##### 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 March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from ______
 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
    
    (I.R.S. Employerincorporation or organization)
    
    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)
 
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Condensed Financial Statements (unaudited)
    
    
    3Consolidated Statements of Income for the three months ended March 31, 2007 and 2006
    
    
    3Consolidated Balance Sheets at March 31, 2007 and December 31, 2006
    
    
    4Consolidated Statements of Stockholders Equity for the three months ended March 31, 2007
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATION
    
    
    22Item 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22EX-10.3EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### 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 EndedMarch 31,2007
    
    
    2006Revenue and Other Income:Outside Sales
    
    $
    98,070
    
    
    $
    101,793Related Party Sales
    
    
    2,191
    
    
    
    1,630Royalty Interest Gas Sales
    
    
    12,182
    
    
    
    15,807Purchased Gas Sales
    
    
    1,159
    
    
    
    22,352Other Income
    
    
    1,530
    
    
    
    6,641Total Revenue and Other Income
    
    
    115,132
    
    
    
    148,223Costs and Expenses:Lifting Costs
    
    
    8,266
    
    
    
    8,575Gathering and Compression Costs
    
    
    14,468
    
    
    
    12,550Royalty Interest Gas Costs
    
    
    10,665
    
    
    
    13,416Purchased Gas Costs
    
    
    1,019
    
    
    
    22,765Other
    
    
    438
    
    
    
    (236
    )General and Administrative
    
    
    13,721
    
    
    
    7,305Depreciation, Depletion and Amortization
    
    
    12,098
    
    
    
    8,904Interest Expense
    
    
    1,219
    
    
    
    7Total Costs and Expenses
    
    
    61,894
    
    
    
    73,286Earnings Before Income Taxes
    
    
    53,238
    
    
    
    74,937Income Taxes
    
    
    20,242
    
    
    
    29,061Net Income
    
    $
    32,996
    
    
    $
    45,876Earnings Per Share:Basic
    
    $
    0.22
    
    
    $
    0.30Diluted
    
    $
    0.22
    
    
    $
    0.30Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,864,825
    
    
    
    150,833,334Dilutive
    
    
    151,068,089
    
    
    
    150,931,545
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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CNX GAS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 (Unaudited)March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    121,327
    
    
    $
    107,173Accounts Receivable:Trade
    
    
    44,953
    
    
    
    46,062Net Related Party
    
    
    
    
    
    
    2,745Other
    
    
    2,400
    
    
    
    2,291Derivatives
    
    
    
    
    
    
    10,548Deferred Taxes
    
    
    4,147
    
    
    
    Other Current Assets
    
    
    3,731
    
    
    
    3,917Total Current Assets
    
    
    176,558
    
    
    
    172,736Property, Plant and Equipment, Net
    
    
    961,959
    
    
    
    918,162Other Assets
    
    
    10,290
    
    
    
    11,820Investments in Equity Affiliates
    
    
    53,312
    
    
    
    52,283TOTAL ASSETS
    
    $
    1,202,119
    
    
    $
    1,155,001LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts PayableTrade
    
    $
    27,358
    
    
    $
    27,872Related Parties
    
    
    162
    
    
    
    Accrued Royalties Payable
    
    
    11,911
    
    
    
    11,960Accrued Severance Taxes
    
    
    2,791
    
    
    
    2,576Accrued Income Taxes
    
    
    9,626
    
    
    
    2,191Derivatives
    
    
    8,037
    
    
    
    Deferred Taxes
    
    
    
    
    
    
    3,091Other Current Liabilities
    
    
    7,436
    
    
    
    9,222Total Current Liabilities
    
    
    67,321
    
    
    
    56,912Deferred Taxes
    
    
    128,573
    
    
    
    120,008Capital Lease Obligation
    
    
    63,222
    
    
    
    63,897Other Liabilities
    
    
    20,282
    
    
    
    15,977Well Plugging Liabilities
    
    
    9,604
    
    
    
    9,214Derivatives
    
    
    8,479
    
    
    
    6,465Postretirement Benefits Other Than Pension
    
    
    2,355
    
    
    
    2,313Total Liabilities
    
    
    299,836
    
    
    
    274,786Stockholders EquityCommon Stock, $.01 par value; 200,000,000 Shares
Authorized, 150,867,825 Issued and Outstanding at
March 31, 2007 and 150,864,075 Issued and
Outstanding at December 31, 2006
    
    
    1,508
    
    
    
    1,508Capital in Excess of Par Value
    
    
    782,796
    
    
    
    781,960Retained Earnings
    
    
    127,280
    
    
    
    94,337Accumulated Other Comprehensive (Loss) Income
    
    
    (9,301
    )
    
    
    2,410Total Stockholders Equity
    
    
    902,283
    
    
    
    880,215TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,202,119
    
    
    $
    1,155,001
 The accompanying notes are an integral part of these consolidated financial statements.
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CNX GAS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (Unaudited)
 (Dollars in thousands)
 AccumulatedCapital in
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Excess of
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Par Value
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at December 31, 2006
    
    $
    1,508
    
    
    $
    781,960
    
    
    $
    94,337
    
    
    $
    2,410
    
    
    $
    880,215Net Income
    
    
    
    
    
    
    
    
    
    
    32,996
    
    
    
    
    
    
    
    32,996Gas Cash Flow Hedge (Net of $8,027 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,683
    )
    
    
    (11,683
    )Comprehensive Income (Loss) (a)
    
    
    
    
    
    
    
    
    
    
    32,996
    
    
    
    (11,683
    )
    
    
    21,313FASB Interpretation No. 48 Adoption
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )Stock Options Exercised
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Tax Benefit from Stock Based Compensation
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Amortization of Restricted Stock Unit Grants
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    139Amortization of Stock Based Compensation Awards
    
    
    
    
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    625Actuarial Salary OPEB revaluation (net of $14 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Actuarial Pension revaluation (net of $2 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Balance at March 31, 2007
    
    $
    1,508
    
    
    $
    782,796
    
    
    $
    127,280
    
    
    $
    (9,301
    )
    
    $
    902,283
 
 (a)
    
    Of the ($11,683) net change in accumulated other
comprehensive income (loss) in the period,
$2,503 represents hedging gains recognized in net income for the portions of the financial
hedges that settled in the current period. 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 Three Months EndedMarch 31,2007
    
    
    2006Operating Activities:Net Income
    
    $
    32,996
    
    
    $
    45,876Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:Depreciation, Depletion and Amortization
    
    
    12,098
    
    
    
    8,904Compensation from Restricted Stock Unit Grants
    
    
    139
    
    
    
    Compensation from Stock Option Grants
    
    
    625
    
    
    
    471Deferred Income Taxes
    
    
    12,527
    
    
    
    13,856Equity in (Earnings) of Affiliates
    
    
    (207
    )
    
    
    (147
    )Changes in Operating Assets:Accounts Receivable
    
    
    1,000
    
    
    
    5,266Related Party Receivable
    
    
    2,745
    
    
    
    (1,598
    )Other Current Assets
    
    
    186
    
    
    
    (53
    )Changes in Other Assets
    
    
    1,530
    
    
    
    161Changes in Operating Liabilities:Accounts Payable
    
    
    1,233
    
    
    
    (688
    )Related Party Liability
    
    
    162
    
    
    
    Income Taxes
    
    
    7,441
    
    
    
    11,909Other Current Liabilities
    
    
    (1,601
    )
    
    
    89Changes in Other Liabilities
    
    
    2,026
    
    
    
    1,046Other
    
    
    219
    
    
    
    223Net Cash Provided by Operating Activities
    
    
    73,119
    
    
    
    85,315Investing Activities:Capital Expenditures
    
    
    (57,535
    )
    
    
    (40,177
    )Investment in Equity Affiliates
    
    
    (822
    )
    
    
    225Net Cash Used in Investing Activities
    
    
    (58,357
    )
    
    
    (39,952
    )Financing Activities:Capital Lease Payments
    
    
    (675
    )
    
    
    Exercise of Stock Options
    
    
    67
    
    
    
    Net Cash Used in Financing Activities
    
    
    (608
    )
    
    
    Net Increase in Cash and Cash Equivalents
    
    
    14,154
    
    
    
    45,363Cash and Cash Equivalents at Beginning of Period
    
    
    107,173
    
    
    
    20,073Cash and Cash Equivalents at End of Period
    
    $
    121,327
    
    
    $
    65,436
 The accompanying notes are an integral part of these consolidated financial statements.
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CNX GAS CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Note 1Basis of Presentation:
      For the Three Months EndedMarch 31,2007
    
    
    2006Net Income
    
    $
    32,996
    
    
    $
    45,876Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,864,825
    
    
    
    150,833,334Effect of stock based compensation
    
    
    203,264
    
    
    
    98,211Dilutive
    
    
    151,068,089
    
    
    
    150,931,545Earnings per share:Basic
    
    $
    0.22
    
    
    $
    0.30Diluted
    
    $
    0.22
    
    
    $
    0.30
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Note 2Pension and Other Postretirement Benefits:
  For the Three Months Ended March 31,Pension
    
    
    Other Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Components of Net Periodic Benefit Costs:Service costs
    
    $
    65
    
    
    $
    70
    
    
    $
    31
    
    
    $
    23Interest costs
    
    
    3
    
    
    
    1
    
    
    
    35
    
    
    
    25Expected Return on Assets
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Amortization of prior service costs credit
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (43
    )Amortization of (gain) loss
    
    
    (6
    )
    
    
    (3
    )
    
    
    5
    
    
    
    Benefit costs
    
    $
    62
    
    
    $
    66
    
    
    $
    28
    
    
    $
    5
  Note 3Income Taxes:
  For the Three Months Ended March 31,2007
    
    
    2006Dollars
    
    
    Rate
    
    
    Dollars
    
    
    RateStatutory U.S. Federal Income Tax Rate
    
    $
    18,633
    
    
    
    35.0
    %
    
    $
    26,228
    
    
    
    35.0
    %Net Effect of State Income Tax
    
    
    2,097
    
    
    
    3.9
    %
    
    
    3,320
    
    
    
    4.4
    %Other
    
    
    (488
    )
    
    
    (0.9
    )%
    
    
    (487
    )
    
    
    (0.6
    )%Income Tax Expense/Effective Rate
    
    $
    20,242
    
    
    
    38.0
    %
    
    $
    29,061
    
    
    
    38.8
    %
      8




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Note 4Property, Plant and Equipment:
 March 31,
    
    
    December 31,2007
    
    
    2006Surface Lands
    
    $
    48,601
    
    
    $
    37,055Mineral Interests
    
    
    55,628
    
    
    
    55,623Wells and Related Equipment
    
    
    127,424
    
    
    
    112,009Intangible Drilling
    
    
    406,666
    
    
    
    383,605Gathering Assets
    
    
    526,344
    
    
    
    520,906Gas Well Plugging
    
    
    5,979
    
    
    
    5,652Capitalized Internal Software
    
    
    6,536
    
    
    
    6,433Total Property, Plant and Equipment
    
    
    1,177,178
    
    
    
    1,121,283Accumulated Depreciation, Depletion and Amortization
    
    
    (215,219
    )
    
    
    (203,121
    )Property, Plant and Equipment, Net
    
    $
    961,959
    
    
    $
    918,162
 Note 5Commitments and Contingent Liabilities:
 Geomet Operating Company, Inc. and
Pocahontas Mining Limited Liability Company v. CNX Gas Company LLC
    9




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TotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    BeyondCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 yearsLetters of Credit:Gas
    
    $
    16,867
    
    
    $
    16,695
    
    
    $
    172
    
    
    $
    
    
    
    $
    Total Letters of Credit
    
    $
    16,867
    
    
    $
    16,695
    
    
    $
    172
    
    
    $
    
    
    
    $
    Surety Bonds:Environmental
    
    $
    344
    
    
    $
    344
    
    
    $
    
    
    
    $
    
    
    
    $
    Other
    
    
    20,876
    
    
    
    20,876
    
    
    
    
    
    
    
    
    
    
    
    Total Surety Bonds
    
    $
    21,220
    
    
    $
    21,220
    
    
    $
    
    
    
    $
    
    
    
    $
    Other:Firm Transportation
    
    $
    54,066
    
    
    $
    7,387
    
    
    $
    14,585
    
    
    $
    11,767
    
    
    $
    20,327Guarantees
    
    $
    20,600
    
    
    $
    20,600
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Guarantees
    
    $
    74,666
    
    
    $
    27,987
    
    
    $
    14,585
    
    
    $
    11,767
    
    
    $
    20,327Total Commitments
    
    $
    112,753
    
    
    $
    65,902
    
    
    $
    14,757
    
    
    $
    11,767
    
    
    $
    20,327
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Letters of Credit
     Surety Bonds
  Other Guarantees
  Note 6Segment Information:
   Central
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &Appalachia
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    91,836
    
    
    $
    6,234
    
    
    $
    98,070
    
    
    $
    
    
    
    $
    
    
    
    $
    98,070Salesrelated parties
    
    
    2,178
    
    
    
    13
    
    
    
    2,191
    
    
    
    
    
    
    
    
    
    
    
    2,191Salesroyalty interest gas
    
    
    12,148
    
    
    
    34
    
    
    
    12,182
    
    
    
    
    
    
    
    
    
    
    
    12,182Salespurchased gas
    
    
    1,159
    
    
    
    
    
    
    
    1,159
    
    
    
    
    
    
    
    
    
    
    
    1,159Other revenue
    
    
    94
    
    
    
    
    
    
    
    94
    
    
    
    1,436
    
    
    
    
    
    
    
    1,530Intersegment revenues
    
    
    19,479
    
    
    
    742
    
    
    
    20,221
    
    
    
    
    
    
    
    (20,221
    )
    
    
    Total Revenue and Other Income
    
    $
    126,894
    
    
    $
    7,023
    
    
    $
    133,917
    
    
    $
    1,436
    
    
    $
    (20,221
    )
    
    $
    115,132Earnings Before Income Taxes (A)
    
    $
    52,992
    
    
    $
    (853
    )
    
    $
    52,139
    
    
    $
    1,099
    
    
    $
    
    
    
    $
    53,238Segment assets (B) (C)
    
    $
    956,931
    
    
    $
    99,197
    
    
    $
    1,056,128
    
    
    $
    145,991
    
    
    $
    
    
    
    $
    1,202,119Depreciation, depletion and amortization
    
    $
    10,637
    
    
    $
    1,461
    
    
    $
    12,098
    
    
    $
    
    
    
    $
    
    
    
    $
    12,098Capital expenditures
    
    $
    38,295
    
    
    $
    19,240
    
    
    $
    57,535
    
    
    $
    
    
    
    $
    
    
    
    $
    57,535
 
 (A)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $303 and ($96) for Central
Appalachia and Corporate segments, respectively. Corporate segment also includes $241 of related bank fees. 11




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##### Table of Contents



(B)
    
    Includes investments in unconsolidated equity affiliates of $28,648 and $24,664 for Central
Appalachia and Corporate segments, respectively.(C)
    
    Includes cash of $121,327 in the Corporate segment.  Central
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &Appalachia
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    95,220
    
    
    $
    6,573
    
    
    $
    101,793
    
    
    $
    
    
    
    $
    
    
    
    $
    101,793Salesrelated parties
    
    
    1,594
    
    
    
    36
    
    
    
    1,630
    
    
    
    
    
    
    
    
    
    
    
    1,630Salesroyalty interest gas
    
    
    15,744
    
    
    
    63
    
    
    
    15,807
    
    
    
    
    
    
    
    
    
    
    
    15,807Salespurchased gas
    
    
    22,352
    
    
    
    
    
    
    
    22,352
    
    
    
    
    
    
    
    
    
    
    
    22,352Other revenue
    
    
    6,260
    
    
    
    11
    
    
    
    6,271
    
    
    
    370
    
    
    
    
    
    
    
    6,641Intersegment revenues
    
    
    12,818
    
    
    
    190
    
    
    
    13,008
    
    
    
    
    
    
    
    (13,008
    )
    
    
    Total Revenue and Other Income
    
    $
    153,988
    
    
    $
    6,873
    
    
    $
    160,861
    
    
    $
    370
    
    
    $
    (13,008
    )
    
    $
    148,223Earnings Before Income Taxes (D)
    
    $
    72,429
    
    
    $
    2,603
    
    
    $
    75,032
    
    
    $
    (95
    )
    
    $
    
    
    
    $
    74,937Segment assets (E) (F)
    
    $
    788,402
    
    
    $
    47,227
    
    
    $
    835,629
    
    
    $
    90,402
    
    
    $
    
    
    
    $
    926,031Depreciation, depletion and amortization
    
    $
    8,331
    
    
    $
    573
    
    
    $
    8,904
    
    
    $
    
    
    
    $
    
    
    
    $
    8,904Capital expenditures
    
    $
    33,061
    
    
    $
    7,116
    
    
    $
    40,177
    
    
    $
    
    
    
    $
    
    
    
    $
    40,177
 
 (D)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $369 and ($222) for
Central Appalachia and Corporate segments, respectively. Corporate segment also includes $243
of related bank fees.(E)
    
    Includes investments in unconsolidated equity affiliates of $24,484 and $24,966 for Central
Appalachia and Corporate segments, respectively.(F)
    
    Includes cash of $65,436 in the Corporate segment. Note 7Recent Accounting Pronouncements:
    12




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##### Table of Contents



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.
  Overview
    Operations & Outlook
      2
  13




---



##### Table of Contents



Results of Operations
 Three Months Ended March 31, 2007 compared with Three Months Ended March 31, 2006
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    98,070
    
    
    $
    101,793
    
    
    $
    (3,723
    )
    
    
    (3.7
    )%Related Party Sales
    
    
    2,191
    
    
    
    1,630
    
    
    
    561
    
    
    
    34.4
    %Royalty Interest Gas Sales
    
    
    12,182
    
    
    
    15,807
    
    
    
    (3,625
    )
    
    
    (22.9
    )%Purchased Gas Sales
    
    
    1,159
    
    
    
    22,352
    
    
    
    (21,193
    )
    
    
    (94.8
    )%Other Income
    
    
    1,530
    
    
    
    6,641
    
    
    
    (5,111
    )
    
    
    (77.0
    )%Total Revenue and Other Income
    
    
    115,132
    
    
    
    148,223
    
    
    
    (33,091
    )
    
    
    (22.3
    )%Costs and Expenses:Lifting Costs
    
    
    8,266
    
    
    
    8,575
    
    
    
    (309
    )
    
    
    (3.6
    )%Gathering and Compression Costs
    
    
    14,468
    
    
    
    12,550
    
    
    
    1,918
    
    
    
    15.3
    %Royalty Interest Gas Costs
    
    
    10,665
    
    
    
    13,416
    
    
    
    (2,751
    )
    
    
    (20.5
    )%Purchased Gas Costs
    
    
    1,019
    
    
    
    22,765
    
    
    
    (21,746
    )
    
    
    (95.5
    )%Other
    
    
    438
    
    
    
    (236
    )
    
    
    674
    
    
    
    285.6
    %General and Administrative
    
    
    13,721
    
    
    
    7,305
    
    
    
    6,416
    
    
    
    87.8
    %Depreciation, Depletion and Amortization
    
    
    12,098
    
    
    
    8,904
    
    
    
    3,194
    
    
    
    35.9
    %Interest Expense
    
    
    1,219
    
    
    
    7
    
    
    
    1,212
    
    
    
    17,314.3
    %Total Costs and Expenses
    
    
    61,894
    
    
    
    73,286
    
    
    
    (11,392
    )
    
    
    (15.5
    )%Earnings Before Income Taxes
    
    
    53,238
    
    
    
    74,937
    
    
    
    (21,699
    )
    
    
    (29.0
    )%Income Taxes
    
    
    20,242
    
    
    
    29,061
    
    
    
    (8,819
    )
    
    
    (30.3
    )%Net Income
    
    $
    32,996
    
    
    $
    45,876
    
    
    $
    (12,880
    )
    
    
    (28.1
    )%
 14




---



##### Table of Contents



Revenue and Other Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    98,070
    
    
    $
    101,793
    
    
    $
    (3,723
    )
    
    
    (3.7
    )%Related Party Sales
    
    
    2,191
    
    
    
    1,630
    
    
    
    561
    
    
    
    34.4
    %Royalty Interest Gas Sales
    
    
    12,182
    
    
    
    15,807
    
    
    
    (3,625
    )
    
    
    (22.9
    )%Purchased Gas Sales
    
    
    1,159
    
    
    
    22,352
    
    
    
    (21,193
    )
    
    
    (94.8
    )%Other Income
    
    
    1,530
    
    
    
    6,641
    
    
    
    (5,111
    )
    
    
    (77.0
    )%Total Revenue and Other Income
    
    $
    115,132
    
    
    $
    148,223
    
    
    $
    (33,091
    )
    
    
    (22.3
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.2
    
    
    
    13.6
    
    
    
    0.6
    
    
    
    4.4
    %Average Sales Price (per Mcf)
    
    $
    7.04
    
    
    $
    7.62
    
    
    $
    (0.58
    )
    
    
    (7.6
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.8
    
    
    
    1.8
    
    
    
    0.0
    
    
    
    0.0
    %Average Sales Price (per Mcf)
    
    $
    6.62
    
    
    $
    8.61
    
    
    $
    (1.99
    )
    
    
    (23.1
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    0.2
    
    
    
    2.5
    
    
    
    (2.3
    )
    
    
    (92.0
    )%Average Sales Price (per Mcf)
    
    $
    7.14
    
    
    $
    8.99
    
    
    $
    (1.85
    )
    
    
    (20.6
    )%
  15




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##### Table of Contents



Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeInsurance Settlements
    
    $
    
    
    
    $
    3,007
    
    
    $
    (3,007
    )
    
    
    (100.0
    )%Royalty Income
    
    
    
    
    
    
    2,885
    
    
    
    (2,885
    )
    
    
    (100.0
    )%Interest Income
    
    
    1,436
    
    
    
    370
    
    
    
    1,066
    
    
    
    288.1
    %Third Party Gathering Revenue
    
    
    36
    
    
    
    323
    
    
    
    (287
    )
    
    
    (88.9
    )%Other Miscellaneous
    
    
    58
    
    
    
    56
    
    
    
    2
    
    
    
    3.6
    %Total Other Income
    
    $
    1,530
    
    
    $
    6,641
    
    
    $
    (5,111
    )
    
    
    (77.0
    )%
    Costs and Expenses
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    8,266
    
    
    $
    8,575
    
    
    $
    (309
    )
    
    
    (3.6
    )%Gathering and Compression Costs
    
    
    14,468
    
    
    
    12,550
    
    
    
    1,918
    
    
    
    15.3
    %Royalty Interest Gas Costs
    
    
    10,665
    
    
    
    13,416
    
    
    
    (2,751
    )
    
    
    (20.5
    )%Purchased Gas Costs
    
    
    1,019
    
    
    
    22,765
    
    
    
    (21,746
    )
    
    
    (95.5
    )%Other
    
    
    438
    
    
    
    (236
    )
    
    
    674
    
    
    
    285.6
    %General and Administrative
    
    
    13,721
    
    
    
    7,305
    
    
    
    6,416
    
    
    
    87.8
    %Depreciation, Depletion and Amortization
    
    
    12,098
    
    
    
    8,904
    
    
    
    3,194
    
    
    
    35.9
    %Interest Expense
    
    
    1,219
    
    
    
    7
    
    
    
    1,212
    
    
    
    17,314.3
    %Total Costs and Expenses
    
    $
    61,894
    
    
    $
    73,286
    
    
    $
    (11,392
    )
    
    
    (15.5
    )%
 Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.2
    
    
    
    13.6
    
    
    
    0.6
    
    
    
    4.4
    %Average Lifting Costs (per Mcf)
    
    $
    0.58
    
    
    $
    0.63
    
    
    $
    (0.05
    )
    
    
    (7.9
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.2
    
    
    
    13.6
    
    
    
    0.6
    
    
    
    4.4
    %Average Gathering and Compression Costs (per Mcf)
    
    $
    1.02
    
    
    $
    0.92
    
    
    $
    0.10
    
    
    
    10.9
    %
  16




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##### Table of Contents



Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.8
    
    
    
    1.8
    
    
    
    0.0
    
    
    
    0.0
    %Average Cost (per Mcf)
    
    $
    5.79
    
    
    $
    7.31
    
    
    $
    (1.52
    )
    
    
    (20.8
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    0.2
    
    
    
    2.5
    
    
    
    (2.3
    )
    
    
    (92.0
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    6.28
    
    
    $
    9.16
    
    
    $
    (2.88
    )
    
    
    (31.4
    )%
   Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    

ChangeExploration
    
    $
    462
    
    
    $
    332
    
    
    $
    130
    
    
    
    39.2
    %Imbalance
    
    
    183
    
    
    
    (421
    )
    
    
    604
    
    
    
    143.5
    %Equity in (Earnings) of Affiliates
    
    
    (207
    )
    
    
    (147
    )
    
    
    (60
    )
    
    
    (40.8
    )%Total Other Costs and Expenses
    
    $
    438
    
    
    $
    (236
    )
    
    $
    674
    
    
    
    285.6
    %
    Dollar
    
    
    Percentage2007
    
    

2006
    
    
    Variance
    
    
    ChangeProduction
    
    $
    7,568
    
    
    $
    5,812
    
    
    $
    1,756
    
    
    
    30.2
    %Gathering
    
    
    4,530
    
    
    
    3,092
    
    
    
    1,438
    
    
    
    46.5
    %Total Depreciation, Depletion and Amortization
    
    $
    12,098
    
    
    $
    8,904
    
    
    $
    3,194
    
    
    
    35.9
    %
  17




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##### Table of Contents



Income Taxes
 Percentage2007
    
    2006
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    53,238
    
    
    $
    74,937
    
    
    $
    (21,699
    )
    
    
    (29.0
    )%Tax Expense
    
    $
    20,242
    
    
    $
    29,061
    
    
    $
    (8,819
    )
    
    
    (30.3
    )%Effective Income Tax Rate
    
    
    38.0
    %
    
    
    38.8
    %
    
    
    (0.8
    )%
  Liquidity and Capital Resources
     Cash Flows
 Year to Date
    
    Year to Date2007
    
    2006
    
    ChangeCash provided by operating activities
    
    $
    73,119
    
    
    $
    85,315
    
    
    $
    (12,196
    )Cash used in investing activities
    
    $
    (58,357
    )
    
    $
    (39,952
    )
    
    $
    (18,405
    )Cash used in financing activities
    
    $
    (608
    )
    
    $
    
    
    
    $
    (608
    )
 
    
    Cash provided by operating activities decreased primarily as a result of lower average
sales prices impacting net income as previously discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
    
    Cash used in investing activities increased primarily due to our expanded capital program.
    
    Cash used in financing activities increased due to the Jewell Ridge capital lease payments.
 18




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##### Table of Contents



Contractual Commitments
  Within
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong Term Debt Obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital (Finance) Lease Obligations (a)
    
    
    65,844
    
    
    
    2,622
    
    
    
    5,857
    
    
    
    6,783
    
    
    
    50,582Operating Lease Obligations
    
    
    6,438
    
    
    
    1,256
    
    
    
    2,202
    
    
    
    1,810
    
    
    
    1,170Other Long-Term Liabilities:Gas Firm Transportation Obligation
    
    
    54,066
    
    
    
    7,387
    
    
    
    14,585
    
    
    
    11,767
    
    
    
    20,327Other Liabilities (b)
    
    
    14,358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,358Well Plugging Liabilities
    
    
    9,604
    
    
    
    401
    
    
    
    801
    
    
    
    801
    
    
    
    7,601Pension
    
    
    257
    
    
    
    3
    
    
    
    13
    
    
    
    23
    
    
    
    218Postretirement Benefits Other than Pension
    
    
    2,366
    
    
    
    11
    
    
    
    68
    
    
    
    154
    
    
    
    2,133Total Contractual Obligations (c)
    
    $
    152,933
    
    
    $
    11,680
    
    
    $
    23,526
    
    
    $
    21,338
    
    
    $
    96,389
 
 (a)
    
    In conjunction with the completion of the Jewell Ridge lateral in October 2006, CNX Gas
entered into a 15 year firm transportation agreement with East Tennessee Natural Gas (ETNG), a
subsidiary of Spectra Energy, at pre-determined fixed rates. The present value of our payments
under this firm transportation agreement is approximately $66 million. In addition to
providing us with transportation flexibility, the Jewell Ridge lateral will provide access for
our production to alternate and growing Southeastern and East Coast markets.(b)
    
    This item represents legal contingencies reflected on the balance sheet for potential
settlements for two of the cases referenced in Note 5 of our quarterly financial statements.
Due to the uncertainty surrounding these settlements, it is difficult to predict if and when a
payout may take place.(c)
    
    The significant obligation table does not include obligations to taxing authorities due to
the uncertainty surrounding the ultimate settlement of amounts and timing of these
obligations. Off-Balance Sheet Transactions
  FORWARD-LOOKING STATEMENTS
  19




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##### Table of Contents




    
    our business strategy;
    
    our financial position, cash flow, and liquidity;
    
    declines in the prices we receive for our gas affecting our operating results and cash flow;
    
    uncertainties in estimating our gas reserves and replacing our gas reserves;
    
    uncertainties in exploring for and producing gas;
    
    our inability to obtain additional financing necessary in order to fund our operations,
capital expenditures and to meet our other obligations;
    
    disruptions to capacity constraints in or other limitations on the pipeline systems which deliver our gas;
    
    competition in the gas industry;
    
    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 state, and costs
associated with perfecting title for gas rights in some of our properties;
    
    litigation concerning real property rights, intellectual property rights, and royalty calculations;
    
    our relationships and arrangements with CONSOL Energy; and
    
    other factors discussed under Risk Factors in the 10-K for the year ended December 31, 2006.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      20




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##### Table of Contents



Incremental decrease in pre-tax income assuming aHypothetical price increase of:10%
    
    25%(In millions)Natural Gas (1)
    
    $
    17.4
    
    
    $
    41.0
 
 (1)
    
    CNX Gas remains at risk for possible changes in the market value of these derivative
instruments, however, such risk should be reduced by price changes in the underlying hedged
item. The effect of this offset is not reflected in the sensitivity analyses. CNX Gas entered
into derivative instruments to convert the market prices related to portions of the 2007
through 2009 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. When commodity prices increase, pretax income decreases. As of March 31, 2007, the
fair value of these contracts was a net loss of $10,082 (net of $6,434 deferred tax). We
continually evaluate the portfolio of derivative commodity instruments and adjust the strategy
to anticipated market conditions and risks accordingly. Hedging Volumes
  Three months
    
    Three months
    
    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    endedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    Total Year2007 Fixed Price VolumesHedged Mcf
    
    
    3,247,423
    
    
    
    4,690,722
    
    
    
    4,742,268
    
    
    
    4,742,268
    
    
    
    17,422,681Weighted Average Hedge Price/Mcf
    
    $
    7.77
    
    
    $
    8.00
    
    
    $
    8.00
    
    
    $
    8.00
    
    
    $
    7.962008 Fixed Price VolumesHedged Mcf
    
    
    4,690,722
    
    
    
    4,690,722
    
    
    
    4,742,268
    
    
    
    4,742,268
    
    
    
    18,865,980Weighted Average Hedge Price/Mcf
    
    $
    8.19
    
    
    $
    8.00
    
    
    $
    8.07
    
    
    $
    8.07
    
    
    $
    8.082009 Fixed Price VolumesHedged Mcf
    
    
    2,783,505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,783,505Weighted Average Hedge Price/Mcf
    
    $
    8.72
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8.72
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  21




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##### Table of Contents



Changes in Internal Controls Over Financial Reporting.
  
 PART II
OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 10.1
    
    Offer letter of Mark D. Gibbons is incorporated by reference from the companys Current Report
on Form 8-K filed on January 26, 2007, wherein it appeared as exhibit 10.110.2
    
    Description of CNX Gas 2007 Short-term incentive program is incorporated by reference from the
companys Current Report on Form 8-K filed on March 1, 2006.10.3
    
    Transfer Agreement dated as of January 24, 2007, between the registrant and Gary J. Bench.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    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 200232.2
    
    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
  22




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##### Table of Contents



SIGNATURES
   CNX Gas CorporationBy:
    /s/ Nicholas J. DeIuliisNicholas J. DeIuliisPresident and Chief Executive Officer

(Duly Authorized Officer) By:
    /s/ Mark D. GibbonsMark D. GibbonsSenior Vice President and Chief Financial Officer
(Principal Financial Officer) 23




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##### Table of Contents



EXHIBIT INDEX
 10.1
    
    Offer letter of Mark D. Gibbons is incorporated by reference from the companys Current Report
on Form 8-K filed on January 26, 2007, wherein it appeared as exhibit 10.110.2
    
    Description of CNX Gas 2007 Short-term incentive program is incorporated by reference from the
companys Current Report on Form 8-K filed on March 1, 2006.10.3
    
    Transfer Agreement dated as of January 24, 2007, between the registrant and Gary J. Bench.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    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 200232.2
    
    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
  24