

Amortization of prior service costs and actuarial loss

     (20 )     (26 )     (62 )     (79 )

Gas Cash Flow Hedge

     210,686       7,875       59,809       6,549  
                                

Total comprehensive income

   $ 278,081     $ 39,145     $ 241,338     $ 112,250  
                                

Note 9—Fair Value of Financial Instruments:

Effective January 1, 2008, CNX Gas adopted Statement of Financial Accounting Standards 157, “Fair Value Measurements” (SFAS 157) and Statement of Financial Accounting Standards 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (FAS 159). As a result of the adoption, CNX Gas elected not to measure any additional financial assets or liabilities at fair value, other than those which were recorded at fair value prior to the adoption.

The financial assets and (liabilities) measured at fair value on a recurring basis are summarized below:

 

Description

   Fair Value Measurements at September 30, 2008
   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

   $ —      $ 106,994    $ —  

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 CNX Gas’ current incremental borrowing rates for similar types of borrowing arrangements.

 

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The carrying amounts and fair values of financial instruments for which SFAS 159 was not elected are as follows:

 

     September 30, 2008     December 31, 2007  
   Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Cash and cash equivalents

   $ 3,116     $ 3,116     $ 32,048     $ 32,048  

Short-term notes payable

   $ (58,200 )   $ (58,200 )   $ —       $ —    

Long-term debt

   $ (20,834 )   $ (17,453 )   $ (8,850 )   $ (7,951 )

Note 10—Variable Interest:

In a prior year, CNX Gas entered into a business relationship with a contractor to perform CNX Gas’ well drilling requirements primarily in Northern Appalachia. CNX Gas is the primary customer of the contractor. In addition, CNX has guaranteed up to $7,000 of a loan agreement between the contractor and Huntington National Bank dated March 28, 2008. Under FASB Interpretation (FIN) No. 46R, “Consolidation of Variable Interest Entities-an Interpretation of ARB No. 51,” the contractor is a variable interest entity and CNX Gas is the primary beneficiary even though CNX Gas has no financial ownership. Therefore, CNX Gas has consolidated the contractor into the Consolidated Financial Statements. At September 30, 2008, the contractor has a carrying value of property, plant and equipment of $18,834 and total assets of $23,987, with related debt of $20,834 and total liabilities of $21,808.

Note 11—Segment Information:

The principal activity of CNX Gas is to produce methane gas for sale primarily to gas wholesalers. In the current year, CNX Gas implemented a new internal segment reporting method to align segment results to how management assesses the operations. As a result, some charges that were previously reflected in Central Appalachia and Northern Appalachia segments have been reclassified to the Other segment. Also, some corporate charges that were previously reflected in the Central Appalachia and Northern Appalachia segment are now reported as Corporate items and reflected in the reconciliation between Segment Earnings (Loss) Before Income Tax to Total Earnings (Loss) Before Income Tax. CNX Gas has three reportable segments: Central Appalachia, Northern Appalachia and Other. Each of these reportable segments includes a number of operating segments. For the three and nine months ended September 30, 2008, the Central Appalachia segment includes the following operating segments: Virginia Operations, Cardinal States Gathering, Hokie, Knox Energy and Bluegrass. For the three and nine months ended September 30, 2008, the Northern Appalachia segment includes the following operating segments: Mountaineer, Nittany and Panther. The Other segment includes other plays that fall outside the reported geographic areas and various other activities assigned to operations but not allocated to an individual operating segment. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses.

 

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Reportable segment results for the three months ended September 30, 2008 are:

 

     Central
Appalachia
   Northern
Appalachia
   Other    Total Gas    Corporate     Consolidated

Sales—outside

   $ 154,647    $ 32,413    $ 1,552    $ 188,612    $ —       $ 188,612

Sales—related parties

     2,582      5      —        2,587      —         2,587

Sales—royalty interest gas

     22,072      830      —        22,902      —         22,902

Sales—purchased gas

     1,616      58      —        1,674      —         1,674

Other revenue

     211      36      581      828      344       1,172
                                          

Total Revenue and Other Income

   $ 181,128    $ 33,342    $ 2,133    $ 216,603    $ 344     $ 216,947
                                          

Earnings Before Income Taxes

   $ 104,370    $ 12,848    $ 1,014    $ 118,232    $ (2,657 )   $ 115,575
                                          

Segment assets

   $ 1,297,829    $ 452,907    $ 75,989    $ 1,826,725    $ 28,172     $ 1,854,897
                                          

Depreciation, depletion and amortization

   $ 13,787    $ 3,132    $ 884    $ 17,803    $ —       $ 17,803
                                          

Capital expenditures

   $ 64,736    $ 104,816    $ 822    $ 170,374    $ —       $ 170,374
                                          

Reportable segment results for the three months ended September 30, 2007 are:

 

     Central
Appalachia
   Northern
Appalachia
    Other     Total Gas    Corporate     Consolidated

Sales—outside

   $ 87,551    $ 8,619     $ 52     $ 96,222    $ —       $ 96,222

Sales—related parties

     2,369      10       —         2,379      —         2,379

Sales—royalty interest gas

     10,166      9       —         10,175      —         10,175

Sales—purchased gas

     821      —         —         821      —         821

Other revenue

     219      —         11       230      904       1,134
                                            

Total Revenue and Other Income

   $ 101,126    $ 8,638     $ 63     $ 109,827    $ 904     $ 110,731
                                            

Earnings Before Income Taxes (A)

   $ 55,547    $ (232 )   $ (401 )   $ 54,914    $ (2,917 )   $ 51,997
                                            

Segment assets (B)

   $ 998,644    $ 170,382     $ 67,918     $ 1,236,944    $ 83,180     $ 1,320,124
                                            

Depreciation, depletion and amortization

   $ 9,923    $ 1,612     $ 713     $ 12,248    $ —       $ 12,248
                                            

Capital expenditures

   $ 34,157    $ 36,445     $ 2,611     $ 73,213    $ —       $ 73,213
                                            

 

(A) Includes equity in earnings (loss) of unconsolidated affiliates of $650 for Central Appalachia.
(B) Includes investments in unconsolidated affiliates of $31,095 for Central Appalachia.

 

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Reportable segment results for the nine months ended September 30, 2008 are:

 

     Central
Appalachia
   Northern
Appalachia
   Other    Total Gas    Corporate     Consolidated

Sales—outside

   $ 415,372    $ 77,541    $ 1,711    $ 494,624    $ —       $ 494,624

Sales—related parties

     8,010      25      —        8,035      —         8,035

Sales—royalty interest gas

     61,904      17      —        61,921      —         61,921

Sales—purchased gas

     6,802      58      —        6,860      —         6,860

Other revenue

     9,704      80      1,669      11,453      476       11,929
                                          

Total Revenue and Other Income

   $ 501,792    $ 77,721    $ 3,380    $ 582,893    $ 476     $ 583,369
                                          

Earnings Before Income Taxes (C)

   $ 281,791    $ 32,295    $ 1,521    $ 315,607    $ (14,729 )   $ 300,878
                                          

Segment assets

   $ 1,297,829    $ 452,907    $ 75,989    $ 1,826,725    $ 28,172     $ 1,854,897
                                          

Depreciation, depletion and amortization

   $ 41,546    $ 7,899    $ 895    $ 50,340    $ —       $ 50,340
                                          

Capital expenditures

   $ 185,195    $ 216,778    $ 4,207    $ 406,180    $ —       $ 406,180
                                          

 

(C) Includes equity in earnings (loss) of unconsolidated affiliates of $223 for Central Appalachia.

Reportable segment results for the nine months ended September 30, 2007 are:

 

     Central
Appalachia
   Northern
Appalachia
    Other     Total Gas    Corporate     Consolidated

Sales—outside

   $ 285,982    $ 20,575     $ 58     $ 306,615    $ —       $ 306,615

Sales—related parties

     6,940      40       —         6,980      —         6,980

Sales—royalty interest gas

     36,759      82       —         36,841      —         36,841

Sales—purchased gas

     3,297      —         —         3,297      —         3,297

Other revenue

     2,580      —         46       2,626      3,379       6,005
                                            

Total Revenue and Other Income

   $ 335,558    $ 20,697     $ 104     $ 356,359    $ 3,379     $ 359,738
                                            

Earnings Before Income Taxes (D)

   $ 184,111    $ (3,694 )   $ (1,127 )   $ 179,290    $ (7,123 )   $ 172,167
                                            

Segment assets (E)

   $ 998,644    $ 170,382     $ 67,918     $ 1,236,944    $ 83,180     $ 1,320,124
                                            

Depreciation, depletion and amortization

   $ 31,096    $ 4,516     $ 713     $ 36,325    $ —       $ 36,325
                                            

Capital expenditures

   $ 113,898    $ 80,672     $ 70,546     $ 265,116    $ —       $ 265,116
                                            

 

(D) Includes equity in earnings (loss) of unconsolidated affiliates of $1,313 for Central Appalachia.
(E) Includes investments in unconsolidated affiliates of $31,095 for Central Appalachia.

 

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Reconciliation of Segment Information to Consolidated Amounts

Earnings Before Income Taxes:

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
   2008     2007     2008     2007  

Segment earnings before income taxes for total reportable business segments

   $ 118,232     $ 54,914     $ 315,607     $ 179,290  

Equity in earnings (losses) of Buchanan Generation

     236       276       129       17  

Incentive Compensation

     (2,550 )     (1,013 )     (6,053 )     (2,497 )

Compensation from restricted stock unit grants, stock option expense and performance share unit expense

     2,495       (1,352 )     (2,911 )     (4,419 )

Bank fees

     (129 )     (236 )     (674 )     (715 )

Interest income (expense), net

     (2,709 )     (592 )     (5,220 )     491  
                                

Earnings before income taxes

   $ 115,575     $ 51,997     $ 300,878     $ 172,167  
                                

Total Assets:

 

     September 30,
   2008    2007

Segment assets for total reportable business segments

   $ 1,826,725    $ 1,236,944

Items excluded from segment assets:

     

Cash and other investments

     3,167      58,403

Investment in Buchanan Generation

     25,005      24,777
             

Total Consolidated Assets

   $ 1,854,897    $ 1,320,124
             

Note 12—Recent Accounting Pronouncements:

In May 2008, The Financial Accounting Standards Board (FASB) issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Statement 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Statement 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect this guidance to have a significant impact on CNX Gas.

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB statement 133” (SFAS 161). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. CNX Gas management is currently assessing the new disclosure requirements required by SFAS 161.

 

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In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141R), and Statement of Financial Accounting Standards No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141R and SFAS 160 will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141R retains the fundamental requirements in Statement 141 “Business Combinations” while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests, and classified as a component of equity. These Statements become simultaneously effective January 1, 2009. Early adoption is not permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This Current Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward Looking Statements.”

Unless the context otherwise requires, “we,” “us,” “our,” “the company” and “CNX Gas” mean CNX Gas Corporation and its consolidated subsidiaries.

Operations and Outlook

CNX Gas had production (net of royalty and line loss) of 19.7 billion cubic feet (Bcf), or 213.7 million cubic feet (MMcf) per day, for the quarter ended September 30, 2008. This was 38% higher than the 14.3 Bcf, or 156.0 MMcf per day, for the quarter ended September 30, 2007. It was also higher than the 18.8 Bcf produced in the quarter ended June 30, 2008. For the nine months ended September 20, 2008, production was 54.3 Bcf, compared to production of 43.4 Bcf in the nine months ended September 30, 2007.

CNX Gas drilled 84 coalbed methane wells in its Virginia operating segment in the third quarter, excluding gob wells. For the first nine months 242 coalbed methane wells were drilled. Virginia operations also continued its workover program to boost production from its existing wells, resulting in legacy frac production (from wells online prior to January 1, 2007) increasing by 0.5 Bcf in the three months ended September 30, 2008, when compared to the year-earlier quarter. Additional gains came from bringing wells online more quickly after they had been drilled. CNX Gas expects to drill 300 wells in Virginia in 2008.

CNX Gas drilled 33 coal bed methane wells in its Mountaineer operating segment during the quarter. For the first nine months, 85 coalbed methane wells were drilled. During the quarter, Mountaineer operations brought online another satellite gas processing facility, in Marshall County, West Virginia. CNX Gas expects to drill 100 horizontal coalbed methane wells in Mountaineer in 2008.

CNX Gas drilled 29 coalbed methane wells in its Nittany operating segment during the third quarter and 75 coalbed methane wells in the first nine months. CNX Gas expects to drill 100 coalbed methane wells in the Nittany operating segment in 2008.

In the Marcellus Shale during the third quarter, CNX Gas drilled its first and second horizontal wells in southwestern Pennsylvania. The first horizontal well cost $6 million and was stimulated with a five-stage slickwater frac. The second horizontal well has been drilled and is currently awaiting fracing. Its cost, before fracing, has been $2.8 million. CNX Gas will keep one horizontal rig and one vertical rig running in the Marcellus Shale for the remainder of the year.

In the Chattanooga Shale, CNX Gas drilled three horizontal wells in the quarter, bringing the yearly total to seven, and the project total to eight. The latest well was drilled and completed for only $0.9 million. No wells were connected during the third quarter. Two conventional wells were also drilled in Tennessee in the third quarter. CNX Gas has two rigs drilling in the Chattanooga Shale for the remainder of the year in the areas that have shown better initial results.

In the Huron Shale during the third quarter, CNX Gas drilled one additional horizontal well in eastern Kentucky. A total of two Huron wells have been drilled in 2008. CNX Gas is building out gathering and compression in this area, with an expected in-service date of March 2009.

In the Illinois Basin, current plans are to emphasize exploring in the shallower conventional formations above the New Albany Shale until results are available from the shale consortium the company joined. CNX Gas is currently recompleting three shale wells to test shallow oil potential in both Kentucky and Indiana. Two offsets

 

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will be drilled to a shallow oil well that was drilled in the second quarter. Two new shallow wells will also be drilled. The Benoist and Tar Springs are the targeted zones.

During the third quarter, CNX Gas employees worked another quarter without incurring a lost time incident. This raises the cumulative time worked by employees without a lost time incident to 3.3 million hours, with the last incident in June 1994.

CNX Gas continued to add to its acreage position in the quarter. Gross acres crossed the four million mark, and now stand at 4.1 million. On a net basis, CNX Gas controls 3.6 million acres. The bulk of the acres recently acquired were coalbed methane acres in Northern and Central Appalachia. The company’s shale acreage position did not increase significantly from the period ended June 30, 2008.

CONSOL Energy continues to beneficially own approximately 81.7% of our outstanding common stock, as such CNX Gas’ financial statements are consolidated into CONSOL Energy’s financial statements.

Results of Operations

Three Months Ended September 30, 2008 compared with Three Months Ended September 30, 2007

(Amounts reported in millions)

Net Income

Net income changed primarily due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
   Percentage
Change
 

Revenue and Other Income:

           

Outside Sales

   $ 189    $ 96    $ 93    96.9 %

Related Party Sales

     2      2      —      —    

Royalty Interest Gas Sales

     23      10      13    130.0 %

Purchased Gas Sales

     2      2      —      —    

Other Income

     1      1      —      —    
                       

Total Revenue and Other Income

     217      111      106    95.5 %

Costs and Expenses:

           

Lifting Costs

     21      9      12    133.3 %

Gathering and Compression Costs

     24      15      9    60.0 %

Gas Royalty Interest Costs

     21      9      12    133.3 %

Purchased Gas Costs

     2      —        2    100.0 %

Other

     1      —        1    100.0 %

General and Administrative

     13      13      —      —    

Depreciation, Depletion and Amortization

     18      12      6    50.0 %

Interest Expense

     2      1      1    100.0 %
                       

Total Costs and Expenses

     102      59      43    72.9 %

Earnings Before Income Taxes and Minority Interest

     115      52      63    121.2 %

Minority Interest

     —        —        —      —    
                       

Earnings Before Income Taxes

     115      52      63    121.2 %

Income Tax Expense

     48      21      27    128.6 %
                       

Net Income

   $ 67    $ 31    $ 36    116.1 %
                       

 

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Net income for the quarter was higher primarily due to higher average sales prices and higher production, offset, in part, by increased costs as discussed below.

Revenue and Other Income

Revenue and other income increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
   Percentage
Change
 

Revenue and Other Income:

           

Outside Sales

   $ 189    $ 96    $ 93    96.9 %

Related Party Sales

     2      2      —      —    

Royalty Interest Gas Sales

     23      10      13    130.0 %

Purchased Gas Sales

     2      2      —      —    

Other Income

     1      1      —      —    
                       

Total Revenue and Other Income

   $ 217    $ 111    $ 106    95.5 %
                       

Outside sales and related party sales, combined, increased due primarily to higher average sales prices received and higher volumes of gas sold.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     19.7      14.3      5.4    37.8 %

Average Sales Price Per thousand cubic feet

   $ 9.73    $ 6.87    $ 2.86    41.6 %

The increase in average sales price is the result of CNX Gas realizing general market price increases in the period-to-period comparison. CNX Gas periodically enters 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 hedges represented approximately 12.8 Bcf of our produced gas sales volumes for the three months ended September 30, 2008 at an average price of $9.44 per Mcf. In the prior year, these financial hedges represented approximately 4.7 Bcf at an average price of $8.00 per Mcf. Sales volumes increased as a result of additional wells coming online from our on-going drilling program.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     2.4      1.8      0.6    33.3 %

Average Sales Price Per thousand cubic feet

   $ 9.71    $ 5.81    $ 3.90    67.1 %

Included in royalty interest gas sales are the revenues related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The increase 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.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Purchased Gas Sales Volumes (in billion cubic feet)

     0.2      0.1      0.1    100.0 %

Average Sales Price Per thousand cubic feet

   $ 10.20    $ 6.13    $ 4.07    66.4 %

Purchased gas sales volumes represent volumes of gas we sold at market prices that were purchased from third-party producers.

 

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Other income consists of the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
    Percentage
Change
 

Third party gathering revenue

   $ 1    $ —      $ 1     100.0 %

Interest income

     —        1      (1 )   (100.0 )%
                        

Total other income

   $ 1    $ 1    $ —       —    
                        

Third-party gathering revenue increased $1 million in the 2008 period due primarily to higher third party volumes being transported on CNX Gas gathering lines.

Interest income decreased $1 million as a result of the lower average cash balances throughout the 2008 period compared to the 2007 period. Lower cash balances are the result of additional capital expenditures related to the expanded drilling program and higher acquisition costs for additional gas acreage.

Costs and Expenses

Costs and Expenses increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
   Percentage
Change
 

Costs and Expenses:

           

Lifting Costs

   $ 21    $ 9    $ 12    133.3 %

Gathering and Compression

     24      15      9    60.0 %

Royalty Interest Gas Costs

     21      9      12    133.3 %

Purchased Gas

     2      —        2    100.0 %

Other

     1      —        1    100.0 %

General and Administrative

     13      13      —      —    

Depreciation, Depletion and Amortization

     18      12      6    50.0 %

Interest Expense

     2      1      1    100.0 %
                       

Total Cost of Goods Sold

   $ 102    $ 59    $ 43    72.9 %
                       

Lifting costs have increased due to higher average unit costs and higher volumes of gas sold.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     19.7      14.3      5.4    37.8 %

Average Lifting Costs Per thousand cubic feet

   $ 1.06    $ 0.60    $ 0.46    76.7 %

Average lifting costs per unit increased in the 2008 period as a result of several factors. Water disposal costs increased $0.10 per thousand cubic feet due to additional volumes of water produced by CNX Gas wells in the 2008 period compared to the 2007 period. Severance taxes, which are included in lifting costs, have increased $0.10 per thousand cubic feet due to the higher average sales prices. Repairs and maintenance costs have increased $0.09 per thousand cubic feet due to higher material expenses and higher contract labor expenses. Well closing costs increased $0.06 per thousand cubic feet in the 2008 period related to adjustments in the 2007 period related to well lives which resulted in a reduction to expense. Well service costs have also increased by $0.05 per thousand cubic feet due to additional work on existing wells in order to slow down expected rates of decline. Other costs increased $0.06 per thousand cubic feet for various items that occurred throughout both periods, none of which were individually material.

 

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Table of Contents

The increase in gathering and compression was attributable to higher volumes produced and higher average unit costs during the 2008 period compared to the 2007 period.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     19.7      14.3      5.4    37.8 %

Average Gathering Costs Per thousand cubic feet

   $ 1.20    $ 1.07    $ 0.13    12.1 %

The increase in average gathering and compression unit costs was attributable to higher power costs and higher fuel costs, offset, in part, by lower repairs and maintenance costs. Power and fuel costs increased $0.14 per thousand cubic feet due to additional compressors being placed in service along the existing gathering systems in order to flow gas more efficiently. Other costs increased $0.04 per thousand cubic feet due to various items that occurred throughout both periods, none of which are individually significant. These impairments in unit costs were offset, in part, by lower repair and maintenance costs per unit sold. Dollars spent for repairs and maintenance of the gathering and compression system have remained consistent in the period-to-period comparison; therefore, additional volumes gathered and transported have lowered the related unit costs for these components by approximately $0.05 per thousand cubic feet.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     2.4      1.8      0.6    33.3 %

Average Cost Per thousand cubic feet

   $ 8.93    $ 4.88    $ 4.05    83.0 %

Included in royalty interest gas 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 market prices, contractual differences among leases and the mix of average and index prices used in calculating royalties contributed to the year-to-date period-to-period change.

 

     2008
Period
   2007
Period
   Variance    Change  

Purchased Gas Sales Volumes (in billion cubic feet)

     0.2      0.1      0.1    100.0 %

Average Cost Per thousand cubic feet

   $ 9.23    $ 4.76    $ 4.47    93.9 %

Purchased gas sales volumes represent volumes of gas purchased from third-party producers that we sell. Purchased gas volumes sold also reflect the impact of pipeline imbalances. The higher average cost per thousand cubic feet is due to overall price increases and contractual differences among customers in the period-to-period comparison.

Other costs and expenses increased $1 million due to various transactions that occurred throughout the period, none of which were individually material.

General and Administrative expenses remained consistent in the period-to-period comparison.

 

     2008
Period
    2007
Period
   Dollar
Variance
    Percentage
Change
 

Short-term incentive compensation

   $ 3     $ 1    $ 2     200.0 %

Wages and salaries

     5       3      2     66.7 %

Professional services

     3       2      1     50.0 %

Stock-based compensation

     (2 )     2      (4 )   (200.0 )%

Other

     4       5      (1 )   (20.0 )%
                         

Total Selling, General and Administrative

   $ 13     $ 13    $ —       —    
                         

 

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Table of Contents

The short-term incentive compensation program is designed to increase compensation to eligible employees when CNX Gas reaches predetermined targets for production, unit cost and safety. Incentive compensation expense increased approximately $2 million in the period-to-period comparison due to improved performance relative to targets.

Employee wages and salaries have increased $2 million primarily due to the additional staffing added as a result of the on-going growth of the company.

Professional services have increased $1 million primarily due to various administrative projects, which have occurred throughout both periods, none of which are individually significant.

Stock-based compensation has decreased $4 million primarily due to the performance share program reduction in costs. These reductions in cost are related to the decrease in the market price of CNX Gas common stock in the 2008 period.

The $1 million decrease in other miscellaneous costs is related to various transactions which occurred in both periods, none of which were individually material.

Depreciation, depletion and amortization have increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
   Percentage
Change
 

Production

   $ 13    $ 8    $ 5    62.5 %

Gathering

     5      4      1    25.0 %
                       

Total Depreciation, Depletion and Amortization

   $ 18    $ 12    $ 6    50.0 %
                       

The increase in production depreciation, depletion and amortization was primarily due to increased volumes produced combined with an increase in the units of production rates in the period-to-period comparison. These rates increased due to the higher proportion of capital assets placed in service versus the proportion of proved developed reserve additions. These rates are generally calculated using the net book value of assets at the end of the previous year divided by either proved or proved developed reserves.

Gathering depreciation, depletion and amortization is recorded using the straight-line method and increased $1 million due to assets placed in service after the 2007 period.

Interest expense increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
   Percentage
Change
 

Revolver

   $ 1    $ —      $ 1    100.0 %

Capitalized lease

     1      1      —      —    
                       

Total Interest Expense

   $ 2    $ 1    $ 1    100.0 %
                       

Interest expense increased in the period-to-period comparison due to outstanding principal on the revolving credit facility. There were no outstanding principal amounts on the facility in the 2007 period.

Interest on capitalized leases remained consistent in the period-to-period comparison.

Minority Interest

Minority interest relates to a variable interest entity in which CNX Gas holds no ownership interest.

 

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Table of Contents

Income Taxes

 

     2008
Period
    2007
Period
    Variance     Percentage
Change
 

Earnings Before Income Taxes

   $ 115     $ 52     $ 63     $ 121.2 %

Tax Expense

   $ 48     $ 21     $ 27     $ 128.6 %

Effective Income Tax Rate

     41.7 %     39.8 %     1.9 %  

CNX Gas’ effective tax rate increased in the period-to-period comparison primarily due to changes in the net effect of state income taxes. See Note 4 – Income Taxes of the Consolidated Financial Statements for additional details.

Nine Months Ended September 30, 2008 compared with Nine Months Ended September 30, 2007

(Amounts reported in millions)

Net Income

Net income changed primarily due to the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
   Percentage
Change
 

Revenue and Other Income:

           

Outside Sales

   $ 495    $ 307    $ 188    61.2 %

Related Party Sales

     8      7      1    14.3 %

Royalty Interest Gas Sales

     62      37      25    67.6 %

Purchased Gas Sales

     7      3      4    133.3 %

Other Income

     11      6      5    83.3 %
                       

Total Revenue and Other Income

     583      360      223    61.9 %

Costs and Expenses:

           

Lifting Costs

     50      26      24    92.3 %

Gathering and Compression Costs

     59      47      12    25.5 %

Gas Royalty Interest Costs

     59      32      27    84.4 %

Purchased Gas Costs

     7      3      4    133.3 %

Other

     1      1      —      —    

General and Administrative

     51      39      12    30.8 %

Depreciation, Depletion and Amortization

     50      36      14    38.9 %

Interest Expense

     6      4      2    50.0 %
                       

Total Costs and Expenses

     283      188      95    50.5 %
                       

Earnings Before Income Taxes and Minority Interest

     300      172      128    74.4 %

Minority Interest

     1      —        1    100.0 %
                       

Earnings Before Income Taxes

     301      172      129    75.0 %

Income Taxes

     119      66      53    80.3 %
                       

Net Income

   $ 182    $ 106    $ 76    71.7 %
                       

 

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Table of Contents

Net income for the nine months ended September 30, 2008 was higher than the nine months ended September 30, 2007 primarily due to higher average sales prices and higher production volumes, offset, in part, by increased costs as discussed below.

Revenue and Other Income

Revenue and other income increased due to the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
   Percentage
Change
 

Revenue and Other Income:

           

Outside Sales

   $ 495    $ 307    $ 188    61.2 %

Related Party Sales

     8      7      1    14.3 %

Royalty Interest Gas Sales

     62      37      25    67.6 %

Purchased Gas Sales

     7      3      4    133.3 %

Other Income

     11      6      5    83.3 %
                       

Total Revenue and Other Income

   $ 583    $ 360    $ 223    61.9 %
                       

Outside sales and related party sales, combined, increased due primarily to higher average sales prices received and higher volumes of gas sold.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     54.3      43.4      10.9    25.1 %

Average Sales Price Per thousand cubic feet

   $ 9.25    $ 7.22    $ 2.03    28.1 %

The increase in average sales price is the result of CNX Gas realizing general market price increases in the year-to-date period-to-period comparison. CNX Gas periodically enters 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 hedges represented approximately 30.6 Bcf of our produced gas sales volumes for the nine months ended September 30, 2008 at an average price of $9.17 per Mcf. In the prior year, these financial hedges represented approximately 12.7 Bcf at an average price of $7.95 per Mcf. Sales volumes increased as a result of additional wells coming online from our on-going drilling program.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     6.1      5.4      0.7    13.0 %

Average Sales Price Per thousand cubic feet

   $ 10.07    $ 6.77    $ 3.30    48.7 %

Included in royalty interest gas sales are the revenues related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The increase in market prices, contractual differences among leases and the mix of average and index prices used in calculating royalties contributed to the year-to-date period-to-period change.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Purchased Gas Sales Volumes (in billion cubic feet)

     0.7      0.5      0.2    40.0 %

Average Sales Price Per thousand cubic feet

   $ 9.22    $ 6.90    $ 2.32    33.6 %

Purchased gas sales volumes represent volumes of gas we sold at market prices that were purchased from third-party producers, less our gathering fees.

 

25


Table of Contents

Other income consists of the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
    Percentage
Change
 

Insurance settlements

   $ 8    $ —      $ 8     100.0 %

Timber income

     1      —        1     100.0 %

Legal settlements

     1      —        1     100.0 %

Third party gathering revenue

     1      1      —       —    

Interest income

     —        3      (3 )   (100.0 )%

Equity in earnings of affiliates

     —        1      (1 )   (100.0 )%

Other miscellaneous

     —        1      (1 )   (100.0 )%
                        

Total other income

   $ 11    $ 6    $ 5     83.3 %
                        

CNX Gas received $8 million of proceeds from its insurance carrier as final settlement of the insurance claim related to the July 2007 Buchanan Mine event which idled the mine. The $8 million represents business interruption coverage.

Timber income increased $1 million in the year-to-date 2008 period due primarily to a sale which occurred in February 2008. No assurance can be given that another sale will occur in the future.

A litigation settlement with a royalty holder in the year-to-date 2008 period resulted in approximately $1 million of income.

Third-party gathering revenue remained consistent in the period-to-period comparison.

Interest income decreased $3 million as a result of the lower average cash balance throughout the year-to-date 2008 period compared to the year-to-date 2007 period. Lower cash balances are the result of the June 2007 acquisition of Peabody’s oil and gas interests, additional capital expenditures related to the expanded drilling program, as well as acquisition costs for additional gas acreage.

Equity in earnings of affiliates decreased due to the acquisition in June 2008 of the remaining interest in Knox Energy LLC. Prior to December 31, 2007, Knox Energy LLC was accounted for using the equity method of accounting.

Other miscellaneous income decreased $1 million due to various transactions which occurred throughout both periods, none of which were individually material.

Costs and Expenses

Costs and expenses increased due to the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
   Percentage
Change
 

Costs and Expenses:

           

Lifting Costs

   $ 50    $ 26    $ 24    92.3 %

Gathering and Compression

     59      47      12    25.5 %

Royalty Interest Gas Costs

     59      32      27    84.4 %

Purchased Gas

     7      3      4    133.3 %

Other

     1      1      —      —    

General and Administrative

     51      39      12    30.8 %

Depreciation, Depletion and Amortization

     50      36      14    38.9 %

Interest Expense

     6      4      2    50.0 %
                       

Total Cost of Goods Sold

   $ 283    $ 188    $ 95    50.5 %
                       

 

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Table of Contents

Lifting costs increased due to higher unit costs and higher volumes sold.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     54.3      43.4      10.9    25.1 %

Average Lifting Costs Per thousand cubic feet

   $ 0.92    $ 0.59    $ 0.33    55.9 %

Average lifting costs per unit sold increased in the current year as a result of higher well closing costs, higher severance taxes, higher water disposal costs, higher well service costs and higher repairs and maintenance costs. Well closing costs were impaired $0.06 per thousand cubic feet in the period-to-period comparison. Well closing liabilities were adjusted in the year-to-date 2007 period to reflect longer well lives than were previously estimated. This adjustment resulted in a reduction to expense. The adjustments to well closing liabilities were insignificant in the 2008 year-to-date period. Severance taxes per unit sold were $0.06 per thousand cubic feet sold higher in the 2008 period. The increase in severance tax was attributable to the higher average sale prices for gas. Water disposal costs have increased $0.05 per thousand cubic feet due to additional volumes of water produced by CNX Gas wells. Well service costs per unit have increased $0.04 per thousand cubic feet in the year-to-date period-to-period comparison due to additional work on existing wells in order to slow down expected rates of decline. Repairs and maintenance costs have increased $0.04 per thousand cubic feet due to higher material costs and higher contract labor costs. Other costs have also increased by $0.08 for various items which occurred throughout both periods, none of which were individually material.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     54.3      43.4      10.9    25.1 %

Average Gathering Costs Per thousand cubic feet

   $ 1.09    $ 1.07    $ 0.02    1.9 %

The increase in average gathering and transportation unit costs was attributable to a $0.05 per thousand cubic feet increase in fuel costs, a $0.03 per thousand cubic feet increase in compressor costs and a $0.03 per thousand cubic feet increase in other costs. These cost increases were offset, in part, by a $0.05 per thousand cubic feet reduction in maintenance expense and a $0.04 per thousand cubic feet reduction in firm transportation charges. Higher fuel and higher compression expenses per unit were related to additional compressors being placed in service along the existing gathering systems in order to flow gas more efficiently. Higher other charges were related to various items incurred throughout both periods, none of which were individually material. These impairments in costs were offset, in part, by lower unit costs for repairs and maintenance and firm transportation. Dollars spent for maintenance and firm transportation have remained fairly consistent in the year-to-date period-to-period comparison; therefore, additional volumes gathered and transported have lowered the related unit costs for these components.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     6.1      5.4      0.7    13.0 %

Average Costs Per thousand cubic feet

   $ 9.61    $ 5.83    $ 3.78    64.8 %

Included in royalty interest gas 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 price relates to the volatility and contractual differences among leases, the mix of average and index prices used in calculating royalties, and the actualization of advanced royalty payments.

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Variance    Percentage
Change
 

Purchased Gas Sales Volumes (in billion cubic feet)

     0.8      0.5      0.3    60.0 %

Average Costs Per thousand cubic feet

   $ 8.69    $ 6.09    $ 2.60    42.7 %

 

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Purchased gas sales volumes represent volumes of gas purchased from third-party producers, less our gathering fees, that we sell at market prices. Purchased gas volumes also include the impact of pipeline imbalances. The higher average cost per thousand cubic feet is due to overall price increases and contractual differences among customers in the year-to-date period-to-period comparison.

Other costs and expenses remained consistent in the period-to-period comparison.

General and Administrative expenses increased due to the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
    Percentage
Change
 

Short-term incentive compensation

   $ 6    $ 2    $ 4     200.0 %

Wages and salaries

     12      9      3     33.3 %

Professional services

     12      10      2     20.0 %

Stock-based compensation

     3      4      (1 )   (25.0 )%

Other

     18      14      4     28.6 %
                        

Total General and Administrative

   $ 51    $ 39    $ 12     30.8 %
                        

The short-term incentive compensation program is designed to increase compensation to eligible employees when CNX Gas reaches predetermined targets for production, unit cost and safety. Incentive compensation expense increased $4 million, when compared to the prior year, due to improved performance relative to the targets.

Employee wages and salaries have increased $3 million due to the additional staffing added as a result of the on-going growth of the company.

Professional services have increased $2 million primarily due to fees related to completing registration of emission offset credits on the Chicago Climate Exchange. Professional services also increased due to various administrative projects which have occurred throughout both periods, none of which were individually significant.

Stock-based compensation has decreased $1 million primarily due to the performance share program reductions of cost. The reductions of cost are related to the decrease in the market price of CNX Gas common stock in the year-to-date 2008 period. This reduction was offset, in part, by additional awards granted subsequent to the 2007 period.

The $4 million increase in other costs is related to various transactions that occurred throughout both periods, none of which were individually material.

Depreciation, depletion and amortization have increased due to the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
   Percentage
Change
 

Production

   $ 35    $ 22    $ 13    59.1 %

Gathering

     14      13      1    7.7 %

Other

     1      1      —      —    
                       

Total Depreciation, Depletion and Amortization

   $ 50    $ 36    $ 14    38.9 %
                       

 

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The $13 million increase in production-related depreciation, depletion and amortization was primarily due to higher volumes combined with an increase in the units of production rates in the year-to-date period-to-period comparison. These rates increased due to the higher proportion of capital assets placed in service versus the proportion of proved developed reserve additions. These rates are generally calculated using the net book value of assets at the end of the previous year divided by either proved or proved developed reserves.

Gathering depreciation, depletion and amortization is recorded using the straight-line method and increased $1 million due to additional assets placed in service after the year-to-date 2007 period.

Other depreciation remained consistent in the year-to-date period-to-period comparison.

Interest expense increased due to the following items:

 

     Year to
Date 2008
Period
   Year to
Date 2007
Period
   Dollar
Variance
    Percentage
Change
 

Variable interest entity

   $ 1    $ —      $ 1     100.0 %

Revolver

     1      —        1     100.0 %

Capitalized lease

     3      4      (1 )   (25.0 )%

Miscellaneous

     1      —        1     100.0 %
                        

Total Interest Expense

   $ 6    $ 4    $ 2     50.0 %
                        

Our variable interest entity incurred debt during the year-to-date 2008 period, which correspondingly increased the related interest expense by $1 million.

Interest expense increased $1 million in the year-to-date period-to-period comparison due to outstanding principal on the revolving credit facility. There were no outstanding principal amounts on the facility in the year-to-date 2007 period.

Interest on capitalized leases decreased $1 million in the year-to-date period-to-period comparison primarily as a result of lower outstanding principal balances. Lower outstanding principal balances are the result of scheduled payments.

Miscellaneous interest expense increased $1 million due to various transactions which occurred throughout the period, none of which are individually significant.

Minority Interest

Minority interest relates to a variable interest entity in which CNX Gas holds no ownership interest.

Income Taxes

 

     Year to
Date 2008
Period
    Year to
Date 2007
Period
    Variance     Percentage
Change
 

Earnings Before Income Taxes

   $ 301     $ 172     $ 129     75.0 %

Tax Expense

   $ 119     $ 66     $ 53     80.3 %

Effective Income Tax Rate

     39.6 %     38.6 %     1.0 %  

CNX Gas’ effective tax rate increased in the period-to-period comparison primarily due to changes in the net effect of state income taxes. See Note 4—Income Taxes of the Consolidated Financial Statements for additional details.

 

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Liquidity and Capital Resources

CNX Gas has satisfied its working capital requirements and funded its capital expenditures with cash from operations and its $200 million credit facility. Our credit agreement provides for a revolving credit facility with an initial aggregate outstanding principal amount of up to $200 million (with the ability to request an increase in the aggregate outstanding principal amount up to $300 million), including borrowings and letters of credit. We may use borrowings under the credit agreement for general corporate purposes, including transaction fees, letters of credit, acquisitions, capital expenditures and working capital. Our obligations under our credit agreement are not secured by a lien on our assets, however it does contain a negative pledge provision providing that our assets cannot be used to secure any other obligation. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. The facility includes a minimum interest coverage ratio of no less than 3.00 to 1.00, measured quarterly. The interest coverage ratio was 76.43 to 1.00 at September 30, 2008. The facility also includes a maximum leverage ratio of no more than 3.00 to 1.00, measured quarterly. The leverage ratio was 0.32 to 1.00 at September 30, 2008. Affirmative and negative covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. At September 30, 2008, the facility had $58.2 million of borrowings outstanding and $14.9 million of letters of credit outstanding, leaving $126.9 million of unused capacity.

As a result of our status as a majority-owned subsidiary of CONSOL Energy and having entered into a credit agreement with third-party commercial lenders, CNX Gas and its subsidiaries are guarantors of CONSOL Energy’s 7.875% notes due March 1, 2012 in the principal amount of approximately $250 million. This agreement requires all subsidiaries of CONSOL Energy that incur third-party debt to also guarantee the 7.875% notes. In addition, if CNX Gas were to grant liens to a lender as part of a future borrowing, the indenture governing the 7.875% notes requires CNX Gas to ratably secure the notes.

We believe that cash generated from operations and borrowings under our credit facility will be sufficient to meet our working capital requirements, anticipated capital expenditures (other than major acquisitions), and to provide required financial resources. Nevertheless, our ability to satisfy our working capital requirements or fund planned capital expenditures will depend upon our future operating performance, which will be affected by prevailing economic conditions in the gas industry and other financial and business factors, some of which are beyond our control.

Currently, there is an unprecedented uncertainty in the financial markets. The uncertainty in the market brings additional potential risks to CNX Gas. The risks include additional declines in our stock value, less availability and higher costs of additional credit streams, 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 could be considered take-over candidates. Although we have no indication that any such transactions would impact our current credit facility, the possibility does exist. Financial market disruptions may impact our ability to collect trade receivables. The credit worthiness of our customers is constantly monitored by CNX Gas. We believe that our current group of customers are sound and represent no abnormal business risk.

In order to manage the market risk exposure of volatile natural gas prices in the future, CNX Gas enters into various physical gas supply transactions with both gas marketers and end users for terms varying in length. CNX Gas 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 approximately $107.0 million at September 30, 2008. The ineffective portion of these contracts was insignificant to earnings in the nine months ended September 30, 2008. Hedge counterparties consists of commercial banks who participate in the revolving credit facility. These counterparties have maintained good credit profiles and no issues related to our hedge agreements have been encountered to date.

CNX Gas frequently evaluates potential acquisitions. CNX Gas has funded acquisitions primarily with cash generated from operations and proceeds from our revolving credit facility. There can be no assurance that capital resources, including debt financing, will be available to CNX Gas on terms which we find acceptable, or at all.

 

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Cash Flows (in thousands)

 

     Year to
Date 2008
    Year to
Date 2007
    Change  

Cash provided by operating activities

   $ 306,919     $ 211,075     $ 95,844  

Cash used in investing activities

   $ (404,649 )   $ (267,188 )   $ (137,461 )

Cash provided by financing activities

   $ 68,798     $ 7,343     $ 61,455  

Cash provided by operating activities increased primarily due to increased production and higher realized prices. These increases were partially offset by increased operating costs and various other working capital requirements.

Cash used in investing activities increased primarily due to the $36 million cash paid to acquire the remaining 50% interest in Knox Energy, LLC on June 24, 2008. The remaining increase in investing activities is due to higher capital expenditures which are the result of our expanded drilling program. The year-to-date 2007 period included $61 million of cash paid to acquire certain gas rights from Peabody Energy in a three way transaction. See Note 2 to the Consolidated Financial Statements for additional detail.

Cash provided by financing activities increased primarily due to the $58 million of proceeds received from the revolving credit facility in the 2008 period. There was no activity under the facility in the 2007 period. The increase was also due to the $11,984 of debt proceeds by our variable interest entity. There were $9 million of debt proceeds by our variable interest entity in the 2007 period.

Contractual Commitments

The following is a summary of our significant contractual obligations at September 30, 2008 (dollars in thousands).

 

     Within
1 Year
   1-3
Years
   3-5
Years
   More Than
5 Years
   Total

Short Term Debt Obligations—Revolver

   $ 58,200    $ —      $ —      $ —      $ 58,200

Long Term Debt Obligations

     4,404      16,430      —        —        20,834

Interest on Capital Lease Obligation

     4,836      8,226      7,193      14,767      35,022

Capital Lease Obligations

     3,159      6,535      7,568      44,832      62,094

Operating Lease Obligations

     2,447      4,061      2,828      2,530      11,866

Other Long-term Liabilities:

              

Gas Firm Transportation Obligation

     18,030      34,974      30,318      235,038      318,360

Other Liabilities

     —        —        —        14,824      14,824

Well Plugging Liabilities

     —        229      62      6,916      7,207

Pension

     —        35      91      92      218

Post Retirement Benefits

              

Other Than Pension

     118      268      374      2,254      3,014
                                  

Total Contractual Obligations (a)

   $ 91,194    $ 70,758    $ 48,434    $ 321,253    $ 531,639
                                  

 

(a) The significant obligation table does not include obligations to taxing authorities related to the uncertainty surrounding the ultimate settlement of amounts and timing of these obligations.

 

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Stockholders’ Equity

CNX Gas had stockholders’ equity of $1,268 million at September 30, 2008 and $1,023 million at December 31, 2007. The increase was primarily attributable to net income and other comprehensive income related to cash flow hedges.

Off-Balance Sheet Transactions

CNX Gas does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are likely to have a material current or future effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the notes to the consolidated financial statements.

Recent Accounting:

In May 2008, The Financial Accounting Standards Board (FASB) issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Statement 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Statement 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect this guidance to have a significant impact on CNX Gas.

In March 2008, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB statement 133” (SFAS 161). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. CNX Gas management is currently assessing the new disclosure requirements required by SFAS 161.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141R), and Statement of Financial Accounting Standards No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141R and SFAS 160 will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141R retains the fundamental requirements in Statement 141 “Business Combinations” while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests, and classified as a component of equity. These Statements become simultaneously effective January 1, 2009. Early adoption is not permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

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FORWARD-LOOKING STATEMENTS

We are including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf, of us. With the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. When we use the words “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:

 

   

our business strategy;

 

   

our financial position, cash flow, and liquidity;

 

   

declines in the prices we receive for our gas affecting our operating results and cash flow;

 

   

uncertainties in estimating our gas reserves and replacing our gas reserves;

 

   

uncertainties in exploring for and producing gas;

 

   

our inability to obtain additional financing necessary in order to fund our operations, capital expenditures and to meet our other obligations;

 

   

disruptions to, capacity constraints in or other limitations on the pipeline systems which deliver our gas;

 

   

the availability of personnel and equipment, including our inability to retain and attract key personnel;

 

   

increased costs;

 

   

the effects of government regulation and permitting and other legal requirements;

 

   

legal uncertainties relating to the ownership of the coalbed methane estate, and costs associated with perfecting title for gas rights in some of our properties;

 

   

litigation concerning real property rights, intellectual property rights, royalty calculations and other matters;

 

   

our relationships and arrangements with CONSOL Energy;

 

   

factors affecting CONSOL Energy’s coal mining operations, such as changes in the coal market, the risk inherent in coal mining and compliance with laws; and

 

   

other factors discussed under “Risk Factors” in the 10-K for the year ended December 31, 2007 and in this Form 10-Q.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to the risks inherent in our operations, CNX Gas is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding CNX Gas’ exposure to the risks of changing natural gas prices.

CNX Gas uses fixed-price contracts and derivative commodity instruments that qualify as cash-flow hedges under Statement of Financial Accounting Standards No. 133, as amended, to minimize exposure to market price volatility in the sale of natural gas. Our risk management policy strictly prohibits the use of derivatives for speculative purposes.

CNX Gas has established risk management policies and procedures to strengthen the internal control environment of the marketing of commodities produced from our asset base. All of the derivative instruments are held for purposes other than trading. They are used primarily to reduce uncertainty and volatility and cover underlying exposures. CNX Gas’ market risk strategy incorporates fundamental risk management tools to assess market price risk and establish a framework in which management can maintain a portfolio of transactions within pre-defined risk parameters.

CNX Gas believes that the use of derivative instruments, along with the risk assessment procedures and internal controls, mitigates CNX’s exposure to material risk. However, the use of derivative instruments without other risk assessment procedures could materially affect CNX Gas’ results of operations depending on interest rates or market prices. Nevertheless, we believe that use of these instruments will not have a material adverse effect on our financial position or liquidity.

For a summary of accounting policies related to derivative instruments, see Note 1 of the notes to the consolidated annual financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Sensitivity analyses of the incremental effects on future pre-tax income of a hypothetical 10% and 25% increase in natural gas prices for open derivative instruments as of September 30, 2008 are provided in the following table:

 

     Incremental decrease in pre-tax income assuming
a Hypothetical price increase of:
                     10%                                    25%                
     (In millions)

Natural Gas (1)

   $ 58.1    $ 152.4

 

(1) CNX Gas remains at risk for possible changes in the market value of these derivative instruments; however, such risk should be offset by price changes in the underlying hedged item. CNX Gas entered into derivative instruments to convert the market prices related to portions of the 2008 through 2010 anticipated sales of natural gas to fixed prices. The sensitivity analyses reflect an inverse relationship between increases in commodity prices and a benefit to earnings. As of September 30, 2008, the fair value of these contracts was a net gain of $66.3 million (net of $40.7 deferred tax). We continually evaluate the portfolio of derivative commodity instruments and adjust the strategy to anticipated market conditions and risks accordingly.

 

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Hedging Volumes

As of September 30, 2008, our hedged volumes for the periods indicated are as follows:

 

     Three months
ended March 31
   Three months
ended June 30
   Three months
ended September 30
   Three months
ended December 31
   Total
Year

2008 Fixed Price Volumes

              

Hedged Mcf

     6,097,938      11,737,113      12,804,124      12,804,124      43,443,299

Weighted Average Hedge Price/Mcf

   $ 8.39    $ 9.28    $ 9.44    $ 9.44    $ 9.25

2009 Fixed Price Volumes

              

Hedged Mcf

     10,670,103      10,631,443      10,670,103      9,884,021      41,855,670

Weighted Average Hedge Price/Mcf

   $ 9.85    $ 9.73    $ 9.74    $ 9.64    $ 9.74

2010 Fixed Price Volumes

              

Hedged Mcf

     9,278,351      7,974,227      5,082,474      479,381      22,814,433

Weighted Average Hedge Price/Mcf

   $ 9.70    $ 9.54    $ 9.70    $ 8.30    $ 9.61

CNX Gas 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 CNX Gas’ natural gas derivative instruments also participate in CNX Gas’ revolving credit facility. See Liquidity and Capital Resources section of Item 2 for further discussion of current capital markets.

CNX Gas’ interest expense is sensitive to changes in the general level of interest rates in the United States. At September 30, 2008, CNX Gas had $82,928 aggregate principal amount of debt outstanding under fixed-rate instruments and $58,200 aggregate principal amount of debt outstanding under variable-rate instruments. CNX Gas’ primary exposure to market risk is for changes in interest rates related to the revolving credit facility, under which there were $58,200 of borrowings outstanding at September 30, 2008. CNX Gas’ revolving credit facility bore interest at a weighted average rate of 3.8% per annum during the nine months ended September 30, 2008. Due to the level of borrowings against this facility in the nine months ended September 30, 2008, a 100 basis-point increase in the average rate for CNX Gas’ revolving credit facility would not have significantly decreased net income for the period.

All CNX Gas transactions are denominated in U.S. dollars, and, as a result, we do not have any exposure to currency exchange-rate risks.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

CNX Gas, under the supervision and with the participation of its management, including the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of its “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer have concluded that CNX Gas’ disclosure controls and procedures are effective as of September 30, 2008 to ensure that information required to be disclosed by CNX Gas in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting.

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The first through sixth paragraphs of Note 7—Commitments and Contingent Liabilities in the notes to the Consolidated Financial Statements included in Part I of this Form 10-Q are incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

We are adding the following risk factor to the risk factors contained in our Annual Report on Form 10-K for the period ended December 31, 2007, under the caption “Risk Factor, Risks Relating to our relationship with CONSOL Energy,” to more clearly address the risks to our business of factors affecting CONSOL Energy’s coal operations:

A significant portion of our production is associated with the coal mining operations of CONSOL Energy and any disruption to those coal mining operations will adversely impact our production and results of operations.

In 2007, approximately 27% of our gas production was produced in connection with coal extraction by CONSOL Energy; 14% of our production is associated with CONSOL Energy’s active mining operations.

CONSOL Energy’s coal mining operations can be impacted by many events, some of which are beyond CONSOL Energy’s control, including for example,

 

   

an extended decline in prices it receives for coal;

 

   

changes in the supply of and demand for coal;

 

   

the disruption of rail, barge and other systems that transport coal;

 

   

the availability of qualified personnel to work in coal operations;

 

   

work stoppages at union-represented mines;

 

   

legal proceedings brought by property owners, environmental groups, governmental authorities and others;

 

   

the risks inherent in coal mining, such as unforeseeable geological conditions, equipment failure, methane gas issues, fires, accidents and weather conditions; and

 

   

compliance with laws and government regulations, including the need to obtain government permits for mining operations, environmental laws and regulations and employee health and safety regulations.

If CONSOL Energy’s mining operations are idled or curtailed as a result of any of these factors at any coal mine where we have gas operations associated with mining operations, especially CONSOL Energy’s Buchanan Mine in southwest Virginia, our CBM production would be adversely affected and the impact could have a material adverse effect on our results of operations. For example, in 2005, 2007 and 2008, CONSOL Energy was forced to idle its Buchanan Mine due to operational and safety issues. As a result, we estimate that our total gas production was 4.0 Bcf, 3.7 Bcf and 1.3 Bcf less than it otherwise would have been in those years if the Buchanan Mine had operated at normal levels.

Further, CONSOL Energy’s coal mining activities at its Buchanan Mine require the removal of water from the mine and the ventilation of the mine. Several lawsuits and permit appeals have been filed that could affect the removal of water from the mine. Separately, a lawsuit has been filed with respect to a ventilation fan that could affect the ventilation of the mine. If operations at CONSOL Energy’s Buchanan Mine are adversely affected as a result of these legal proceedings, our gas production relating to mining activities would be adversely affected.

 

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We are revising the following risk factor contained in our Annual Report on Form 10-K for the period ended December 31, 2007, under the caption “Risk Factor, Risks Relating to our relationship with CONSOL Energy,” as follows:

Our prior and continuing relationship with CONSOL Energy exposes us to risks attributable to CONSOL Energy’s businesses.

We and CONSOL Energy are obligated to indemnify each other for certain matters as set forth in our agreements with CONSOL Energy. As a result, any claims made against us that are properly attributable to CONSOL Energy (or conversely, claims against CONSOL Energy that are properly attributable to us) in accordance with these arrangements could require us or CONSOL Energy to exercise our respective rights under the master separation agreement and the master cooperation and safety agreement. In addition, we have an agreement with CONSOL Energy that we will refrain from taking certain actions that would result in CONSOL Energy being in default under its debt instruments. Those debt instruments currently contain covenants that would be breached if we borrow from a third party unless we contemporaneously guaranteed indebtedness of CONSOL Energy under those debt instruments. In addition, those debt instruments contain covenants that would be breached by our granting liens on certain assets unless we contemporaneously grant a pari passu lien securing the indebtedness of CONSOL Energy under those debt instruments. In connection with our obtaining an unsecured credit facility with a group of commercial lenders, we guaranteed CONSOL Energy’s $250,000 7.875% notes due March 1, 2012. We are exposed to the risk that, in these circumstances, CONSOL Energy cannot, or will not, make the required payment or in turn that we are required to make a required payment to CONSOL Energy. If this were to occur, our business and financial performance could be adversely affected.

 

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ITEM 6. EXHIBITS

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
100    Form 10-Q for the quarterly period ended September 30, 2008 furnished in XBRL. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the financial information contained in the XBRL document is unaudited and these are not the official publicly filed financial statements of CNX Gas. The purpose of submitting this XBRL formatted document is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished document and not rely on this information in making investment decisions

In accordance with SEC Release 33-8238, Exhibits 32.1, 32.2 and 100 are being furnished and not filed.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

Dated: November 4, 2008

 

CNX Gas Corporation

By:

 

/s/    NICHOLAS J. DEIULIIS        

  Nicholas J. DeIuliis
  President and Chief Executive Officer
  (Duly Authorized Officer and Principal Executive Officer)

By:

 

/s/    WILLIAM J. LYONS        

  William J. Lyons
  Chief Financial Officer
  (Duly Authorized Officer and Principal Financial Officer)

 

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Table of Contents

Exhibit Index

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
100    Form 10-Q for the quarterly period ended September 30, 2008 furnished in XBRL. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the financial information contained in the XBRL document is unaudited and these are not the official publicly filed financial statements of CNX Gas. The purpose of submitting this XBRL formatted document is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished document and not rely on this information in making investment decisions

In accordance with SEC Release 33-8238, Exhibits 32.1, 32.2 and 100 are being furnished and not filed.

 

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