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CNX Gas 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7.  
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 June 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 July 18, 2008 is 150,940,111 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 six months ended June 30, 2008 and 2007

   1
 

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

   2
 

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2008

   4
 

Consolidated Statements of Cash Flows for the six months ended June 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

   17

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 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   36

ITEM 6.

 

EXHIBITS

   37


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
June 30,
   For the Six Months Ended
June 30,
     2008     2007    2008     2007

Revenue and Other Income:

         

Outside Sales

   $ 179,372     $ 112,296    $ 306,012     $ 210,393

Related Party Sales

     1,547       2,410      5,448       4,601

Royalty Interest Gas Sales

     22,515       14,484      39,019       26,666

Purchased Gas Sales

     1,647       1,317      5,186       2,476

Other Income

     728       3,161      10,757       4,871
                             

Total Revenue and Other Income

     205,809       133,668      366,422       249,007

Costs and Expenses:

         

Lifting Costs

     17,960       8,763      29,467       17,029

Gathering and Compression Costs

     20,082       16,842      35,392       31,310

Royalty Interest Gas Costs

     21,913       12,528      38,002       23,193

Purchased Gas Costs

     1,522       1,473      4,943       2,492

Other

     458       1,350      807       1,995

General and Administrative

     21,430       12,555      37,174       26,276

Depreciation, Depletion and Amortization

     16,592       11,979      32,537       24,077

Interest Expense

     1,683       1,246      3,155       2,465
                             

Total Costs and Expenses

     101,640       66,736      181,477       128,837
                             

Earnings Before Income Taxes and Minority Interest

     104,169       66,932      184,945       120,170

Minority Interest

     (217 )     —        (358 )     —  
                             

Earnings Before Income Taxes

     104,386       66,932      185,303       120,170

Income Taxes

     40,131       25,444      71,127       45,686
                             

Net Income

   $ 64,255     $ 41,488    $ 114,176     $ 74,484
                             

Earnings Per Share:

         

Basic

   $ 0.43     $ 0.27    $ 0.76     $ 0.49
                             

Dilutive

   $ 0.42     $ 0.27    $ 0.75     $ 0.49
                             

Weighted Average Number of Common Shares Outstanding:

         

Basic

     150,937,820       150,870,810      150,930,655       150,867,834
                             

Dilutive

     151,438,737       151,145,174      151,381,574       151,107,413
                             

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)

 

     (Unaudited)
June 30,
2008
   December 31,
2007

ASSETS

     

Current Assets:

     

Cash and Cash Equivalents

   $ 23,101    $ 32,048

Accounts and Notes Receivable:

     

Trade

     80,921      38,680

Related Parties

     2,843      1,022

Other Receivables

     3,289      1,406

Recoverable Income Taxes

     —        972

Deferred Income Taxes

     65,276      —  

Derivatives

     —        10,711

Other

     1,423      3,148
             

Total Current Assets

     176,853      87,987

Property, Plant and Equipment:

     

Property, Plant and Equipment

     1,759,209      1,509,060

Less—Accumulated Depreciation, Depletion and Amortization

     282,853      254,154
             

Total Property, Plant and Equipment—Net

     1,476,356      1,254,906

Other Assets:

     

Investment in Affiliates

     24,769      28,284

Other

     4,539      9,526
             

Total Other Assets

     29,308      37,810
             

TOTAL ASSETS

   $ 1,682,517    $ 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)
June 30,
2008
    December 31,
2007

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts Payable

   $ 41,768     $ 30,263

Accrued Royalties

     22,274       12,896

Accrued Severance Taxes

     5,140       2,620

Derivatives

     164,100       —  

Short-Term Notes Payable

     27,000       —  

Deferred Income Taxes

     —         1,269

Accrued Income Taxes

     2,591       —  

Current Portion of Long-Term Debt

     7,450       5,819

Other Current Liabilities

     13,009       9,817
              

Total Current Liabilities

     283,332       62,684

Long-Term Debt:

    

Long-Term Debt

     16,955       5,799

Capital Lease Obligations

     59,686       61,150
              

Total Long-Term Debt

     76,641       66,949

Deferred Credits and Other Liabilities:

    

Derivatives

     74,638       1,092

Deferred Income Taxes

     212,916       188,415

Asset Retirement Obligations

     6,740       3,981

Postretirement Benefits Other Than Pensions

     2,856       2,700

Other

     36,884       30,965
              

Total Deferred Credits and Other Liabilities

     334,034       227,153

Minority Interest

     6       680
              

Total Liabilities and Minority Interest

     694,013       357,466

Stockholders’ Equity:

    

Common Stock, $.01 par value; 200,000,000 Shares Authorized, 150,940,111 Issued and Outstanding at June 30, 2008 and 150,915,198 Issued and Outstanding at December 31, 2007

     1,509       1,509

Capital in Excess of Par Value

     787,685       785,575

Retained Earnings

     344,058       229,962

Accumulated Other Comprehensive Income (Loss)

     (144,748 )     6,191
              

Total Stockholders’ Equity

     988,504       1,023,237
              

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,682,517     $ 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

    —       —       114,176       —         114,176  

Gas Cash Flow Hedge (Net of ($96,703) tax)

    —       —       —         (150,877 )     (150,877 )

Amortization of Prior Service Costs and Actuarial Losses (Net of ($27) tax)

    —       —       —         (42 )     (42 )
                                   

Comprehensive Income (Loss)

        114,176       (150,919 )     (36,743 )

Cumulative Effect of FAS 158 Measurement Adoption (Net of ($91) tax)

    —       —       (80 )     (20 )     (100 )

Stock Options Exercised

    —       278     —         —         278  

Tax Benefit from Stock Based Compensation

    —       178     —         —         178  

Amortization of Stock Based Compensation Awards

    —       1,654     —         —         1,654  
                                   

Balance—June 30, 2008

  $ 1,509   $ 787,685   $ 344,058     $ (144,748 )   $ 988,504  
                                   

 

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 Six Months Ended
June 30,
 
     2008     2007  

Operating Activities:

    

Net Income

   $ 114,176     $ 74,484  

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

    

Depreciation, Depletion and Amortization

     32,537       24,077  

Stock-based Compensation

     1,654       1,584  

Change in Minority Interest

     (358 )     —    

Deferred Income Taxes

     53,988       28,275  

Equity in Earnings of Affiliates

     (116 )     (403 )

Changes in Operating Assets:

    

Accounts Receivable

     (41,155 )     4,577  

Related Party Receivable

     (1,821 )     1,204  

Other Current Assets

     990       1,847  

Changes in Other Assets

     4,506       2,174  

Changes in Operating Liabilities:

    

Accounts Payable

     (1,951 )     (9,326 )

Income Taxes

     3,563       6,722  

Other Current Liabilities

     15,002       2,893  

Changes in Other Liabilities

     6,070       1,824  

Other

     (306 )     672  
                

Net Cash Provided by Operating Activities

     186,779       140,604  
                

Investing Activities:

    

Capital Expenditures

     (199,806 )     (131,415 )

Acquisition of Knox Energy

     (36,000 )     —    

Acquisition of Mineral Rights

     —         (60,488 )

Investment in Equity Affiliates

     1,081       (786 )

Proceeds From Sales of Assets

     450       40  
                

Net Cash Used in Investing Activities

     (234,275 )     (192,649 )
                

Financing Activities:

    

Capital Lease Payments

     (1,360 )     (1,263 )

Proceeds from Variable Interest Entity Debt

     12,453       5,973  

Proceeds from Short-Term Borrowings

     27,000       —    

Exercise of Stock Options

     278       164  

Tax Benefit from Stock Based Compensation

     178       26  
                

Net Cash Provided by Financing Activities

     38,549       4,900  
                

Net Decrease in Cash and Cash Equivalents

     (8,947 )     (47,145 )

Cash and Cash Equivalents at Beginning of Period

     32,048       107,173  
                

Cash and Cash Equivalents at End of Period

   $ 23,101     $ 60,028  
                

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

 

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Table of Contents

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 six months ended June 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 six months ended June 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 2,000 shares and 477,306 shares of common stock were outstanding for the three month period ended June 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 480,065 shares of common stock were outstanding for the six month period ended June 30, 2008 and 2007, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Additionally, 20,823 shares of outstanding restricted stock units for the six month period ending June 30, 2007 were not included in the computation of dilutive earnings per share because the effect would be antidilutive.

There were 1,525 options and 5,556 options exercised during the three months ended June 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the three months ended June 30, 2008 and 2007 was $17.93 and $16.00, respectively. There were 17,298 shares and 9,306 shares of options exercised during the six months ended June 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the six months ended June 30, 2008 and 2007 was $16.17 and $16.73, respectively.

 

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

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2008    2007    2008    2007

Net Income

   $ 64,255    $ 41,488    $ 114,176    $ 74,484
                           

Average shares of common stock outstanding:

           

Basic

     150,937,820      150,870,810      150,930,655      150,867,834

Effect of stock-based compensation

     500,917      274,364      450,919      239,579
                           

Dilutive

     151,438,737      151,145,174      151,381,574      151,107,413
                           

Earnings per share:

           

Basic

   $ 0.43    $ 0.27    $ 0.76    $ 0.49
                           

Dilutive

   $ 0.42    $ 0.27    $ 0.75    $ 0.49
                           

Note 2—Significant Acquisitions:

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 are not significant to CNX Gas’ financial results.

In June 2007, CNX Gas entered into a three-way transaction with Peabody Energy and 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 $6,770, 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 $488 of miscellaneous acquisition costs. Subsequent to June 30, 2007, $1,289 of additional acquisition costs were paid. This acreage has no proved gas reserves.

Note 3—Pension and Other Postretirement Benefits:

The components of net periodic benefit costs are as follows:

 

    Pension Benefits     Other Benefits  
    Three Months Ended
June 30,
    Six Months Ended
June 30,
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
        2008             2007             2008             2007             2008             2007             2008             2007      

Services cost

  $ 81     $ 65     $ 161     $ 130     $ 33     $ 31     $ 66     $ 62  

Interest cost

    10       3       20       6       46       35       92       70  

Expected return on assets

    (6 )     —         (12 )     1       —         —         —         —    

Amortization of prior service costs credit

    —         —         —         —         (43 )     (43 )     (86 )     (86 )

Amortization of (gain) loss

    —         (6 )     —         (12 )     9       5       18       10  
                                                               

Benefit costs

  $ 85     $ 62     $ 169     $ 125     $ 45     $ 28     $ 90     $ 56  
                                                               

 

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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 six months ended June 30, 2008, there were $82 and $126 in contributions made pursuant to the pension plan. CNX Gas presently anticipates contributing a total of $600 to the pension trust in 2008.

As previously discussed in the notes to its audited consolidated financial statements for the year ended December 31, 2007, 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 six months ended June 30, 2008, $27 and $77 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 Six Months Ended June 30,  
     2008     2007  
     Amount     Percent     Amount     Percent  

Statutory U.S. federal income tax rate

   $ 64,856     35.0 %   $ 42,060     35.0 %

Net effect of state income taxes

     7,323     4.0       4,733     3.9  

Other

     (1,052 )   (0.6 )     (1,107 )   (0.9 )
                            

Income Tax Expense / Effective Rate

   $ 71,127     38.4 %   $ 45,686     38.0 %
                            

CNX Gas Corporation 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 June 30, 2008 and June 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.

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 June 30, 2008 and June 30, 2007, the Company had accrued interest of approximately $339 and $131, respectively, for interest related to uncertain tax positions. The accrued liabilities for the six months ended June 30, 2008 and 2007 include $157 and $38, respectively, of interest expense recorded in the Company’s statements of operations related to unrecognized tax benefits.

 

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

Note 5—Property, Plant and Equipment:

 

     June 30,
2008
    December 31,
2007
 

Leasehold Improvements

   $ 1,351     $ 1,351  

Proved Properties

     198,998       125,118  

Unproved Properties

     75,249       81,078  

Wells and Related Equipment

     192,196       166,468  

Intangible Drilling

     620,921       531,098  

Gathering Assets

     660,239       596,171  

Asset Retirement Obligations

     3,288       1,035  

Capitalized Internal Software

     6,967       6,741  
                

Total Property, Plant and Equipment

     1,759,209       1,509,060  

Amortization

     (282,853 )     (254,154 )
                

Property, Plant and Equipment, net

   $ 1,476,356     $ 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, whereas CNX Gas assets cannot be used to secure other obligations. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Covenants in the facility limit CNX Gas’ ability to dispose of assets, make investments, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. The facility includes a maximum leverage ratio covenant of not more than 3.00 to 1.00, measured quarterly. The leverage ratio was 0.24 to 1.00 at June 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 72.65 to 1.00 at June 30, 2008. At June 30, 2008, the CNX Gas credit agreement had $27,000 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $158,067 of capacity available for borrowings and the issuance of letters of credit.

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). 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. The court stayed the portion of its order that required GeoMet to remove its pipeline, pending GeoMet’s appeal of the decision to the Virginia Supreme Court. GeoMet

 

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filed an emergency appeal to the Virginia Supreme Court, which on June 20, 2007, overturned the provision of the circuit court’s order requiring GeoMet to remove its pipeline, as well as the related stay and the conditions thereof. The remaining portions of the May 23, 2007 order have been certified for interlocutory appeal to the Virginia Supreme Court and the appeal is pending in the Virginia Supreme Court. Pocahontas Mining has amended its complaint to seek rescission or reformation of the lease. We cannot predict the ultimate outcome of this litigation; however, it is reasonably possible that payments in the future with respect to this lawsuit may be material to the financial position, results of operations or cash flows of CNX Gas.

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. 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 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 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

 

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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.

In November 2005, we filed a complaint for declaratory judgment in the U.S. District Court for the Western District of Pennsylvania (C.A. No. 05-1574) against CDX Gas, LLC, seeking a judicial determination that we do not infringe any claim of any valid and enforceable CDX patent relating to certain vertical to horizontal CBM drilling methods. CDX filed an answer and counterclaim denying our allegations of invalidity and alleging that we infringe certain claims of their patents. On June 2, 2008, CNX Gas and CDX announced that they had settled this litigation. As part of the settlement, CNX Gas affirmed the validity and enforceability of the patents at issue in the litigation and CNX Gas licensed the CDX technology from CDX. The settlement did not require CNX Gas to pay CDX any cash consideration for CNX Gas' prior drilling activities. The pending litigation was dismissed with prejudice. The parties have agreed to enter into joint venture arrangements with respect to several properties.

At June 30, 2008, CNX Gas has provided the following financial guarantees and letters of credit to certain third parties. 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. The fair value of all liabilities associated with these guarantees has been properly recorded and reported in the financial statements.

 

     Total
Amounts
Committed
   Less
Than

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

Letters of Credit

   $ 14,933    $ 152    $ 14,781    $ —      $ —  

Surety Bonds:

              

Environmental

   $ 1,375    $ 1,375    $ —      $ —      $ —  

Other

     1,951      1,915      36      —        —  
                                  

Total Surety Bonds

   $ 3,326    $ 3,290    $ 36    $ —      $ —  

Other:

              

Guarantees

   $ 28,904    $ 28,904    $ —      $ —      $ —  
                                  

Total Commitments

   $ 47,163    $ 33,346    $ 14,817    $ —      $ —  
                                  

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.

 

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Note 8—Comprehensive Income:

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Net Income

   $ 64,255     $ 41,488     $ 114,176     $ 74,484  

Amortization of prior service costs and actuarial losses

     (20 )     (25 )     (42 )     (53 )

Gas Cash Flow Hedge

     (101,702 )     10,357       (150,877 )     (1,326 )
                                

Total comprehensive (loss) income

   $ (37,467 )   $ 51,820     $ (36,743 )   $ 73,105  
                                

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 liabilities measured at fair value on a recurring basis are summarized below:

 

     Fair Value Measurements at June 30, 2008

Description

   Quoted Prices in Active
Markets for Identical
Liabilities (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Gas Cash Flow Hedges

   $ —      $ 238,738    $ —  

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.

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

 

     June 30, 2008     December 31, 2007  
     Carrying
Amounts
    Fair
Value
    Carrying
Amounts
    Fair
Value
 

Cash and cash equivalents

   $ 23,101     $ 23,101     $ 32,048     $ 32,048  

Short-term note payable

   $ (27,000 )   $ (27,000 )   $ —       $ —    

Long-term debt

   $ (21,303 )   $ (17,633 )   $ (8,850 )   $ (7,951 )

 

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Note 10—Variable Interest:

In prior years, 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. Therefore, CNX Gas has consolidated the contractor into the Consolidated Financial Statements. At June 30, 2008, the contractor has a carrying value of property, plant & equipment of $19,754 and total assets of $24,196, with related debt of $21,303 and total liabilities of $22,049.

Note 11—Segment Information:

The principal activity of CNX Gas is to produce methane gas for sale primarily to gas wholesalers. In the current period, 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 (plays). For the three and six months ended June 30, 2008, the Central Appalachia segment includes the following plays: Virginia Operations, Cardinal States Gathering, Hokie, Knox Energy and Bluegrass. For the three and six months ended June 30, 2008 the Northern Appalachia segment includes the following plays: 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 play. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses.

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

 

     Central
Appalachia
   Northern
Appalachia
    Other    Total Gas    Corporate     Consolidated

Sales—outside

   $ 149,593    $ 29,669     $ 110    $ 179,372    $ —       $ 179,372

Sales—related parties

     1,541      6       —        1,547      —         1,547

Sales—royalty interest gas

     23,565      (1,050 )     —        22,515      —         22,515

Sales—purchased gas

     1,647      —         —        1,647      —         1,647

Other revenue

     237      43       450      730      (2 )     728
                                           

Total Revenue and Other Income

   $ 176,583    $ 28,668     $ 560    $ 205,811    $ (2 )   $ 205,809
                                           

Earnings Before Income Taxes (A)

   $ 97,714    $ 14,445     $ 198    $ 112,357    $ (7,971 )   $ 104,386
                                           

Segment assets

   $ 1,153,157    $ 341,228     $ 74,965    $ 1,569,350    $ 113,167     $ 1,682,517
                                           

Depreciation, depletion and amortization

   $ 14,211    $ 2,370     $ 11    $ 16,592    $ —       $ 16,592
                                           

Capital expenditures

   $ 84,579    $ 63,258     $ 1,417    $ 149,254    $ —       $ 149,254
                                           

 

(A) Includes equity in earnings (loss) of unconsolidated affiliates of $90 for Central Appalachia.

 

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

 

    Central
Appalachia
  Northern
Appalachia
    Other     Total Gas   Corporate     Consolidated

Sales—outside

  $ 106,568   $ 5,722     $ 6     $ 112,296   $ —       $ 112,296

Sales—related parties

    2,392     18       —         2,410     —         2,410

Sales—royalty interest gas

    14,446     38       —         14,484     —         14,484

Sales—purchased gas

    1,317     —         —         1,317     —         1,317

Other revenue

    2,324     —         35       2,359     802       3,161
                                         

Total Revenue and Other Income

  $ 127,047   $ 5,778     $ 41     $ 132,866   $ 802     $ 133,668
                                         

Earnings Before Income Taxes (B)

  $ 73,330   $ (2,843 )   $ (694 )   $ 69,793   $ (2,861 )   $ 66,932
                                         

Segment assets (C)

  $ 978,984   $ 132,460     $ 64,566     $ 1,176,010   $ 84,528     $ 1,260,538
                                         

Depreciation, depletion and amortization

  $ 10,536   $ 1,443     $ —       $ 11,979   $ —       $ 11,979
                                         

Capital expenditures

  $ 41,185   $ 27,181     $ 66,002     $ 134,368   $ —       $ 134,368
                                         

 

(B) Includes equity in earnings (loss) of unconsolidated affiliates of $303 for Central Appalachia.
(C) Includes investments in unconsolidated affiliates of $28,972 for Central Appalachia.

Reportable segment results for the six months ended June 30, 2008 are:

 

    Central
Appalachia
  Northern
Appalachia
    Other   Total Gas   Corporate     Consolidated

Sales—outside

  $ 260,725   $ 45,128     $ 159   $ 306,012   $ —       $ 306,012

Sales—related parties

    5,428     20       —       5,448     —         5,448

Sales—royalty interest gas

    39,832     (813 )     —       39,019     —         39,019

Sales—purchased gas

    5,186     —         —       5,186     —         5,186

Other revenue

    9,493     44       1,088     10,625     132       10,757
                                       

Total Revenue and Other Income

  $ 320,664   $ 44,379     $ 1,247   $ 366,290   $ 132     $ 366,422
                                       

Earnings Before Income Taxes (D)

  $ 177,421   $ 19,447     $ 507   $ 197,375   $ (12,072 )   $ 185,303
                                       

Segment assets

  $ 1,153,157   $ 341,228     $ 74,965   $ 1,569,350   $ 113,167     $ 1,682,517
                                       

Depreciation, depletion and amortization

  $ 27,759   $ 4,767     $ 11   $ 32,537   $ —       $ 32,537
                                       

Capital expenditures

  $ 120,459   $ 111,962     $ 3,385   $ 235,806   $ —       $ 235,806
                                       

 

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

 

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Reportable segment results for the six months ended June 30, 2007 are:

 

     Central
Appalachia
   Northern
Appalachia
    Other     Total Gas    Corporate     Consolidated

Sales—outside

   $ 198,431    $ 11,956     $ 6     $ 210,393    $ —       $ 210,393

Sales—related parties

     4,571      30       —         4,601      —         4,601

Sales—royalty interest gas

     26,593      73       —         26,666      —         26,666

Sales—purchased gas

     2,476      —         —         2,476      —         2,476

Other revenue

     2,361      —         35       2,396      2,475       4,871
                                            

Total Revenue and Other Income

   $ 234,432    $ 12,059     $ 41     $ 246,532    $ 2,475     $ 249,007
                                            

Earnings Before Income Taxes (E)

   $ 128,564    $ (3,462 )   $ (726 )   $ 124,376    $ (4,206 )   $ 120,170
                                            

Segment assets (F)

   $ 978,984    $ 132,460     $ 64,566     $ 1,176,010    $ 84,528     $ 1,260,538
                                            

Depreciation, depletion and amortization

   $ 21,173    $ 2,904     $ —       $ 24,077    $ —       $ 24,077
                                            

Capital expenditures

   $ 79,741    $ 44,227     $ 67,935     $ 191,903    $ —       $ 191,903
                                            

 

(E) Includes equity in earnings (loss) of unconsolidated affiliates of $663 for Central Appalachia.
(F) Includes investments in unconsolidated affiliates of $28,972 for Central Appalachia.

Reconciliation of Segment Information to Consolidated Amounts

Earnings Before Income Taxes:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2008     2007     2008     2007  

Segment earnings before income taxes for total reportable business segments

   $ 112,357     $ 69,793     $ 197,375     $ 124,376  

Equity in earnings (losses) of Buchanan Generation

     (84 )     (163 )     (107 )     (259 )

Incentive Compensation

     (2,500 )     (723 )     (3,503 )     (1,484 )

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

     (3,754 )     (1,790 )     (5,406 )     (3,067 )

Bank fees

     (295 )     (237 )     (545 )     (479 )

Interest income (expense), net

     (1,338 )     52       (2,511 )     1,083  
                                

Earnings before income taxes

   $ 104,386     $ 66,932     $ 185,303     $ 120,170  
                                

Total Assets:

 

     June 30,
     2008    2007

Segment assets for total reportable business segments

   $ 1,569,350    $ 1,176,010

Items excluded from segment assets:

     

Cash and other investments

     23,122      60,028

Deferred Income Taxes

     65,276      —  

Investment in Buchanan Generation

     24,769      24,500
             

Total Consolidated Assets

   $ 1,682,517    $ 1,260,538
             

 

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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.

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

During the second 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 nearly 3.1 million hours, with the 3 million mark having been passed in May.

Gas production was 18.8 billion cubic feet (Bcf), or 206.5 million cubic feet (MMcf) per day, for the three months ended June 30, 2008. This was 26% higher than the 14.9 Bcf, or 163.6 MMcf per day, for the three months ended June 30, 2007.

Virginia CBM Operations achieved record production in the quarter. CNX Gas drilled 84 wells in its Virginia CBM Operations in the second quarter, excluding gob wells. For the first six months 158 wells were drilled. Virginia Operations also conducted an aggressive workover program to increase production from its existing wells. 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.

Mountaineer CBM Operations achieved record production in the quarter. CNX Gas drilled 29 wells during the quarter in this Northern Appalachia play. For the first six months, 52 wells were drilled. A gas processing facility at Greene Hill came online during the quarter, enabling the company to increase sales volumes. CNX Gas expects to drill 100 horizontal wells in Mountaineer in 2008.

Nittany CBM Operations achieved record production in the quarter. CNX Gas drilled 35 wells in the second quarter in this west-central Pennsylvania play and 46 wells in the first six months. CNX Gas acquired an additional 8,000 net acres in Nittany this quarter, raising the total position to 256,000 acres. CNX Gas expects to drill approximately 100 wells in Nittany in 2008.

CNX Gas expects to begin drilling exploration wells in its Illinois Basin CBM acreage in the second half of the year.

CNX Gas achieved additional exploration success in the Chattanooga Shale in Tennessee during the second quarter. CNX Gas drilled four follow-up wells to the initial exploration well, which as previously reported, achieved an open flow of 3.9 MMcf per day. This well is currently producing at 265 Mcf per day. One well was an offset to the initial well. The other three were exploration wells, as CNX Gas tested several areas across its acreage. Two of the exploration wells have been turned in line and are producing at 450-460 Mcf per day. The remaining two exploration wells are in various stages of clean up. CNX Gas plans to drill about a ten additional wells in the Chattanooga Shale this year, while the company formulates its plans for 2009 and beyond.

CNX Gas increased its Chattanooga Shale acreage position from 132,000 net acres to 235,000 net acres. This was accomplished primarily by buying out its 50% partner in Knox Energy, LLC and acquiring several additional leasehold acquisitions. CNX Gas now has a leading acreage position in the Chattanooga Shale. CNX Gas is the operator of all of its horizontal Chattanooga Shale wells.

 

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During the second quarter, CNX Gas also began drilling in its Marcellus Shale acreage in southwestern Pennsylvania. The first Marcellus well was drilled to a depth of about 8,000 feet. Shale thickness is 80 feet. The well was drilled as a vertical well, at an estimated cost of $1.3 million. The well was stimulated with a single-stage water frac.

CNX Gas has chosen to drill its Marcellus Shale acreage directly beneath its Mountaineer CBM operations, where it already has a gas gathering system. CNX Gas is currently able to avoid processing costs by blending shale gas with its CBM production. The company is currently drilling two Marcellus Shale wells at nearby locations. The company acquired an additional 24,000 net acres of Marcellus Shale in southwestern Pa. and northern West Virginia so far this year, raising the total position to 185,000 acres.

CNX Gas has drilled one horizontal well in the Huron Shale in eastern Kentucky. CNX Gas has 198,000 net acres in the Huron Shale.

CNX Gas drilled an exploratory shallow oil well on its Illinois Basin conventional acreage. The well did not penetrate the New Albany Shale, but has produced over 1,000 bbls of oil from shallower formations. The company will be drilling offsets in the third quarter on this property, acquired last year from Peabody Energy.

CNX Gas has entered into precedent agreements with several interstate gas pipeline companies for the acquisition of approximately 114,000 dekatherms per day of firm transportation capacity at negotiated rates, to transport current and future forecasted production within the Appalachian Basin to market once agreed upon expansions are completed by the gas pipeline companies. We expect to enter into firm transportation contracts upon completion of the related expansion projects, which is expected to occur between December 1, 2008 and November 1, 2009.

CNX Gas has completed the independent verification process for several Chicago Climate Exchange (CCX) approved projects relating to the capture of coal mine methane. Approximately 8.4 million metric tons of emission offsets were verified and registered for trading on the CCX in the three months ended June 30, 2008. CCX is a rules-based Greenhouse Gas (GhG) allowance trading system. CCX emitting members make a voluntary but legally binding commitment to meet annual GhG emission reduction targets. Those emitting members who exceed their targets have surplus allowances to sell or bank; those who fall short of their targets comply by purchasing offsets which are called CCX Carbon Financial Instruments (CFI) contracts. As a CCX offset provider, CNX Gas is not bound to any emission reduction targets. An offset provider is an owner of an offset project that registers and sells offsets on its own behalf. Sales of these emission offsets will be reflected in income as they occur. To date, no offsets have been sold.

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.

 

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Results of Operations

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

(Amounts reported in thousands)

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

   $ 179,372     $ 112,296    $ 67,076     59.7 %

Related Party Sales

     1,547       2,410      (863 )   (35.8 )%

Royalty Interest Gas Sales

     22,515       14,484      8,031     55.4 %

Purchased Gas Sales

     1,647       1,317      330     25.1 %

Other Income

     728       3,161      (2,433 )   (77.0 )%
                         

Total Revenue and Other Income

     205,809       133,668      72,141     54.0 %

Costs and Expenses:

         

Lifting Costs

     17,960       8,763      9,197     105.0 %

Gathering and Compression Costs

     20,082       16,842      3,240     19.2 %

Gas Royalty Interest Costs

     21,913       12,528      9,385     74.9 %

Purchased Gas Costs

     1,522       1,473      49     3.3 %

Other

     458       1,350      (892 )   (66.1 )%

General and Administrative

     21,430       12,555      8,875     70.7 %

Depreciation, Depletion and Amortization

     16,592       11,979      4,613     38.5 %

Interest Expense

     1,683       1,246      437     35.1 %
                         

Total Costs and Expenses

     101,640       66,736      34,904     52.3 %

Earnings Before Income Taxes and Minority Interest

     104,169       66,932      37,237     55.6 %

Minority Interest

     (217 )     —        (217 )   100.0 %
                         

Earnings Before Income Taxes

     104,386       66,932      37,454     56.0 %

Income Tax Expense

     40,131       25,444      14,687     57.7 %
                         

Net Income

   $ 64,255     $ 41,488    $ 22,767     54.9 %
                         

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

   $ 179,372    $ 112,296    $ 67,076     59.7 %

Related Party Sales

     1,547      2,410      (863 )   (35.8 )%

Royalty Interest Gas Sales

     22,515      14,484      8,031     55.4 %

Purchased Gas Sales

     1,647      1,317      330     25.1 %

Other Income

     728      3,161      (2,433 )   (77.0 )%
                        

Total Revenue and Other Income

   $ 205,809    $ 133,668    $ 72,141     54.0 %
                        

 

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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)

     18.8      14.8      4.0    27.0 %

Average Sales Price Per thousand cubic feet

   $ 9.63    $ 7.74    $ 1.89    24.4 %

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 11.7 Bcf of our produced gas sales volumes for the three months ended June 30, 2008 at an average price of $9.28 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)

     1.9      1.9      —      —    

Average Sales Price Per thousand cubic feet

   $ 11.99    $ 7.82    $ 4.17    53.3 %

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 contribute to the period-to-period change.

 

     2008
Period
   2007
Period
   Variance     Percentage
Change
 

Purchased Sales Volumes (in billion cubic feet)

     0.1      0.2      (0.1 )   (50.0 )%

Average Sales Price Per thousand cubic feet

   $ 12.36    $ 7.26    $ 5.10     70.2 %

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

Other income consists of the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
    Percentage
Change
 

Third-party gathering revenue

   $ 76    $ 1,581    $ (1,505 )   (95.2 )%

Interest income

     84      1,297      (1,213 )   (93.5 )%

Other miscellaneous

     568      283      285     100.7 %
                        

Total Other Income

   $ 728    $ 3,161    $ (2,433 )   (77.0 )%
                        

Third-party gathering revenue decreased $1,505 in the 2008 period due primarily to lower third party volumes being transported on CNX Gas gathering lines.

Interest income decreased $1,213 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 the June 2007 acquisition of Peabody’s oil and gas interests, as well as additional capital expenditures related to the expanded drilling program.

Other miscellaneous income increased $285 in the period-to-period comparison due to various transactions throughout both periods, none of which are individually significant.

 

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Table of Contents

Costs and Expenses

Costs and Expenses increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
    Percentage
Change
 

Lifting Costs

   $ 17,960    $ 8,763    $ 9,197     105.0 %

Gathering and Compression Costs

     20,082      16,842      3,240     19.2 %

Gas Royalty Interest Costs

     21,913      12,528      9,385     74.9 %

Purchased Gas Costs

     1,522      1,473      49     3.3 %

Other

     458      1,350      (892 )   (66.1 )%

General and Administrative

     21,430      12,555      8,875     70.7 %

Depreciation, Depletion and Amortization

     16,592      11,979      4,613     38.5 %

Interest Expense

     1,683      1,246      437     35.1 %
                        

Total Costs and Expenses

   $ 101,640    $ 66,736    $ 34,904     52.3 %
                        

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)

     18.8      14.8      4.0    27.0 %

Average Lifting Costs Per thousand cubic feet

   $ 0.96    $ 0.59    $ 0.37    62.7 %

Average unit lifting costs increased in the 2008 period as a result of several factors. Well closing liabilities were adjusted in the 2007 period to reflect longer well lives than were previously estimated. This adjustment resulted in a reduction to expense. The adjustments to the well closing liabilities were insignificant in the 2008 period. Also, severance taxes, which are included in lifting costs, have increased due to the higher average sales prices. Service and maintenance costs per unit have also increased in the period-to-period comparison due to additional work on existing wells in order to increase future production. Water disposal costs have also increased due to additional volumes of water produced by CNX Gas wells.

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

 

     2008
Period
   2007
Period
   Variance     Percentage
Change
 

Produced Gas Sales Volumes (in billion cubic feet)

     18.8      14.8      4.0     27.0 %

Average Gathering Costs Per thousand cubic feet

   $ 1.07    $ 1.14    $ (0.07 )   (6.1 )%

The decrease in average gathering and compression unit costs was attributable to lower maintenance costs per unit and lower firm transportation costs per unit. Dollars spent for maintenance and firm transportation have remained consistent in the period-to-period comparison; therefore, additional volumes gathered and transported have lowered the related unit costs for these components. These improvements in unit costs were offset, in part, by higher compression expenses and higher fuel charges related to additional compressors being placed in service along the existing gathering systems in order to flow gas more efficiently.

 

     2008
Period
   2007
Period
   Variance    Percentage
Change
 

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     1.9      1.9      —      —    

Average Cost Per thousand cubic feet

   $ 11.67    $ 6.76    $ 4.91    72.6 %

 

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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 contribute to the year to date period-to-period change.

 

     2008
Period
   2007
Period
   Variance     Percentage
Change
 

Purchased Sales Volumes (in billion cubic feet)

     0.1      0.2      (0.1 )   (50.0 )%

Average Cost Per thousand cubic feet

   $ 10.62    $ 6.58    $ 4.04     61.4 %

Purchased gas sales volumes represent volumes of gas purchased from third-party producers that we sell. The higher average cost per Mcf is due to overall price increases and contractual differences among customers in the period-to-period comparison.

Other costs and expenses decreased due to the following items:

 

     2008
Period
   2007
Period
    Dollar
Variance
    Percentage
Change
 

Exploration

   $ 458    $ 1,533     $ (1,075 )   (70.1 )%

Imbalance

     —        (183 )     183     (100.0 )%
                         

Total Other Costs and Expenses

   $ 458    $ 1,350     $ (892 )   (66.1 )%
                         

Exploration costs decreased primarily as a result of expenses related to core hole drilling in the 2007 period which did not occur in the 2008 period. Decreased exploration costs were also the result of lower broker fees in the current year as compared to the prior year. Lower broker fee expenses in 2008 were the result of more land deals being completed successfully than in the 2007 period; therefore, these costs were capitalized versus expensed.

The pipeline imbalance is now included in either outside sales or purchased gas costs depending on our delivery position into the transmission pipelines. The prior year imbalance amount was insignificant, and therefore was not reclassified.

General and Administrative expenses increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
   Percentage
Change
 

Professional services

   $ 5,251    $ 3,082    $ 2,169    70.4 %

Stock-based compensation

     3,754      1,789      1,965    109.8 %

Short-term incentive compensation

     2,500      723      1,777    245.8 %

Wages and salaries

     4,256      3,127      1,129    36.1 %

Other miscellaneous

     5,669      3,834      1,835    47.9 %
                       

Total General and Administrative

   $ 21,430    $ 12,555    $ 8,875    70.7 %
                       

Professional services have increased 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.

Stock-based compensation has increased primarily due to the performance share program additional costs. These additional costs are related to the increase in the market price of CNX Gas common stock in the 2008 period.

 

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Table of Contents

The 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 $1,777 in the period-to-period comparison due to improved performance relative to targets.

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

The increase 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

   $ 11,479    $ 7,214    $ 4,265    59.1 %

Gathering

     4,829      4,519      310    6.9 %

Other

     284      246      38    15.4 %
                       

Total Depreciation, Depletion and Amortization

   $ 16,592    $ 11,979    $ 4,613    38.5 %
                       

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 due to additional assets placed in service after the 2007 period.

Other depreciation is related to various other corporate assets placed in service after the 2007 period, none of which are individually significant.

Interest expense increased due to the following items:

 

     2008
Period
   2007
Period
   Dollar
Variance
    Percentage
Change
 

Variable interest entity

   $ 263    $ —      $ 263     100.0 %

Deferred payment

     83      —        83     100.0 %

Revolver

     58      —        58     100.0 %

Unrecognized tax benefits

     95      38      57     100.0 %

Capitalized lease

     1,159      1,208      (49 )   (4.1 )%

Other

     25      —        25     100.0 %
                        

Total Interest Expense

   $ 1,683    $ 1,246    $ 437     35.1 %
                        

Our variable interest entity incurred debt during the 2008 period which correspondingly increased the related interest expense.

The accretion of a deferred payment related to the June 2007 Peabody acreage acquisition caused interest expense to increase.

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.

 

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Interest on unrecognized tax benefits increased due primarily to a slight increase in the uncertain tax liability balance in the 2008 period.

Interest on capitalized leases decreased in the period-to-period comparison primarily related to lower outstanding principal due to scheduled payments.

Minority Interest

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

Income Taxes

 

     2008
Period
    2007
Period
    Variance     Percentage
Change
 

Earnings Before Income Taxes

   $ 104,386     $ 66,932     $ 37,454     56.0 %

Tax Expense

   $ 40,131     $ 25,444     $ 14,687     57.7 %

Effective Income Tax Rate

     38.4 %     38.0 %     0.4 %  

CNX Gas’ effective tax rate remained consistent in the period-to-period comparison.

Six Months Ended June 30, 2008 compared with Six Months Ended June 30, 2007

(Amounts reported in thousands)

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

   $ 306,012     $ 210,393    $ 95,619     45.4 %

Related Party Sales

     5,448       4,601      847     18.4 %

Royalty Interest Gas Sales

     39,019       26,666      12,353     46.3 %

Purchased Gas Sales

     5,186       2,476      2,710     109.5 %

Other Income

     10,757       4,871      5,886     120.8 %
                         

Total Revenue and Other Income

     366,422       249,007      117,415     47.2 %

Costs and Expenses:

         

Lifting Costs

     29,467       17,029      12,438     73.0 %

Gathering and Compression Costs

     35,392       31,310      4,082     13.0 %

Gas Royalty Interest Costs

     38,002       23,193      14,809     63.9 %

Purchased Gas Costs

     4,943       2,492      2,451     98.4 %

Other

     807       1,995      (1,188 )   (59.5 )%

General and Administrative

     37,174       26,276      10,898     41.5 %

Depreciation, Depletion and Amortization

     32,537       24,077      8,460     35.1 %

Interest Expense

     3,155       2,465      690     28.0 %
                         

Total Costs and Expenses

     181,477       128,837      52,640     40.9 %
                         

Earnings Before Income Taxes and Minority Interest

     184,945       120,170      64,775     53.9 %

Minority Interest

     (358 )     —        (358 )   100.0 %
                         

Earnings Before Minority Interest

     185,303       120,170      65,133     54.2 %

Income Taxes

     71,127       45,686      25,441     55.7 %
                         

Net Income

   $ 114,176     $ 74,484    $ 39,692     53.3 %
                         

 

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Table of Contents

Net income for the six months ended June 30, 2008 was higher than the six months ended June 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
 

Outside Sales

   $ 306,012    $ 210,393    $ 95,619    45.4 %

Related Party Sales

     5,448      4,601      847    18.4 %

Royalty Interest Gas Sales

     39,019      26,666      12,353    46.3 %

Purchased Gas Sales

     5,186      2,476      2,710    109.5 %

Other Income

     10,757      4,871      5,886    120.8 %
                       

Total Revenue and Other Income

   $ 366,422    $ 249,007    $ 117,415    47.2 %
                       

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)

     34.7      29.1      5.6    19.2 %

Average Sales Price Per thousand cubic feet

   $ 8.99    $ 7.40    $ 1.59    21.5 %

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 17.8 Bcf of our produced gas sales volumes for the six months ended June 30, 2008 at an average price of $8.97 per Mcf. In the prior year, these financial hedges represented approximately 7.9 Bcf at an average price of $7.91 per Mcf. Sales volumes increased as a result of additional wells coming online from our on-going drilling program, offset, in part, by the deferral of active and sealed gob production related to the CONSOL Energy’s idling of the Buchanan Mine through mid-March 2008.

 

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

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     3.8      3.7      0.1    2.7 %

Average Sales Price Per thousand cubic feet

   $ 10.29    $ 7.22    $ 3.07    42.5 %

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 contribute to the year to date period-to-period change.

 

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

Purchased Sales Volumes (in billion cubic feet)

     0.6      0.3      0.3    100.0 %

Average Sales Price Per thousand cubic feet

   $ 8.94    $ 7.20    $ 1.74    24.2 %

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

 

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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

   $ 8,000    $ —      $ 8,000     100.0 %

Timber income

     768      80      688     860.0 %

Legal settlement

     650      —        650     100.0 %

Third-party gathering revenue

     159      1,617      (1,458 )   (90.2 )%

Interest income

     242      2,734      (2,492 )   (91.1 )%

Other miscellaneous

     938      440      498     113.2 %
                        

Total other income

   $ 10,757    $ 4,871    $ 5,886     120.8 %
                        

CNX Gas received $8,000 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 $8,000 represents business interruption coverage.

Timber income increased 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 $650 of income.

Third-party gathering revenue decreased $1,458 in the year to date 2008 period due primarily to lower third-party volumes being transported on CNX Gas gathering lines.

Interest income decreased $2,492 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, as well as additional capital expenditures related to the expanded drilling program.

Other miscellaneous income increased $498 in the year to date period-to-period comparison due to various transactions throughout both periods, none of which are individually significant.

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
 

Lifting Costs

   $ 29,467    $ 17,029    $ 12,438     73.0 %

Gathering and Compression Costs

     35,392      31,310      4,082     13.0 %

Gas Royalty Interest Costs

     38,002      23,193      14,809     63.9 %

Purchased Gas Costs

     4,943      2,492      2,451     98.4 %

Other

     807      1,995      (1,188 )   (59.5 )%

General and Administrative

     37,174      26,276      10,898     41.5 %

Depreciation, Depletion and Amortization

     32,537      24,077      8,460     35.1 %

Interest Expense

     3,155      2,465      690     28.0 %
                        

Total Costs and Expenses

   $ 181,477    $ 128,837    $ 52,640     40.9 %
                        

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)

     34.7      29.1      5.6    19.2 %

Average Lifting Costs Per thousand cubic feet

   $ 0.85    $ 0.59    $ 0.26    44.1 %

 

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Average lifting costs per unit sold increased in the current year as a result of higher well closing costs, higher severance taxes and higher well service costs. 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 period. Higher severance taxes are attributable to the higher average sale prices for gas. Service and maintenance costs per unit have also increased in the year to date period-to-period comparison due to additional work on existing wells in order to increase future production. Water disposal costs have also increased due to additional volumes of water produced by CNX Gas wells.

The increase in gathering and compression was attributable to higher volumes produced during the year to date 2008 period compared to the year to date 2007 period, offset, in part, by lower average unit costs.

 

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

Produced Gas Sales Volumes (in billion cubic feet)

     34.7      29.1      5.6     19.2 %

Average Gathering Costs Per thousand cubic feet

   $ 1.02    $ 1.08    $ (0.06 )   (5.6 )%

The decrease in average gathering and transportation unit costs was attributable to lower maintenance expense per unit, lower power charges per unit and lower firm transportation charges per unit, offset in part by higher compression and fuel expense per unit. Dollars spent for maintenance, power and firm transportation have remained 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. These improvements in unit costs were offset, in part, by higher compression expenses per unit and higher fuel charges per unit related to additional compressors being placed in service along the existing gathering systems in order to flow gas more efficiently.

 

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

Gas Royalty Interest Sales Volumes (in billion cubic feet)

     3.8      3.7      0.1    2.7 %

Average Costs Per thousand cubic feet

   $ 10.03    $ 6.28    $ 3.75    59.7 %

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 Sales Volumes (in billion cubic feet)

     0.6      0.4      0.2    50.0 %

Average Costs Per thousand cubic feet

   $ 8.52    $ 6.45    $ 2.07    32.1 %

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

Other cost and expenses represent costs related to CNX Gas explorations program.

 

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

Exploration

   $ 807    $ 1,995    $ (1,188 )   (59.5 )%

 

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Exploration costs decreased primarily as a result of expenses related to core hole drilling in the year to date 2007 period which did not occur in the year to date 2008 period. Decreased exploration costs were also the result of lower broker fees in the current year as compared to the prior year. Lower broker fee expenses in the year to date 2008 period were the result of more land deals being completed successfully than in the prior year to date period; therefore, additional costs were capitalized versus expensed.

General and Administrative expenses increased due to the following items:

 

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

Professional services

   $ 9,671    $ 7,923    $ 1,748    22.1 %

Stock-based compensation

     5,405      3,067      2,338    76.2 %

Short-term incentive compensation

     3,503      1,484      2,019    136.1 %

Wages and salaries

     7,616      5,938      1,678    28.3 %

Other

     10,979      7,864      3,115    39.6 %
                       

Total General and Administrative

   $ 37,174    $ 26,276    $ 10,898    41.5 %
                       

Professional services have increased 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.

Stock-based compensation has increased primarily due to the performance share program additional costs. These additional costs are related to the increase in the market price of CNX Gas common stock in the year to date 2008 period.

The 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 $2,019, when compared to the prior year, due to improved performance relative to the targets.

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

The 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

   $ 22,312    $ 14,562    $ 7,750    53.2 %

Gathering

     9,658      9,049      609    6.7 %

Other

     567      466      101    21.7 %
                       

Total Depreciation, Depletion and Amortization

   $ 32,537    $ 24,077    $ 8,460    35.1 %
                       

The 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.

 

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

Other depreciation is related to various other corporate assets placed in service after the year to date 2007 period, none of which are individually significant.

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

   $ 405    $ —      $ 405     100.0 %

Deferred payment

     166      —        166     100.0 %

Unrecognized tax benefits

     156      38      118     310.5 %

Revolver

     58      —        58     100.0 %

Capitalized lease

     2,331      2,427      (96 )   (4.0 )%

Other

     39      —        39     100.0 %
                        

Total Interest Expense

   $ 3,155    $ 2,465    $ 690     28.0 %
                        

Our variable interest entity incurred debt during the year to date 2008 period which correspondingly increased the related interest expense.

The accretion of a deferred payment related to the June 2007 Peabody acreage acquisition caused interest expense to increase.

Interest on unrecognized tax benefits increased due primarily to a slight increase in the uncertain tax liability balance in the year-to-date 2008 period.

Interest expense increased 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 in the year-to-date period-to-period comparison primarily related to lower outstanding principal. Lower outstanding principal is due to scheduled payments.

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

   $ 185,303     $ 120,170     $ 65,133     54.2 %

Tax Expense

   $ 71,127     $ 45,686     $ 25,441     55.7 %

Effective Income Tax Rate

     38.4 %     38.0 %     0.4 %  

CNX Gas’ effective tax rate remained consistent in the year-to-date period-to-period comparison.

 

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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 $200,000 credit facility. Our credit agreement provides for a revolving credit facility with an initial aggregate outstanding principal amount of up to $200,000 (with the ability to request an increase in the aggregate outstanding principal amount up to $300,000), 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 72.65 to 1.00 at June 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 0.24 to 1.00 at June 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 June 30, 2008, the facility had $27,000 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $158,067 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 $250,000. 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.

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 a liability of $238,738 at June 30, 2008. The ineffective portion of these contracts was insignificant to earnings in the six months ended June 30, 2008.

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.

Cash Flows (in thousands)

 

     Year to
Date 2008
    Year to
Date 2007
    Change  

Cash provided by operating activities

   $ 186,779     $ 140,604     $ 46,175  

Cash used in investing activities

   $ (234,275 )   $ (192,649 )   $ (41,626 )

Cash provided by financing activities

   $ 38,549     $ 4,900     $ 33,649  

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

 

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Cash used in investing activities increased primarily due to the $36,000 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.

Cash provided by financing activities increased primarily due to the $27,000 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 $12,453 of debt proceeds by our variable interest entity. There were $5,973 of debt proceeds by our variable interest entity in the 2007 period.

Our projected capital expenditures for the year ended December 31, 2008 have increased from $470,000 to $552,000 to reflect recent land acquisitions.

Contractual Commitments

The following is a summary of our significant contractual obligations at June 30, 2008.

 

     Total    Within
1 Year
   1–3
Years
   3–5
Years
   More than
5 Years

Short-Term Note Payable

   $ 27,000    $ 27,000    $ —      $ —      $ —  

Long-Term Debt Obligations

     21,303      4,349      9,649      7,305      —  

Interest on Capital Lease Obligations

     36,173      4,894      8,345      7,330      15,604

Capital Lease Obligations

     62,788      3,102      6,416      7,430      45,840

Operating Lease Obligations

     6,956      1,901      2,767      1,587      701

Gas Firm Transportation Obligations

     49,457      8,200      15,181      11,024      15,052

Other Long-Term Liabilities (a)

     24,661      137      300      440      23,784
                                  

Total Contractual Obligations (b)

   $ 228,338    $ 49,583    $ 42,658    $ 35,116    $ 100,981
                                  

 

(a) This item includes asset retirement obligations, pension, postretirement benefits other than pension and legal contingencies, which are reflected on the balance sheet for the potential settlement of the items referenced in Note 7 to the Consolidated Financial Statements. Due to the uncertainty surrounding these settlements, it is difficult to predict if and when a payout may take place.
(b) 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.

Stockholders’ Equity

CNX Gas had stockholders’ equity of $988,504 at June 30, 2008 and $1,023,237 at December 31, 2007. The decrease was primarily attributable to other comprehensive losses related to cash flow hedges, offset, in part, by net income.

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

 

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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.

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;

 

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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; and

 

   

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

 

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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 June 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)

   $ 124.4    $ 287.4

 

(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 June 30, 2008, the fair value of these contracts was a net loss of $145,773 (net of $92,965 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 July 08, 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 Volumnes

         

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 Volumnes

         

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 Volumnes

         

Hedged Mcf

    9,278,351     7,974,227     2,716,495     —       19,969,072

Weighted Average Hedge Price/Mcf

  $ 9.70   $ 9.54   $ 10.36     —     $ 9.73

CNX Gas is exposed to credit risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is subject to continuing review.

CNX interest expense is sensitive to changes in the general level of interest rates in the United States. At June 30, 2008, CNX Gas had $84,091 aggregate principal amount of debt outstanding under fixed-rate instruments and $27,000 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 $27,000 of borrowings outstanding at June 30, 2008. CNX Gas’ revolving credit facility bore interest at a weighted average rate of 4.1% per annum during the six months ended June 30, 2008. Due to the level of borrowings against this facility in the six months ended June 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 June 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 seventh 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting (the “Meeting”) of Shareholders of CNX Gas Corporation (the “Company”) was held on April 21, 2008. As of March 14, 2008, the Record Date for the meeting, there were outstanding 150,930,971 voting shares of Common Stock of the Company. There were present, in person or by proxy, at the Meeting, shareholders of record of 148,282,678 shares of Common Stock of the Company entitled to exercise 98.25% of the voting power of the Company in respect of any of the purposes for which the Meeting was called. The shares so represented constituted a quorum of shareholders for purposes of holding a valid Meeting. At the Meeting, the following actions were taken:

a. Election of Directors

The following persons were elected Directors of the Company, each having received the number of votes set opposite his respective name:

 

Nominee

   Votes For    Votes Withheld    % Votes For  

Philip W. Baxter

   148,084,896    197,782    99.87 %

James E. Altmeyer, Sr.  

   148,032,128    250,550    99.83 %

Nicholas J. DeIuliis

   148,044,372    238,306    99.84 %

Raj K. Gupta

   148,085,626    197,052    99.87 %

J. Brett Harvey

   136,978,080    11,304,598    92.38 %

William J. Lyons

   137,016,455    11,266,223    92.40 %

John R. Pipski

   148,085,126    197,552    99.87 %

Joseph T. Williams

   148,085,626    197,052    99.87 %

b. Ratification of Ernst & Young LLP, as independent auditors

The ratification of the selection of Ernst & Young LLP as independent auditors for 2008 was approved, having received 148,253,740 votes in favor of approval, or 99.98% of the votes cast, and 10,781 votes against approval, or 0.01% of the votes cast. There were 18,155 abstentions and 2 broker non-votes on this matter.

 

36


Table of Contents
ITEM 6. EXHIBITS

 

10.1    Separation Agreement and General Release dated as of April 30, 2008 between Mark D. Gibbons and CNX Gas Corporation.*
10.2    Amendment No. 1 to the Master Cooperation and Safety Agreement dated as of May 30, 2008, between CONSOL Energy Inc. and certain of its subsidiaries, on the one hand, and CNX Gas Corporation and certain of its subsidiaries, on the other hand. (1)
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 June 30, 2008 furnished in XBRL.

 

(1) Incorporated by reference from the Current Report on Form 8-K filed by CNX Gas Corporation on June 2, 2008 wherein it was included as Exhibit 10.1.
 * Management compensatory contract or arrangement.

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

 

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Table of Contents

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: August 5, 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)

 

38


Table of Contents

Exhibit Index

 

10.1    Separation Agreement and General Release dated as of April 30, 2008 between Mark D. Gibbons and CNX Gas Corporation.*
10.2    Amendment No. 1 to the Master Cooperation and Safety Agreement dated as of May 30, 2008, between CONSOL Energy Inc. and certain of its subsidiaries, on the one hand, and CNX Gas Corporation and certain of its subsidiaries, on the other hand. (1)
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 June 30, 2008 furnished in XBRL.

 

(1) Incorporated by reference from the Current Report on Form 8-K filed by CNX Gas Corporation on June 2, 2008 wherein it was included as Exhibit 10.1.
 * Management compensatory contract or arrangement.

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

 

39

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