##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 2006
 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
(State or other jurisdiction of 
incorporation or organization)
    
    20-3170639
(I.R.S. Employer
Identification No.)
 4000 Brownsville Road
South Park, PA 15129
(412) 854-6719
 
 (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 INFORMATIONItem 1. Condensed Financial Statements (unaudited)Consolidated Statements of Income for the three and nine months ended September 30, 2006 and
 2005
    
    3Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
    
    4Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2006
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and  2005
    
    6Notes to Consolidated Financial Statements
    
    7-15Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    15-29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    29-30Item 4. Controls and Procedures
    
    30PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    30Item 1A. Risk Factors
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 3. Defaults Upon Senior Securities
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    31Item 5. Other Information
    
    31Item 6. Exhibits
    
    31EX-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 ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue and Other Income:Outside Sales
    
    $
    92,507
    
    
    $
    71,681
    
    
    $
    286,494
    
    
    $
    192,878Related Party Sales
    
    
    2,719
    
    
    
    1,926
    
    
    
    5,753
    
    
    
    5,325Royalty Interest Gas Sales
    
    
    13,221
    
    
    
    12,317
    
    
    
    41,714
    
    
    
    31,059Purchased Gas Sales
    
    
    9,076
    
    
    
    88,288
    
    
    
    41,206
    
    
    
    157,545Other Income
    
    
    6,044
    
    
    
    2,100
    
    
    
    19,475
    
    
    
    6,627Total Revenue and Other Income
    
    
    123,567
    
    
    
    176,312
    
    
    
    394,642
    
    
    
    393,434Costs and Expenses:Lifting Costs
    
    
    7,295
    
    
    
    6,907
    
    
    
    21,990
    
    
    
    19,087Gathering and Compression Costs
    
    
    13,949
    
    
    
    10,696
    
    
    
    40,940
    
    
    
    29,918Royalty Interest Gas Costs
    
    
    10,808
    
    
    
    10,042
    
    
    
    34,491
    
    
    
    24,505Purchased Gas Costs
    
    
    9,340
    
    
    
    89,653
    
    
    
    42,091
    
    
    
    159,739Other
    
    
    2,265
    
    
    
    2,741
    
    
    
    6,138
    
    
    
    8,335Equity in (Earnings) Loss of Affiliates
    
    
    45
    
    
    
    88
    
    
    
    (727
    )
    
    
    220General and Administrative
    
    
    8,522
    
    
    
    4,699
    
    
    
    23,228
    
    
    
    12,171Depreciation, Depletion and Amortization
    
    
    9,546
    
    
    
    8,671
    
    
    
    27,437
    
    
    
    25,883Total Costs and Expenses
    
    
    61,770
    
    
    
    133,497
    
    
    
    195,588
    
    
    
    279,858Earnings Before Income Taxes
    
    
    61,797
    
    
    
    42,815
    
    
    
    199,054
    
    
    
    113,576Income Taxes
    
    
    24,204
    
    
    
    16,745
    
    
    
    77,432
    
    
    
    43,988Net Income
    
    $
    37,593
    
    
    $
    26,070
    
    
    $
    121,622
    
    
    $
    69,588Earnings Per Share:Basic
    
    $
    0.25
    
    
    $
    0.19
    
    
    $
    0.81
    
    
    $
    0.54Diluted
    
    $
    0.25
    
    
    $
    0.19
    
    
    $
    0.81
    
    
    $
    0.54Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,850,930
    
    
    
    139,294,276
    
    
    
    150,839,264
    
    
    
    128,422,601Dilutive
    
    
    151,029,192
    
    
    
    139,416,414
    
    
    
    150,998,713
    
    
    
    128,499,081
 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)September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    107,576
    
    
    $
    20,073Accounts Receivable:Trade
    
    
    33,016
    
    
    
    41,121Related Party
    
    
    671
    
    
    
    728Other
    
    
    1,347
    
    
    
    550Derivatives
    
    
    6,848
    
    
    
    Deferred Taxes
    
    
    
    
    
    
    9,339Other Current Assets
    
    
    23,392
    
    
    
    18,067Total Current Assets
    
    
    172,850
    
    
    
    89,878Property, Plant and Equipment, Net
    
    
    811,214
    
    
    
    723,547Other Assets
    
    
    11,114
    
    
    
    11,903Investments in Equity Affiliates
    
    
    51,658
    
    
    
    49,528TOTAL ASSETS
    
    $
    1,046,836
    
    
    $
    874,856LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    18,686
    
    
    $
    22,541Accrued Royalties Payable
    
    
    12,842
    
    
    
    10,504Accrued Severance Taxes
    
    
    2,017
    
    
    
    2,747Accrued Income Taxes
    
    
    6,591
    
    
    
    5,518Derivatives
    
    
    
    
    
    
    23,777Deferred Taxes
    
    
    2,671
    
    
    
    Other Current Liabilities
    
    
    26,130
    
    
    
    21,071Total Current Liabilities
    
    
    68,937
    
    
    
    86,158Deferred Taxes
    
    
    103,540
    
    
    
    47,736Other Liabilities
    
    
    17,783
    
    
    
    14,310Well Plugging Liabilities
    
    
    8,723
    
    
    
    10,908Derivatives
    
    
    6,328
    
    
    
    32,909Postretirement Benefits Other Than Pension
    
    
    3,337
    
    
    
    3,363Total Liabilities
    
    
    208,648
    
    
    
    195,384Stockholders EquityCommon Stock, $.01 par value; 200,000,000 Shares
Authorized, 150,864,075 Issued and Outstanding at
September 30, 2006 and December 31, 2005
    
    
    1,508
    
    
    
    1,508Capital in Excess of Par Value
    
    
    780,304
    
    
    
    779,509Retained Earnings (Deficit)
    
    
    56,092
    
    
    
    (65,530
    )Accumulated Other Comprehensive Income (Loss)
    
    
    284
    
    
    
    (34,733
    )Unearned
Compensation on Restricted Stock Units
    
    
    
    
    
    
    (1,282
    )Total Stockholders Equity
    
    
    838,188
    
    
    
    679,472TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,046,836
    
    
    $
    874,856
 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)
 Accumulated
    
    
    UnearnedCapital in
    
    
    Retained
    
    
    Other
    
    
    Compensation
    
    
    TotalCommon
    
    
    Excess of
    
    
    Earnings/
    
    
    Comprehensive
    
    
    on Restricted
    
    
    StockholdersStock
    
    
    Par Value
    
    
    (Deficit)
    
    
    Income (Loss)
    
    

Stock
Units
    
    
    EquityBalance at December 31, 2005
    
    $
    1,508
    
    
    $
    779,509
    
    
    $
    (65,530
    )
    
    $
    (34,733
    )
    
    $
    (1,282
    )
    
    $
    679,472Net Income
    
    
    
    
    
    
    
    
    
    
    121,622
    
    
    
    
    
    
    
    
    
    
    
    121,622Gas Cash Flow Hedge (Net of ($22,469) tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,017
    
    
    
    
    
    
    
    35,017Comprehensive Income (a)
    
    
    
    
    
    
    
    
    
    
    121,622
    
    
    
    35,017
    
    
    
    
    
    
    
    156,639Elimination of Unearned Compensation on
Restricted Stock Units
    
    
    
    
    
    
    (1,282
    )
    
    
    
    
    
    
    
    
    
    
    1,282
    
    
    
    Amortization of Restricted Stock Unit Grants
    
    
    
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654Amortization of Stock Based Compensation
Awards
    
    
    
    
    
    
    1,423
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,423Balance at September 30, 2006
    
    $
    1,508
    
    
    $
    780,304
    
    
    $
    56,092
    
    
    $
    284
    
    
    $
    
    
    
    $
    838,188
 
 (a)
    
    Of the $35,017 net change in accumulated other comprehensive income in the period, $7,670
represents hedging gains recognized in net income for the portions of the financial hedges that
settled in the current period. Comprehensive loss for the period ended September 30, 2005 was
$50,299. The accompanying notes are an integral part of these consolidated financial statements.
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CNX GAS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  (Dollars in thousands)
 For the nine months endedSeptember 30,2006
    
    
    2005Operating Activities:Net Income
    
    $
    121,622
    
    
    $
    69,588Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:Depreciation, Depletion and Amortization
    
    
    27,437
    
    
    
    25,883Stock Based Compensation
    
    
    2,077
    
    
    
    Deferred Income Taxes
    
    
    45,345
    
    
    
    32,948Equity in (Earnings) Loss of Affiliates
    
    
    (727
    )
    
    
    220Changes in Operating Assets:Accounts Receivable
    
    
    7,308
    
    
    
    (36,281
    )Related Party Receivable
    

    
    57Other Current Assets
    
    
    (161
    )
    
    
    (2,710
    )Changes in Other Assets
    
    
    845
    
    
    
    4,374Changes in Operating Liabilities:Accounts Payable
    
    
    (3,855
    )
    
    
    10,297Income Taxes
    
    
    1,073
    
    
    
    11,040Other Current Liabilities
    
    
    758
    
    
    
    9,325Changes in Other Liabilities
    
    
    3,690
    
    
    
    63Other
    
    
    474
    
    
    
    149Net Cash Provided by Operating Activities
    
    
    205,943
    
    
    
    124,896Investing Activities:Capital Expenditures
    
    
    (117,037
    )
    
    
    (70,207
    )Investment in Equity Affiliates
    
    
    (1,403
    )
    
    
    (2,697
    )Net Cash Used in Investing Activities
    
    
    (118,440
    )
    
    
    (72,904
    )Financing Activities:Issuance of Common Stock
    
    
    
    
    
    
    420,167Dividends Paid
    
    
    
    
    
    
    (420,167
    )Payments to Parent
    
    
    
    
    
    
    (22,439
    )Net Cash Used in Financing Activities
    
    
    
    
    
    
    (22,439
    )Net Increase in Cash and Cash Equivalents
    
    
    87,503
    
    
    
    29,553Cash and Cash Equivalents at Beginning of Period
    
    
    20,073
    
    
    
    3Cash and Cash Equivalents at End of Period
    
    $
    107,576
    
    
    $
    29,556
 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:
       7




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For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Income
    
    $
    37,593
    
    
    $
    26,070
    
    
    $
    121,622
    
    
    $
    69,588Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,850,930
    
    
    
    139,294,276
    
    
    
    150,839,264
    
    
    
    128,422,601Effect of stock based compensation
    
    
    178,262
    
    
    
    122,138
    
    
    
    159,449
    
    
    
    76,480Dilutive
    
    
    151,029,192
    
    
    
    139,416,414
    
    
    
    150,998,713
    
    
    
    128,499,081Earnings per share:Basic
    
    $
    0.25
    
    
    $
    0.19
    
    
    $
    0.81
    
    
    $
    0.54Diluted
    
    $
    0.25
    
    
    $
    0.19
    
    
    $
    0.81
    
    
    $
    0.54
 Note 2Stock-Based Compensation:
      8




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Three Months Ended
September 30,
    
    
    Nine Months Ended
September 30,2005
    
    
    2005Net income as reported
    
    $
    26,070
    
    
    $
    69,588Add:
Stock-based compensation expense for restricted stock units
    
    
    81
    
    
    
    81Deduct:
Total stock-based employee compensation expense determined under
Black-Scholes option pricing model and stock-based compensation
expense for restricted stock units
    
    
    (266
    )
    
    
    (266
    )Pro forma net income
    
    $
    25,885
    
    
    $
       69,403Earnings
per share:Basic - as reported
    
       $
    0.19
    
    
    $
    0.54Basic - Pro
forma
    
    $
    0.19
    
    
    $
    0.54Diluted - as reported
    
    $
    0.19
    
    
    $
    0.54Diluted -
pro forma
    
    $
    0.19
    
    
    $
    0.54
  For the nine months
    
    For the nine monthsended Sept. 30, 2006
    
    ended Sept. 30, 2005Weighted Average Fair Value of Grants
    
    $
    9.85
    
    
    $
    5.34Risk Free Interest Rate
    
    
    4.65
    %
    
    
    4.24
    %Dividend Yield
    
    
    
    
    
    
    Expected Volatility
    
    
    32.3
    %
    
    
    34.4
    %Expected life in years
    
    
    4.5
    
    
    
    4.0
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicExercise
    
    
    Term
    
    
    ValueShares
    
    
    Price
    
    
    (in years)
    
    
    (in thousands)Outstanding at December 31, 2005
    
    
    1,040,576
    
    
    $
    16.05
    
    
    
    
    
    
    
    Granted
    
    
    478,419
    
    
    
    28.49
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (28,835
    )
    
    
    18.87
    
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    1,490,160
    
    
    $
    19.99
    
    
    
    9.08
    
    
    $
    7,247Vested and expected to vest at September 30, 2006
    
    
    1,490,160
    
    
    $
    19.99
    
    
    
    9.08
    
    
    $
    7,247Exercisable at September 30, 2006
    
    
    254,564
    
    
    $
    16.05
    
    
    
    8.84
    
    
    $
    1,812
    9




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Weighted AverageNumber of Shares
    
    Grant Date Fair ValueNonvested at December 31, 2005
    
    
    92,969
    
    
    $
    16.00Granted
    
    
    6,143
    
    
    
    28.50Vested
    
    
    (30,741
    )
    
    
    16.00Nonvested at September 30, 2006
    
    
    68,371
    
    
    $
    17.12
 Note
3Pension and Other Postretirement Benefits:
  For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,Pension
    
    
    Other Benefits
    
    
    Pension
    
    
    Other Benefits2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of
Net Periodic
Benefit Costs:Service costs
    
    $
    70
    
    
    $
    91
    
    
    $
    23
    
    
    $
    40
    
    
    $
    210
    
    
    $
    91
    
    
    $
    69
    
    
    $
    120Interest costs
    
    
    1
    
    
    
    28
    
    
    
    25
    
    
    
    42
    
    
    
    3
    
    
    
    28
    
    
    
    75
    
    
    
    126Amortization of
prior service costs
credit
    
    
    (2
    )
    
    
    
    
    
    
    (43
    )
    
    
    (28
    )
    
    
    (6
    )
    
    
    
    
    
    
    (129
    )
    
    
    (84
    )Recognized
net actuarial loss
(gain)
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    33Benefit costs
    
    $
    66
    
    
    $
    119
    
    
    $
    5
    
    
    $
    65
    
    
    $
    198
    
    
    $
    119
    
    
    $
    15
    
    
    $
    195
   Note 4Income Taxes:
  For the nine months ended September 30,2006
    
    
    2005Amount
    
    

Percent
    
    

Amount
    
    

PercentStatutory U.S. Federal Income Tax
    
    $
    69,669
    
    
    
    35.0
    %
    
    $
    39,751
    
    
    
    35.0
    %Net Effect of State Income Tax
    
    
    8,619
    
    
    
    4.3
    %
    
    
    4,793
    
    
    
    4.2
    %Other
    
    
    (856
    )
    
    
    (0.4
    )%
    
    
    (556
    )
    
    
    (0.5
    )%Income Tax Expense/ Effective Rate
    
    $
    77,432
    
    
    
    38.9
    %
    
    $
    43,988
    
    
    
    38.7
    %
 10




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Note 5Property, Plant and Equipment:
 September 30,
    
    
    December 31,2006
    
    
    2005Surface Lands
    
    $
    34,171
    
    
    $
    26,573Mineral Interests
    
    
    55,621
    
    
    
    55,621Wells and Related Equipment
    
    
    164,377
    
    
    
    141,959Intangible Drilling
    
    
    357,980
    
    
    
    312,467Gathering Assets
    
    
    381,194
    
    
    
    344,355Gas Well Plugging
    
    
    5,252
    
    
    
    7,680Other
    
    
    5,480
    
    
    
    36Total Property, Plant and Equipment
    
    
    1,004,075
    
    
    
    888,691Accumulated Depreciation, Depletion and Amortization
    
    
    (192,861
    )
    
    
    (165,144
    )Property, Plant and Equipment, net
    
    $
    811,214
    
    
    $
    723,547
 Note 6Credit Facility:
    Note 7Commitments and Contingent Liabilities:
   11




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TotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    BeyondCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 yearsLetters of Credit:Gas
    
    $
    16,847
    
    
    $
    16,847
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Letters of Credit
    
    $
    16,847
    
    
    $
    16,847
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety Bonds:Environmental
    
    $
    420
    
    
    $
    420
    
    
    $
    
    
    
    $
    
    
    
    $
    Other
    
    
    762
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    Total Surety Bonds
    
    $
    1,182
    
    
    $
    1,182
    
    
    $
    
    
    
    $
    
    
    
    $
    Other:Guarantees
    
    $
    11,000
    
    
    $
    11,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Guarantees
    
    $
    11,000
    
    
    $
    11,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Commitments
    
    $
    29,029
    
    
    $
    29,029
    
    
    $
    
    
    
    $
    
    
    
    $
    
  Note 8Segment Information:
   CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    87,636
    
    
    $
    4,871
    
    
    $
    
    
    
    $
    92,507
    
    
    $
    
    
    
    $
    92,507Salesrelated parties
    
    
    2,699
    
    
    
    20
    
    
    
    
    
    
    
    2,719
    
    
    
    
    
    
    
    2,719Salesroyalty interest gas
    
    
    13,202
    
    
    
    19
    
    
    
    
    
    
    
    13,221
    
    
    
    
    
    
    
    13,221Salespurchased gas
    
    
    9,076
    
    
    
    
    
    
    
    
    
    
    
    9,076
    
    
    
    
    
    
    
    9,076Other revenue
    
    
    5,663
    
    
    
    11
    
    
    
    370
    
    
    
    6,044
    
    
    
    
    
    
    
    6,044Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    15,464
    
    
    
    15,464
    
    
    
    (15,464
    )
    
    
    Total Revenue and Other Income
    
    $
    118,276
    
    
    $
    4,921
    
    
    $
    15,834
    
    
    $
    139,031
    
    
    $
    (15,464
    )
    
    $
    123,567Earnings Before Income Taxes
    
    $
    57,700
    
    
    $
    300
    
    
    $
    3,797
    
    
    $
    61,797
    
    
    $
    
    
    
    $
    61,797
    (A)Segment assets
    
    $
    538,418
    
    
    $
    36,117
    
    
    $
    364,725
    
    
    $
    939,260
    
    
    $
    107,576
    
    
    $
    1,046,836
    (B)(C)Depreciation, depletion and amortization
    
    $
    5,727
    
    
    $
    590
    
    
    $
    3,229
    
    
    $
    9,546
    
    
    $
    
    
    
    $
    9,546Capital expenditures
    
    $
    20,741
    
    
    $
    2,483
    
    
    $
    10,804
    
    
    $
    34,028
    
    
    $
    
    
    
    $
    34,028
 
 (A)
    
    Includes equity in loss of unconsolidated affiliates of $45.(B)
    
    Includes investments in unconsolidated equity affiliates of $51,658.(C)
    
    The $107,576 represents cash which is not allocated to individual segments. 13




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##### Table of Contents



CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    67,067
    
    
    $
    4,614
    
    
    $
    
    
    
    $
    71,681
    
    
    $
    
    
    
    $
    71,681Salesrelated parties
    
    
    1,908
    
    
    
    18
    
    
    
    
    
    
    
    1,926
    
    
    
    
    
    
    
    1,926Salesroyalty interest gas
    
    
    12,267
    
    
    
    50
    
    
    
    
    
    
    
    12,317
    
    
    
    
    
    
    
    12,317Salespurchased gas
    
    
    88,288
    
    
    
    
    
    
    
    
    
    
    
    88,288
    
    
    
    
    
    
    
    88,288Other revenue
    
    
    1,796
    
    
    
    10
    
    
    
    294
    
    
    
    2,100
    
    
    
    
    
    
    
    2,100Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    12,424
    
    
    
    12,424
    
    
    
    (12,424
    )
    
    
    Total Revenue and Other Income
    
    $
    171,326
    
    
    $
    4,692
    
    
    $
    12,718
    
    
    $
    188,736
    
    
    $
    (12,424
    )
    
    $
    176,312Earnings Before Income Taxes
    
    $
    38,157
    
    
    $
    471
    
    
    $
    4,187
    
    
    $
    42,815
    
    
    $
    
    
    
    $
    42,815
    (D)Segment assets
    
    $
    483,635
    
    
    $
    14,880
    
    
    $
    327,806
    
    
    $
    826,321
    
    
    $
    
    
    
    $
    826,321
    (E)Depreciation, depletion and amortization
    
    $
    4,871
    
    
    $
    813
    
    
    $
    2,987
    
    
    $
    8,671
    
    
    $
    
    
    
    $
    8,671Capital expenditures
    
    $
    19,394
    
    
    $
    3,464
    
    
    $
    10,707
    
    
    $
    33,565
    
    
    $
    
    
    
    $
    33,565
 
 (D)
    
    Central Appalachia and Tennessee segment includes equity in loss of unconsolidated
affiliates of $88.(E)
    
    Central Appalachia and Tennessee segment includes investments in unconsolidated equity
affiliates of $49,850.  CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    270,138
    
    
    $
    16,356
    
    
    $
    
    
    
    $
    286,494
    
    
    $
    
    
    
    $
    286,494Salesrelated parties
    
    
    5,680
    
    
    
    73
    
    
    
    
    
    
    
    5,753
    
    
    
    
    
    
    
    5,753Salesroyalty interest gas
    
    
    41,574
    
    
    
    140
    
    
    
    
    
    
    
    41,714
    
    
    
    
    
    
    
    41,714Salespurchased gas
    
    
    41,206
    
    
    
    
    
    
    
    
    
    
    
    41,206
    
    
    
    
    
    
    
    41,206Other revenue
    
    
    18,401
    
    
    
    38
    
    
    
    1,036
    
    
    
    19,475
    
    
    
    
    
    
    
    19,475Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    41,687
    
    
    
    41,687
    
    
    
    (41,687
    )
    
    
    Total Revenue and Other Income
    
    $
    376,999
    
    
    $
    16,607
    
    
    $
    42,723
    
    
    $
    436,329
    
    
    $
    (41,687
    )
    
    $
    394,642Earnings Before Income Taxes
    
    $
    183,369
    
    
    $
    3,685
    
    
    $
    12,000
    
    
    $
    199,054
    
    
    $
    
    
    
    $
    199,054
    (F)Segment assets
    
    $
    538,418
    
    
    $
    36,117
    
    
    $
    364,725
    
    
    $
    939,260
    
    
    $
    107,576
    
    
    $
    1,046,836
    (G)(H)Depreciation, depletion and amortization
    
    $
    16,218
    
    
    $
    1,811
    
    
    $
    9,408
    
    
    $
    27,437
    
    
    $
    
    
    
    $
    27,437Capital expenditures
    
    $
    65,377
    
    
    $
    14,987
    
    
    $
    36,673
    
    
    $
    117,037
    
    
    $
    
    
    
    $
    117,037
 
 (F)
    
    Includes equity in earnings of unconsolidated affiliates of $727.(G)
    
    Includes investments in unconsolidated equity affiliates of $51,658.(H)
    
    The $107,576 represents cash which is not allocated to individual segments. 14




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##### Table of Contents



CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    181,673
    
    
    $
    11,205
    
    
    $
    
    
    
    $
    192,878
    
    
    $
    
    
    
    $
    192,878Salesrelated parties
    
    
    5,280
    
    
    
    45
    
    
    
    
    
    
    
    5,325
    
    
    
    
    
    
    
    5,325Salesroyalty interest gas
    
    
    30,953
    
    
    
    106
    
    
    
    
    
    
    
    31,059
    
    
    
    
    
    
    
    31,059Salespurchased gas
    
    
    157,545
    
    
    
    
    
    
    
    
    
    
    
    157,545
    
    
    
    
    
    
    
    157,545Other revenue
    
    
    5,793
    
    
    
    40
    
    
    
    794
    
    
    
    6,627
    
    
    
    
    
    
    
    6,627Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    35,596
    
    
    
    35,596
    
    
    
    (35,596
    )
    
    
    Total Revenue and Other Income
    
    $
    381,244
    
    
    $
    11,396
    
    
    $
    36,390
    
    
    $
    429,030
    
    
    $
    (35,596
    )
    
    $
    393,434Earnings Before Income Taxes
    
    $
    104,404
    
    
    $
    415
    
    
    $
    8,757
    
    
    $
    113,576
    
    
    $
    
    
    
    $
    113,576
    (I)Segment assets
    
    $
    483,635
    
    
    $
    14,880
    
    
    $
    327,806
    
    
    $
    826,321
    
    
    $
    
    
    
    $
    826,321
    (J)Depreciation, depletion and amortization
    
    $
    15,100
    
    
    $
    1,846
    
    
    $
    8,937
    
    
    $
    25,883
    
    
    $
    
    
    
    $
    25,883Capital expenditures
    
    $
    41,766
    
    
    $
    7,725
    
    
    $
    20,716
    
    
    $
    70,207
    
    
    $
    
    
    
    $
    70,207
 
 (I)
    
    Central Appalachia and Tennessee segment includes equity in loss of unconsolidated
affiliates of $220.(J)
    
    Central Appalachia and Tennessee segment includes investments in unconsolidated equity
affiliates of $49,850. Note 9Recent Accounting Pronouncements:
    
 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
     15




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##### Table of Contents



Operations
    Outlook
       16




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##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2006 compared with Three Months Ended September 30, 2005
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    92,507
    
    
    $
    71,681
    
    
    $
    20,826
    
    
    
    29.1
    %Related Party Sales
    
    
    2,719
    
    
    
    1,926
    
    
    
    793
    
    
    
    41.2
    %Royalty Interest Gas Sales
    
    
    13,221
    
    
    
    12,317
    
    
    
    904
    
    
    
    7.3
    %Purchased Gas Sales
    
    
    9,076
    
    
    
    88,288
    
    
    
    (79,212
    )
    
    
    (89.7
    )%Other Income
    
    
    6,044
    
    
    
    2,100
    
    
    
    3,944
    
    
    
    187.8
    %Total Revenue and Other Income
    
    
    123,567
    
    
    
    176,312
    
    
    
    (52,745
    )
    
    
    (29.9
    )%Costs and Expenses:Lifting Costs
    
    
    7,295
    
    
    
    6,907
    
    
    
    388
    
    
    
    5.6
    %Gathering and Compression Costs
    
    
    13,949
    
    
    
    10,696
    
    
    
    3,253
    
    
    
    30.4
    %Royalty Interest Gas Costs
    
    
    10,808
    
    
    
    10,042
    
    
    
    766
    
    
    
    7.6
    %Purchased Gas Costs
    
    
    9,340
    
    
    
    89,653
    
    
    
    (80,313
    )
    
    
    (89.6
    )%Other
    
    
    2,265
    
    
    
    2,741
    
    
    
    (476
    )
    
    
    (17.4
    )%Equity in (Earnings) Loss of Affiliates
    
    
    45
    
    
    
    88
    
    
    
    (43
    )
    
    
    (48.9
    )%General and Administrative
    
    
    8,522
    
    
    
    4,699
    
    
    
    3,823
    
    
    
    81.4
    %Depreciation, Depletion and Amortization
    
    
    9,546
    
    
    
    8,671
    
    
    
    875
    
    
    
    10.1
    %Total Costs and Expenses
    
    
    61,770
    
    
    
    133,497
    
    
    
    (71,727
    )
    
    
    (53.7
    )%Earnings Before Income Taxes
    
    
    61,797
    
    
    
    42,815
    
    
    
    18,982
    
    
    
    44.3
    %Income Taxes
    
    
    24,204
    
    
    
    16,745
    
    
    
    7,459
    
    
    
    44.5
    %Net Income
    
    $
    37,593
    
    
    $
    26,070
    
    
    $
    11,523
    
    
    
    44.2
    %
  Revenue and Other Income
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    92,507
    
    
    $
    71,681
    
    
    $
    20,826
    
    
    
    29.1
    %Related Party Sales
    
    
    2,719
    
    
    
    1,926
    
    
    
    793
    
    
    
    41.2
    %Royalty Interest Gas Sales
    
    
    13,221
    
    
    
    12,317
    
    
    
    904
    
    
    
    7.3
    %Purchased Gas Sales
    
    
    9,076
    
    
    
    88,288
    
    
    
    (79,212
    )
    
    
    (89.7
    )%Other Income
    
    
    6,044
    
    
    
    2,100
    
    
    
    3,944
    
    
    
    187.8
    %Total Revenue and Other Income
    
    $
    123,567
    
    
    $
    176,312
    
    
    $
    (52,745
    )
    
    
    (29.9
    )%
  17




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##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.4
    
    
    
    12.4
    
    
    
    2.0
    
    
    
    16.1
    %Average Sales Price (per Mcf)
    
    $
    6.62
    
    
    $
    5.93
    
    
    $
    0.69
    
    
    
    11.6
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.9
    
    
    
    1.8
    
    
    
    0.1
    
    
    
    5.6
    %Average Sales Price (per Mcf)
    
    $
    6.85
    
    
    $
    6.94
    
    
    $
    (0.09
    )
    
    
    (1.3
    )%
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    1.4
    
    
    
    9.8
    
    
    
    (8.4
    )
    
    
    (85.7
    )%Average Sales Price (per Mcf)
    
    $
    6.45
    
    
    $
    9.03
    
    
    $
    (2.58
    )
    
    
    (28.6
    )%
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeInsurance Settlements
    
    $
    2,121
    
    
    $
    
    
    
    $
    2,121
    
    
    
    100.0
    %Royalty Income
    
    
    2,620
    
    
    
    1,766
    
    
    
    854
    
    
    
    48.4
    %Interest Income
    
    
    1,071
    
    
    
    
    
    
    
    1,071
    
    
    
    100.0
    %Third Party Gathering Revenue
    
    
    391
    
    
    
    294
    
    
    
    97
    
    
    
    33.0
    %Other Miscellaneous
    
    
    (159
    )
    
    
    40
    
    
    
    (199
    )
    
    
    (497.5
    )%Total Other Income
    
    $
    6,044
    
    
    $
    2,100
    
    
    $
    3,944
    
    
    
    187.8
    %
   18




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    7,295
    
    
    $
    6,907
    
    
    $
    388
    
    
    
    5.6
    %Gathering and Compression Costs
    
    
    13,949
    
    
    
    10,696
    
    
    
    3,253
    
    
    
    30.4
    %Royalty Interest Gas Costs
    
    
    10,808
    
    
    
    10,042
    
    
    
    766
    
    
    
    7.6
    %Purchased Gas Costs
    
    
    9,340
    
    
    
    89,653
    
    
    
    (80,313
    )
    
    
    (89.6
    )%Other
    
    
    2,265
    
    
    
    2,741
    
    
    
    (476
    )
    
    
    (17.4
    )%Equity in (Earnings) Loss of Affiliates
    
    
    45
    
    
    
    88
    
    
    
    (43
    )
    
    
    (48.9
    )%General & Administrative
    
    
    8,522
    
    
    
    4,699
    
    
    
    3,823
    
    
    
    81.4
    %Depreciation, Depletion & Amortization
    
    
    9,546
    
    
    
    8,671
    
    
    
    875
    
    
    
    10.1
    %Total Costs and Expenses
    
    $
    61,770
    
    
    $
    133,497
    
    
    $
    (71,727
    )
    
    
    (53.7
    )%
 Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.4
    
    
    
    12.4
    
    
    
    2.0
    
    
    
    16.1
    %Average Lifting Costs (per Mcf)
    
    $
    0.51
    
    
    $
    0.56
    
    
    $
    (0.05
    )
    
    
    (8.9
    )%
  Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.4
    
    
    
    12.4
    
    
    
    2.0
    
    
    
    16.1
    %Average Gathering and Compression Costs (per Mcf)
    
    $
    0.97
    
    
    $
    0.86
    
    
    $
    0.11
    
    
    
    12.8
    %
  19




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##### Table of Contents

\

Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.9
    
    
    
    1.8
    
    
    
    0.1
    
    
    
    5.6
    %Average Cost (per Mcf)
    
    $
    5.60
    
    
    $
    5.66
    
    
    $
    (0.06
    )
    
    
    (1.1
    )%
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    1.4
    
    
    
    9.8
    
    
    
    (8.4
    )
    
    
    (85.7
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    6.64
    
    
    $
    9.17
    
    
    $
    (2.53
    )
    
    
    (27.6
    )%
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeWell Site General Maintenance
    
    $
    366
    
    
    $
    472
    
    
    $
    (106
    )
    
    
    (22.5
    )%Gob Gas Collection Costs
    
    
    697
    
    
    
    821
    
    
    
    (124
    )
    
    
    (15.1
    )%Miscellaneous
    
    
    444
    
    
    
    268
    
    
    
    176
    
    
    
    65.7
    %Land Related
    
    
    469
    
    
    
    562
    
    
    
    (93
    )
    
    
    (16.5
    )%Imbalance
    
    
    289
    
    
    
    618
    
    
    
    (329
    )
    
    
    (53.2
    )%Total Other Costs and Expenses
    
    $
    2,265
    
    
    $
    2,741
    
    
    $
    (476
    )
    
    
    (17.4
    )%
       Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeKnox Energy
    
    $
    30
    
    
    $
    76
    
    
    $
    (46
    )
    
    
    (60.5
    )%Coalfield Pipeline
    
    
    (40
    )
    
    
    (16
    )
    
    
    (24
    )
    
    
    (150.0
    )%Buchanan Generation
    
    
    55
    
    
    
    28
    
    
    
    27
    
    
    
    96.4
    %Total Equity in (Earnings) Loss of Affiliates
    
    $
    45
    
    
    $
    88
    
    
    $
    (43
    )
    
    
    (48.9
    )%
  20




---



##### Table of Contents



Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeProduction
    
    $
    6,357
    
    
    $
    5,793
    
    
    $
    564
    
    
    
    9.7
    %Gathering
    
    
    3,189
    
    
    
    2,878
    
    
    
    311
    
    
    
    10.8
    %Total Depreciation, Depletion and Amortization
    
    $
    9,546
    
    
    $
    8,671
    
    
    $
    875
    
    
    
    10.1
    %
  Income Taxes
 Percentage2006
    
    2005
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    61,797
    
    
    $
    42,815
    
    
    $
    18,982
    
    
    
    44.3
    %Tax Expense
    
    $
    24,204
    
    
    $
    16,745
    
    
    $
    7,459
    
    
    
    44.5
    %Effective Income Tax Rate
    
    
    39.2
    %
    
    
    39.1
    %
    
    
    0.1
    %
  21




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##### Table of Contents



Results of Operations
 Nine Months Ended September 30, 2006 compared with Nine Months Ended September 30, 2005
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    286,494
    
    
    $
    192,878
    
    
    $
    93,616
    
    
    
    48.5
    %Related Party Sales
    
    
    5,753
    
    
    
    5,325
    
    
    
    428
    
    
    
    8.0
    %Royalty Interest Gas Sales
    
    
    41,714
    
    
    
    31,059
    
    
    
    10,655
    
    
    
    34.3
    %Purchased Gas Sales
    
    
    41,206
    
    
    
    157,545
    
    
    
    (116,339
    )
    
    
    (73.8
    )%Other Income
    
    
    19,475
    
    
    
    6,627
    
    
    
    12,848
    
    
    
    193.9
    %Total Revenue and Other Income
    
    
    394,642
    
    
    
    393,434
    
    
    
    1,208
    
    
    
    0.3
    %Costs and Expenses:Lifting Costs
    
    
    21,990
    
    
    
    19,087
    
    
    
    2,903
    
    
    
    15.2
    %Gathering and Compression Costs
    
    
    40,940
    
    
    
    29,918
    
    
    
    11,022
    
    
    
    36.8
    %Royalty Interest Gas Costs
    
    
    34,491
    
    
    
    24,505
    
    
    
    9,986
    
    
    
    40.8
    %Purchased Gas Costs
    
    
    42,091
    
    
    
    159,739
    
    
    
    (117,648
    )
    
    
    (73.7
    )%Other
    
    
    6,138
    
    
    
    8,335
    
    
    
    (2,197
    )
    
    
    (26.4
    )%Equity in (Earnings) Loss of Affiliates
    
    
    (727
    )
    
    
    220
    
    
    
    (947
    )
    
    
    (430.5
    )%General and Administrative
    
    
    23,228
    
    
    
    12,171
    
    
    
    11,057
    
    
    
    90.8
    %Depreciation, Depletion and Amortization
    
    
    27,437
    
    
    
    25,883
    
    
    
    1,554
    
    
    
    6.0
    %Total Costs and Expenses
    
    
    195,588
    
    
    
    279,858
    
    
    
    (84,270
    )
    
    
    (30.1
    )%Earnings Before Income Taxes
    
    
    199,054
    
    
    
    113,576
    
    
    
    85,478
    
    
    
    75.3
    %Income Taxes
    
    
    77,432
    
    
    
    43,988
    
    
    
    33,444
    
    
    
    76.0
    %Net Income
    
    $
    121,622
    
    
    $
    69,588
    
    
    $
    52,034
    
    
    
    74.8
    %
  Revenue and Other Income
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    286,494
    
    
    $
    192,878
    
    
    $
    93,616
    
    
    
    48.5
    %Related Party Sales
    
    
    5,753
    
    
    
    5,325
    
    
    
    428
    
    
    
    8.0
    %Royalty Interest Gas Sales
    
    
    41,714
    
    
    
    31,059
    
    
    
    10,655
    
    
    
    34.3
    %Purchased Gas Sales
    
    
    41,206
    
    
    
    157,545
    
    
    
    (116,339
    )
    
    
    (73.8
    )%Other Income
    
    
    19,475
    
    
    
    6,627
    
    
    
    12,848
    
    
    
    193.9
    %Total Revenue and Other Income
    
    $
    394,642
    
    
    $
    393,434
    
    
    $
    1,208
    
    
    
    0.3
    %
  22




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##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    41.7
    
    
    
    35.9
    
    
    
    5.8
    
    
    
    16.2
    %Average Sales Price (per Mcf)
    
    $
    7.01
    
    
    $
    5.53
    
    
    $
    1.48
    
    
    
    26.8
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    5.6
    
    
    
    5.1
    
    
    
    0.5
    
    
    
    9.8
    %Average Sales Price (per Mcf)
    
    $
    7.42
    
    
    $
    6.06
    
    
    $
    1.36
    
    
    
    22.4
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    5.4
    
    
    
    20.0
    
    
    
    (14.6
    )
    
    
    (73.0
    )%Average Sales Price (per Mcf)
    
    $
    7.67
    
    
    $
    7.87
    
    
    $
    (0.20
    )
    
    
    (2.5
    )%
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeInsurance Proceeds
    
    $
    9,081
    
    
    $
    
    
    
    $
    9,081
    
    
    
    100.0
    %Royalty Income
    
    
    7,198
    
    
    
    5,667
    
    
    
    1,531
    
    
    
    27.0
    %Interest Income
    
    
    2,169
    
    
    
    
    
    
    
    2,169
    
    
    
    100.0
    %Third Party Gathering Revenue
    
    
    1,057
    
    
    
    794
    
    
    
    263
    
    
    
    33.1
    %Other Miscellaneous
    
    
    (30
    )
    
    
    166
    
    
    
    (196
    )
    
    
    (118.1
    )%Total Other Income
    
    $
    19,475
    
    
    $
    6,627
    
    
    $
    12,848
    
    
    
    193.9
    %
   23




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    21,990
    
    
    $
    19,087
    
    
    $
    2,903
    
    
    
    15.2
    %Gathering and Compression Costs
    
    
    40,940
    
    
    
    29,918
    
    
    
    11,022
    
    
    
    36.8
    %Royalty Interest Gas Costs
    
    
    34,491
    
    
    
    24,505
    
    
    
    9,986
    
    
    
    40.8
    %Purchased Gas Costs
    
    
    42,091
    
    
    
    159,739
    
    
    
    (117,648
    )
    
    
    (73.7
    )%Other
    
    
    6,138
    
    
    
    8,335
    
    
    
    (2,197
    )
    
    
    (26.4
    )%Equity in (Earnings) Loss of Affiliates
    
    
    (727
    )
    
    
    220
    
    
    
    (947
    )
    
    
    (430.5
    )%General & Administrative
    
    
    23,228
    
    
    
    12,171
    
    
    
    11,057
    
    
    
    90.8
    %Depreciation, Depletion & Amortization
    
    
    27,437
    
    
    
    25,883
    
    
    
    1,554
    
    
    
    6.0
    %Total Costs and Expenses
    
    $
    195,588
    
    
    $
    279,858
    
    
    $
    (84,270
    )
    
    
    (30.1
    )%
 Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    41.7
    
    
    
    35.9
    
    
    
    5.8
    
    
    
    16.2
    %Average Lifting Costs (per Mcf)
    
    $
    0.53
    
    
    $
    0.53
    
    
    $
    0.00
    
    
    
    0.0
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    41.7
    
    
    
    35.9
    
    
    
    5.8
    
    
    
    16.2
    %Average Gathering and Compression Costs (per Mcf)
    
    $
    0.98
    
    
    $
    0.83
    
    
    $
    0.15
    
    
    
    18.1
    %
  24




---



##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    5.6
    
    
    
    5.1
    
    
    
    0.5
    
    
    
    9.8
    %Average Cost (per Mcf)
    
    $
    6.13
    
    
    $
    4.78
    
    
    $
    1.35
    
    
    
    28.2
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Cost Volumes (Bcf)
    
    
    5.4
    
    
    
    20.0
    
    
    
    (14.6
    )
    
    
    (73.0
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    7.84
    
    
    $
    7.98
    
    
    $
    (0.14
    )
    
    
    (1.8
    )%
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeWell Site General Maintenance
    
    $
    2,166
    
    
    $
    2,022
    
    
    $
    144
    
    
    
    7.1
    %Gob Gas Collection Costs
    
    
    2,081
    
    
    
    2,237
    
    
    
    (156
    )
    
    
    (7.0
    )%Land Related
    
    
    1,055
    
    
    
    1,027
    
    
    
    28
    
    
    
    2.7
    %Miscellaneous
    
    
    1,418
    
    
    
    260
    
    
    
    1,158
    
    
    
    445.4
    %Imbalance
    
    
    (582
    )
    
    
    1,462
    
    
    
    (2,044
    )
    
    
    (139.8
    )%Accounts Receivable Securitization Fees
    
    
    
    
    
    
    1,327
    
    
    
    (1,327
    )
    
    
    (100.0
    )%Total Other Costs and Expenses
    
    $
    6,138
    
    
    $
    8,335
    
    
    $
    (2,197
    )
    
    
    (26.4
    )%
       25




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##### Table of Contents



Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeKnox Energy
    
    $
    (1,136
    )
    
    $
    84
    
    
    $
    (1,220
    )
    
    
    (1,452.4
    )%Coalfield Pipeline
    
    
    (44
    )
    
    
    (35
    )
    
    
    (9
    )
    
    
    (25.7
    )%Buchanan Generation
    
    
    453
    
    
    
    171
    
    
    
    282
    
    
    
    164.9
    %Total Equity in (Earnings) Loss of Affiliates
    
    $
    (727
    )
    
    $
    220
    
    
    $
    (947
    )
    
    
    (430.5
    )%
      Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeProduction
    
    $
    18,002
    
    
    $
    17,251
    
    
    $
    751
    
    
    
    4.4
    %Gathering
    
    
    9,435
    
    
    
    8,632
    
    
    
    803
    
    
    
    9.3
    %Total Depreciation, Depletion and Amortization
    
    $
    27,437
    
    
    $
    25,883
    
    
    $
    1,554
    
    
    
    6.0
    %
  Income Taxes
 Percentage2006
    
    2005
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    199,054
    
    
    $
    113,576
    
    
    $
    85,478
    
    
    
    75.3
    %Tax Expense
    
    $
    77,432
    
    
    $
    43,988
    
    
    $
    33,444
    
    
    
    76.0
    %Effective Income Tax Rate
    
    
    38.9
    %
    
    
    38.7
    %
    
    
    0.2
    %
  Liquidity and Capital Resources
   26




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##### Table of Contents



Cash Flows (in thousands)
 Year to Date
    
    Year to Date2006
    
    2005
    
    ChangeCash provided by operating activities
    
    $
    205,943
    
    
    $
    124,896
    
    
    $
    81,047Cash used in investing activities
    
    $
    (118,440
    )
    
    $
    (72,904
    )
    
    $
    (45,536
    )Cash used in financing activities
    
    $
    
    
    
    $
    (22,439
    )
    
    $
    22,439
    Contractual Commitments
  Within
    
    
    1-3
    
    
    3-5
    
    
    More than(In thousands)
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong Term Debt Obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital
(Finance) Lease Obligations (a)
    
    
    66,919
    
    
    
    2,343
    
    
    
    5,643
    
    
    
    6,535
    
    
    
    52,398Operating Lease Obligations
    
    
    5,280
    
    
    
    820
    
    
    
    1,650
    
    
    
    1,661
    
    
    
    1,149Other Long-Term Liabilities:Gas Firm Transportation Obligation
    
    
    19,606
    
    
    
    3,758
    
    
    
    7,692
    
    
    
    5,512
    
    
    
    2,644Other
Liabilities (b)
    
    
    13,659
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,659Well Plugging Liabilities
    
    
    8,723
    
    
    
    378
    
    
    
    756
    
    
    
    756
    
    
    
    6,833Pension
    
    
    398
    
    
    
    1
    
    
    
    8
    
    
    
    35
    
    
    
    354Postemployment Benefits Other than Pension
    
    
    3,337
    
    
    
    5
    
    
    
    44
    
    
    
    104
    
    
    
    3,184Total Contractual Obligations
    
    $
    117,922
    
    
    $
    7,305
    
    
    $
    15,793
    
    
    $
    14,603
    
    
    $
    80,221
 
 (a)
    
    In conjunction with the completion of the Jewell Ridge lateral pipeline in October 2006, CNX
Gas entered into a 15 year firm transportation agreement with ETNG, a subsidiary of Duke Energy, at
pre-determined fixed rates. The present value of our payments under this firm transportation
agreement is approximately $67 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 7 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. Off-Balance Sheet Transactions
  27




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    our business strategy;
    
    our financial position;
    
    our 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;
    
    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, 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;
    
    increased costs;
    
    our inability to retain and attract key personnel;
    
    our joint venture arrangements;
    
    the effects of government regulation and permitting and other legal requirements;
    
    legal uncertainties relating to the ownership of CBM;
    
    costs associated with perfecting title for gas rights in some of our properties;
    
    our need to use unproven technologies to extract CBM in some properties;
 28




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##### Table of Contents




    
    our relationships and arrangements with CONSOL Energy; and
    
    other factors discussed under Risk Factors in the 10-K for the year ended December 31, 2005.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       Incremental decrease in pre-tax income assuming aHypothetical price change of:10%
    
    25%(In millions)Natural Gas (1)
    
    $
    14.4
    
    
    $
    34.4
 
 (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 2006
through 2008 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 September 30, 2006,
the fair value of these contracts was a net asset of $520, net of $203 deferred tax. We
continually evaluate the portfolio of derivative commodity instruments and adjust the strategy
to anticipated market conditions and risks accordingly. 29




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##### Table of Contents



Hedging Volumes
  Three months
    
    Three months
    
    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    endedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    Total Year2006 Fixed Price VolumesHedged Mcf
    
    
    3,654,822
    
    
    
    4,619,289
    
    
    
    4,670,051
    
    
    
    4,050,761
    
    
    
    16,994,923Weighted Average Hedge Price/Mcf
    
    $
    6.88
    
    
    $
    7.73
    
    
    $
    7.73
    
    
    $
    7.21
    
    
    $
    7.422007 Fixed Price VolumesHedged Mcf
    
    
    1,827,411
    
    
    
    1,847,716
    
    
    
    1,868,020
    
    
    
    1,868,020
    
    
    
    7,411,167Weighted Average Hedge Price/Mcf
    
    $
    7.67
    
    
    $
    7.67
    
    
    $
    7.67
    
    
    $
    7.67
    
    
    $
    7.672008 Fixed Price VolumesHedged Mcf
    
    
    1,847,716
    
    
    
    1,847,716
    
    
    
    1,868,020
    
    
    
    1,868,020
    
    
    
    7,431,472Weighted Average Hedge Price/Mcf
    
    $
    7.20
    
    
    $
    7.20
    
    
    $
    7.20
    
    
    $
    7.20
    
    
    $
    7.20
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls Over Financial Reporting.
  
 PART II
OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  30




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##### Table of Contents



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
    
    CNX Gas Corporation Long-Term Incentive Program for the performance period from October 11, 2006
to December 31, 2009 is incorporated by reference from the companys Current Report on Form 8-K
filed on October 17, 2006, wherein it appeared as exhibit 10.1.*10.2
    
    Form of Award Agreement under the CNX Gas Corporation Long-Term Incentive Program for the
performance period from October 11, 2006 to December 31, 2009 is incorporated by reference from
the companys Current Report on Form 8-K filed on October 17, 2006, wherein it appeared as
exhibit 10.2.*10.3
    
    First Amendment to the CNX Gas Corporation Equity Incentive Plan, as amended, is incorporated by
reference from the companys Current Report on Form 8-K filed on October 17, 2006, wherein it
appeared as exhibit 10.3*10.4
    
    Summary of Non-Employee Director Compensation effective as of November 1, 2006 is incorporated by
reference from the companys Current Report on Form 8-K filed on October 17, 2006, wherein it
appeared as exhibit 10.4.*10.5
    
    Summary of the awards to the companys executive officers under the CNX Gas Corporation Long-Term
Incentive Program for the performance period from October 11, 2006 to December 31, 2009 is
incorporated by reference from the companys Current Report on Form 8-K filed on October 17,
2006, wherein it appeared under the caption Unit Awards under the Program.*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
 
 
 *
    
    Management compensatory contract or arrangement. 31




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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/ Gary J. BenchGary J. BenchSenior Vice President and Chief Financial Officer
(Principal Financial Officer) 32




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##### Table of Contents



EXHIBIT INDEX
 10.1
    
    CNX Gas Corporation Long-Term Incentive Program for the performance period from October 11, 2006
to December 31, 2009 is incorporated by reference from the companys Current Report on Form 8-K
filed on October 17, 2006, wherein it appeared as exhibit 10.1.*10.2
    
    Form of Award Agreement under the CNX Gas Corporation Long-Term Incentive Program for the
performance period from October 11, 2006 to December 31, 2009 is incorporated by reference from
the companys Current Report on Form 8-K filed on October 17, 2006, wherein it appeared as
exhibit 10.2.*10.3
    
    First Amendment to the CNX Gas Corporation Equity Incentive Plan, as amended, is incorporated by
reference from the companys Current Report on Form 8-K filed on October 17, 2006, wherein it
appeared as exhibit 10.3*10.4
    
    Summary of Non-Employee Director Compensation effective as of November 1, 2006 is incorporated by
reference from the companys Current Report on Form 8-K filed on October 17, 2006, wherein it
appeared as exhibit 10.4.*10.5
    
    Summary of the awards to the companys executive officers under the CNX Gas Corporation Long-Term
Incentive Program for the performance period from October 11, 2006 to December 31, 2009 is
incorporated by reference from the companys Current Report on Form 8-K filed on October 17,
2006, wherein it appeared under the caption Unit Awards under the Program.*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
 
 
 *
    
    Management compensatory contract or arrangement. 33