##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period fromto
 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 15276-0102
(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 INFORMATIONItem 1. Condensed Financial Statements (unaudited)
    
    
    3Consolidated Statements of Income for the three and nine months ended September 30, 2007 and 2006
    
    
    3Consolidated Balance Sheets at September 30, 2007 and December 31, 2006
    
    
    4Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2007
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29EX-10.1EX-10.2EX-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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue and Other Income:Outside Sales
    
    $
    96,222
    
    
    $
    92,507
    
    
    $
    306,615
    
    
    $
    286,494Related Party Sales
    
    
    2,379
    
    
    
    2,719
    
    
    
    6,980
    
    
    
    5,753Royalty Interest Gas Sales
    
    
    10,175
    
    
    
    13,221
    
    
    
    36,841
    
    
    
    41,714Purchased Gas Sales
    
    
    821
    
    
    
    9,076
    
    
    
    3,297
    
    
    
    41,206Other Income
    
    
    208
    
    
    
    6,044
    
    
    
    4,675
    
    
    
    19,475Total Revenue and Other Income
    
    
    109,805
    
    
    
    123,567
    
    
    
    358,408
    
    
    
    394,642Costs and Expenses:Lifting Costs
    
    
    8,588
    
    
    
    7,775
    
    
    
    25,617
    
    
    
    24,115Gathering and Compression Costs
    
    
    15,283
    
    
    
    14,646
    
    
    
    46,593
    
    
    
    43,021Royalty Interest Gas Costs
    
    
    8,543
    
    
    
    10,808
    
    
    
    31,736
    
    
    
    34,491Purchased Gas Costs
    
    
    495
    
    
    
    9,340
    
    
    
    2,987
    
    
    
    42,091Other
    
    
    (1,363
    )
    
    
    1,021
    
    
    
    228
    
    
    
    783General and Administrative
    
    
    12,793
    
    
    
    8,634
    
    
    
    39,069
    
    
    
    23,641Depreciation, Depletion and Amortization
    
    
    12,248
    
    
    
    9,546
    
    
    
    36,325
    
    
    
    27,437Interest Expense
    
    
    1,221
    
    
    
    
    
    
    
    3,686
    
    
    
    9Total Costs and Expenses
    
    
    57,808
    
    
    
    61,770
    
    
    
    186,241
    
    
    
    195,588Earnings Before Income Taxes
    
    
    51,997
    
    
    
    61,797
    
    
    
    172,167
    
    
    
    199,054Income Taxes
    
    
    20,701
    
    
    
    24,204
    
    
    
    66,387
    
    
    
    77,432Net Income
    
    $
    31,296
    
    
    $
    37,593
    
    
    $
    105,780
    
    
    $
    121,622Earnings Per Share:Basic
    
    $
    0.21
    
    
    $
    0.25
    
    
    $
    0.70
    
    
    $
    0.81Diluted
    
    $
    0.21
    
    
    $
    0.25
    
    
    $
    0.70
    
    
    $
    0.81Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,895,233
    
    
    
    150,850,930
    
    
    
    150,877,067
    
    
    
    150,839,264Dilutive
    
    
    151,149,432
    
    
    
    151,029,192
    
    
    
    151,103,827
    
    
    
    150,998,713
 The accompanying notes are an integral part of these consolidated financial statements.
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CNX GAS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS  (Dollars in thousands)
 (Unaudited)September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    58,403
    
    
    $
    107,173Accounts Receivable:Trade
    
    
    31,143
    
    
    
    46,062Net Related Party
    
    
    
    
    
    
    2,745Other
    
    
    1,452
    
    
    
    2,291Derivatives
    
    
    13,723
    
    
    
    10,548Other Current Assets
    
    
    2,564
    
    
    
    3,917Total Current Assets
    
    
    107,285
    
    
    
    172,736Property, Plant and Equipment, Net
    
    
    1,147,278
    
    
    
    918,162Other Assets
    
    
    9,689
    
    
    
    11,820Investments in Equity Affiliates
    
    
    55,872
    
    
    
    52,283TOTAL ASSETS
    
    $
    1,320,124
    
    
    $
    1,155,001LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable:Trade
    
    $
    16,794
    
    
    $
    27,872Net Related Party
    
    
    152
    
    
    
    Accrued Royalties Payable
    
    
    10,620
    
    
    
    11,960Accrued Severance Taxes
    
    
    2,337
    
    
    
    2,576Accrued Income Taxes
    
    
    1,385
    
    
    
    2,191Deferred Taxes
    
    
    2,432
    
    
    
    3,091Other Current Liabilities
    
    
    13,357
    
    
    
    9,222Total Current Liabilities
    
    
    47,077
    
    
    
    56,912Long-Term Debt:Long-Term Debt (Note 6)
    
    
    6,240
    
    
    
    Total Long-Term Debt
    
    
    6,240
    
    
    
    Deferred Credits and Other Liabilities:Deferred Taxes
    
    
    173,222
    
    
    
    120,008Capital Lease Obligation
    
    
    61,838
    
    
    
    63,897Other Liabilities
    
    
    30,555
    
    
    
    15,977Well Plugging Liabilities
    
    
    3,402
    
    
    
    9,214Derivatives
    
    
    269
    
    
    
    6,465Postretirement Benefits Other Than Pension
    
    
    2,436
    
    
    
    2,313Total Deferred Credits and Other Liabilities
    
    
    271,722
    
    
    
    217,874Total Liabilities
    
    
    325,039
    
    
    
    274,786Stockholders EquityCommon Stock, $.01 par value; 200,000,000 Shares
Authorized, 150,910,198 Issued and Outstanding at
September 30, 2007 and 150,864,075 Issued and
Outstanding at December 31, 2006
    
    
    1,509
    
    
    
    1,508Capital in Excess of Par Value
    
    
    784,632
    
    
    
    781,960Retained Earnings
    
    
    200,064
    
    
    
    94,337Accumulated Other Comprehensive Income
    
    
    8,880
    
    
    
    2,410Total Stockholders Equity
    
    
    995,085
    
    
    
    880,215TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,320,124
    
    
    $
    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
    
    
    
    
    
    
    
    
    
    
    105,780
    
    
    
    
    
    
    
    105,780Gas Cash Flow Hedge (Net of $3,640 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,549
    
    
    
    6,549Comprehensive Income (Loss) (a)
    
    
    
    
    
    
    
    
    
    
    105,780
    
    
    
    6,549
    
    
    
    112,329FASB Interpretation No. 48 Adoption
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )Stock Options Exercised
    
    
    1
    
    
    
    220
    
    
    
    
    
    
    
    
    
    
    
    221Tax Benefit from Stock Based Compensation
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Amortization of Restricted Stock Unit Grants
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    478Amortization of Stock Option Grants
    
    
    
    
    
    
    1,939
    
    
    
    
    
    
    
    
    
    
    
    1,939Actuarial Salary OPEB revaluation (net of $44 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    (69
    )Actuarial Pension revaluation (net of $7 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Balance at September 30, 2007
    
    $
    1,509
    
    
    $
    784,632
    
    
    $
    200,064
    
    
    $
    8,880
    
    
    $
    995,085
 
 (a)
    
    Of the $6,549 net change in accumulated other comprehensive income (loss) in the period,
$12,428 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 Nine Months EndedSeptember 30,2007
    
    
    2006Operating Activities:Net Income
    
    $
    105,780
    
    
    $
    121,622Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:Depreciation, Depletion and Amortization
    
    
    36,325
    
    
    
    27,437Compensation from Restricted Stock Unit Grants
    
    
    478
    
    
    
    654Compensation from Stock Option Grants
    
    
    1,939
    
    
    
    1,423Deferred Income Taxes
    
    
    52,121
    
    
    
    45,345Equity in Earnings of Affiliates
    
    
    (1,330
    )
    
    
    (727
    )Changes in Operating Assets:Accounts Receivable
    
    
    15,758
    
    
    
    7,308Related Party Receivable
    
    
    2,745
    
    
    
    57Other Current Assets
    
    
    1,353
    
    
    
    (161
    )Changes in Other Assets
    
    
    2,131
    
    
    
    845Changes in Operating Liabilities:Accounts Payable
    
    
    (7,190
    )
    
    
    (3,855
    )Related Party Payable
    
    
    152
    
    
    
    Income Taxes
    
    
    (771
    )
    
    
    1,073Other Current Liabilities
    
    
    (332
    )
    
    
    758Changes in Other Liabilities
    
    
    3,170
    
    
    
    3,690Other
    
    
    (1,254
    )
    
    
    474Net Cash Provided by Operating Activities
    
    
    211,075
    
    
    
    205,943Investing Activities:Capital Expenditures
    
    
    (194,967
    )
    
    
    (117,037
    )Acquisition of Mineral Rights
    
    
    (61,149
    )
    
    
    Capital Expenditures of Variable Interest Entity
    
    
    (9,000
    )
    
    
    Investment in Equity Affiliates
    
    
    (2,259
    )
    
    
    (1,403
    )Proceeds From Sales of Assets
    
    
    187
    
    
    
    Net Cash (Used in) Investing Activities
    
    
    (267,188
    )
    
    
    (118,440
    )Financing Activities:Capital Lease Payments
    
    
    (1,912
    )
    
    
    Proceeds from the Debt of Variable Interest Entity
    
    
    9,000
    
    
    
    Exercise of Stock Options
    
    
    220
    
    
    
    Tax Benefit from Stock Based Compensation
    
    
    35
    
    
    
    Net Cash Provided by Financing Activities
    
    
    7,343
    
    
    
    Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (48,770
    )
    
    
    87,503Cash and Cash Equivalents at Beginning of Period
    
    
    107,173
    
    
    
    20,073Cash and Cash Equivalents at End of Period
    
    $
    58,403
    
    
    $
    107,576
 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, except per share data)
 Note 1Basis of Presentation:
      7




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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net Income
    
    $
    31,296
    
    
    $
    37,593
    
    
    $
    105,780
    
    
    $
    121,622Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,895,233
    
    
    
    150,850,930
    
    
    
    150,877,067
    
    
    
    150,839,264Effect of stock based compensation
    
    
    254,199
    
    
    
    178,262
    
    
    
    226,760
    
    
    
    159,449Dilutive
    
    
    151,149,432
    
    
    
    151,029,192
    
    
    
    151,103,827
    
    
    
    150,998,713Earnings per share:Basic
    
    $
    0.21
    
    
    $
    0.25
    
    
    $
    0.70
    
    
    $
    0.81Diluted
    
    $
    0.21
    
    
    $
    0.25
    
    
    $
    0.70
    
    
    $
    0.81
 Note 2Acquisitions:
    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 Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Components of Net Periodic Benefit Costs:Service costs
    
    $
    65
    
    
    $
    70
    
    
    $
    31
    
    
    $
    23
    
    
    $
    195
    
    
    $
    210
    
    
    $
    93
    
    
    $
    69Interest costs
    
    
    3
    
    
    
    1
    
    
    
    35
    
    
    
    25
    
    
    
    9
    
    
    
    3
    
    
    
    105
    
    
    
    75Expected return on assets
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (6
    )
    
    
    
    
    
    
    Amortization of prior service costs credit
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )
    
    
    (129
    )Amortization of (gain) loss
    
    
    (6
    )
    
    
    (3
    )
    
    
    5
    
    
    
    
    
    
    
    (18
    )
    
    
    (9
    )
    
    
    15
    
    
    
    Benefit costs
    
    $
    62
    
    
    $
    66
    
    
    $
    28
    
    
    $
    5
    
    
    $
    187
    
    
    $
    198
    
    
    $
    84
    
    
    $
    15
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Note 4Income Taxes:
  For the Nine Months Ended September 30,2007
    
    
    2006Dollars
    
    
    Rate
    
    
    Dollars
    
    
    RateStatutory U.S. Federal Income Tax
    
    $
    60,258
    
    
    
    35.0
    %
    
    $
    69,669
    
    
    
    35.0
    %Net Effect of State Income Tax
    
    
    7,145
    
    
    
    4.1
    %
    
    
    8,619
    
    
    
    4.3
    %Other
    
    
    (1,016
    )
    
    
    (0.5
    )%
    
    
    (856
    )
    
    
    (0.4
    )%Income Tax Expense/Effective Rate
    
    $
    66,387
    
    
    
    38.6
    %
    
    $
    77,432
    
    
    
    38.9
    %
      Note 5Property, Plant and Equipment:
 September 30,
    
    
    December 31,2007
    
    
    2006Leasehold Improvements
    
    $
    783
    
    
    $
    Surface Lands
    
    
    61,688
    
    
    
    37,055Mineral Interests
    
    
    125,040
    
    
    
    55,623Wells and Related Equipment
    
    
    146,305
    
    
    
    112,009Intangible Drilling
    
    
    472,390
    
    
    
    383,605Gathering Assets
    
    
    571,795
    
    
    
    520,906Gas Well Plugging
    
    
    371
    
    
    
    5,652Capitalized Internal Software
    
    
    6,536
    
    
    
    6,433Total Property, Plant and Equipment
    
    
    1,384,908
    
    
    
    1,121,283Accumulated Depreciation, Depletion and Amortization
    
    
    (237,630
    )
    
    
    (203,121
    )Property, Plant and Equipment, Net
    
    $
    1,147,278
    
    
    $
    918,162
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Note 6Commitments and Contingent Liabilities:
 GeoMet Operating Company, Inc. and
Pocahontas Mining Limited Liability Company v. CNX Gas Company LLC
    10




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TotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    BeyondCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 yearsLetters of Credit:Gas
    
    $
    14,933
    
    
    $
    14,913
    
    
    $
    20
    
    
    $
    
    
    
    $
    Total Letters of Credit
    
    $
    14,933
    
    
    $
    14,913
    
    
    $
    20
    
    
    $
    
    
    
    $
    Surety Bonds:Environmental
    
    $
    481
    
    
    $
    481
    
    
    $
    
    
    
    $
    
    
    
    $
    Other
    
    
    21,827
    
    
    
    21,827
    
    
    
    
    
    
    
    
    
    
    
    Total Surety Bonds
    
    $
    22,308
    
    
    $
    22,308
    
    
    $
    
    
    
    $
    
    
    
    $
    Other:Firm Transportation
    
    $
    50,655
    
    
    $
    7,392
    
    
    $
    14,554
    
    
    $
    10,482
    
    
    $
    18,227Guarantees
    
    
    11,191
    
    
    
    11,191
    
    
    
    
    
    
    
    
    
    
    
    Total Guarantees
    
    $
    61,846
    
    
    $
    18,583
    
    
    $
    14,554
    
    
    $
    10,482
    
    
    $
    18,227Total Commitments
    
    $
    99,087
    
    
    $
    55,804
    
    
    $
    14,574
    
    
    $
    10,482
    
    
    $
    18,227
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Letters of Credit
    Surety Bonds
  Other Guarantees
  Variable Interest
    12




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Note 7Segment Information:
   CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &and Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    87,603
    
    
    $
    8,619
    
    
    $
    96,222
    
    
    $
    
    
    
    $
    
    
    
    $
    96,222Salesrelated parties
    
    
    2,369
    
    
    
    10
    
    
    
    2,379
    
    
    
    
    
    
    
    
    
    
    
    2,379Salesroyalty interest
    
    
    10,165
    
    
    
    10
    
    
    
    10,175
    
    
    
    
    
    
    
    
    
    
    
    10,175Salespurchased gas
    
    
    821
    
    
    
    
    
    
    
    821
    
    
    
    
    
    
    
    
    
    
    
    821Other revenue
    
    
    (422
    )
    
    
    
    
    
    
    (422
    )
    
    
    630
    
    
    
    
    
    
    
    208Intersegment revenues
    
    
    19,026
    
    
    
    711
    
    
    
    19,737
    
    
    
    
    
    
    
    (19,737
    )
    
    
    Total Revenue and Other Income
    
    $
    119,562
    
    
    $
    9,350
    
    
    $
    128,912
    
    
    $
    630
    
    
    $
    (19,737
    )
    
    $
    109,805Earnings Before Income Taxes
    
    $
    51,321
    
    
    $
    5
    
    
    $
    51,326
    
    
    $
    671
    
    
    $
    
    
    
    $
    51,997
    
    
    
    (A)Segment assets
    
    $
    1,071,858
    
    
    $
    165,086
    
    
    $
    1,236,944
    
    
    $
    83,180
    
    
    $
    
    
    
    $
    1,320,124
    
    
    
    (B)(C)Depreciation, depletion and amortization
    
    $
    10,636
    
    
    $
    1,612
    
    
    $
    12,248
    
    
    $
    
    
    
    $
    
    
    
    $
    12,248Capital expenditures and Acquisition of Mineral Rights
    
    $
    36,819
    
    
    $
    36,394
    
    
    $
    73,213
    
    
    $
    
    
    
    $
    
    
    
    $
    73,213
 
 (A)
    
    Includes equity in earnings of unconsolidated affiliates of $650 and $277 for Central
Appalachia and Corporate Segments, respectively.(B)
    
    Includes investments in unconsolidated equity affiliates of $31,095 and $24,777 for Central
Appalachia and Corporate Segments, respectively.(C)
    
    Includes cash of $58,403 in the Corporate Segment.  CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &and Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    87,636
    
    
    $
    4,871
    
    
    $
    92,507
    
    
    $
    
    
    
    $
    
    
    
    $
    92,507Salesrelated parties
    
    
    2,699
    
    
    
    20
    
    
    
    2,719
    
    
    
    
    
    
    
    
    
    
    
    2,719Salesroyalty interest
    
    
    13,203
    
    
    
    18
    
    
    
    13,221
    
    
    
    
    
    
    
    
    
    
    
    13,221Salespurchased gas
    
    
    9,076
    
    
    
    
    
    
    
    9,076
    
    
    
    
    
    
    
    
    
    
    
    9,076Other revenue
    
    
    4,962
    
    
    
    11
    
    
    
    4,973
    
    
    
    1,071
    
    
    
    
    
    
    
    6,044Intersegment revenues
    
    
    15,131
    
    
    
    333
    
    
    
    15,464
    
    
    
    
    
    
    
    (15,464
    )
    
    
    Total Revenue and Other Income
    
    $
    132,707
    
    
    $
    5,253
    
    
    $
    137,960
    
    
    $
    1,071
    
    
    $
    (15,464
    )
    
    $
    123,567Earnings Before Income Taxes
    
    $
    60,713
    
    
    $
    300
    
    
    $
    61,013
    
    
    $
    784
    
    
    $
    
    
    
    $
    61,797
    
    
    
    (D)Segment assets
    
    $
    844,073
    
    
    $
    51,186
    
    
    $
    895,259
    
    
    $
    132,311
    
    
    $
    
    
    
    $
    1,027,570
    
    
    
    (E)(F)Depreciation, depletion and amortization
    
    $
    8,817
    
    
    $
    729
    
    
    $
    9,546
    
    
    $
    
    
    
    $
    
    
    
    $
    9,546Capital expenditures
    
    $
    25,951
    
    
    $
    8,077
    
    
    $
    34,028
    
    
    $
    
    
    
    $
    
    
    
    $
    34,028
 
 (D)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $10 and ($55) for Central
Appalachia and Corporate Segments, respectively.(E)
    
    Includes investments in unconsolidated equity affiliates of $26,923 and $24,735 for Central
Appalachia and Corporate Segments, respectively.(F)
    
    Includes cash of $107,576 in the Corporate Segment. 13




---



##### Table of Contents



CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &And Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    286,040
    
    
    $
    20,575
    
    
    $
    306,615
    
    
    $
    
    
    
    $
    
    
    
    $
    306,615Salesrelated parties
    
    
    6,940
    
    
    
    40
    
    
    
    6,980
    
    
    
    
    
    
    
    
    
    
    
    6,980Salesroyalty interest
    
    
    36,758
    
    
    
    83
    
    
    
    36,841
    
    
    
    
    
    
    
    
    
    
    
    36,841Salespurchased gas
    
    
    3,297
    
    
    
    
    
    
    
    3,297
    
    
    
    
    
    
    
    
    
    
    
    3,297Other revenue
    
    
    1,312
    
    
    
    
    
    
    
    1,312
    
    
    
    3,363
    
    
    
    
    
    
    
    4,675Intersegment revenues
    
    
    58,363
    
    
    
    2,195
    
    
    
    60,558
    
    
    
    
    
    
    
    (60,558
    )
    
    
    Total Revenue and Other Income
    
    $
    392,710
    
    
    $
    22,893
    
    
    $
    415,603
    
    
    $
    3,363
    
    
    $
    (60,558
    )
    
    $
    358,408Earnings (Loss) Before Income Taxes
    
    $
    173,133
    
    
    $
    (3,631
    )
    
    $
    169,502
    
    
    $
    2,665
    
    
    $
    
    
    
    $
    172,167
    
    
    
    (G)Segment assets
    
    $
    1,071,858
    
    
    $
    165,086
    
    
    $
    1,236,944
    
    
    $
    83,180
    
    
    $
    
    
    
    $
    1,320,124
    
    
    
    (H)(I)Depreciation, depletion and amortization
    
    $
    31,809
    
    
    $
    4,516
    
    
    $
    36,325
    
    
    $
    
    
    
    $
    
    
    
    $
    36,325Capital expenditures and Acquisition of Mineral Rights
    
    $
    171,311
    
    
    $
    93,805
    
    
    $
    265,116
    
    
    $
    
    
    
    $
    
    
    
    $
    265,116
 
 (G)
    
    Includes equity in earnings of unconsolidated affiliates of $1,313 and $17 for Central
Appalachia and Corporate Segments, respectively.(H)
    
    Includes investments in unconsolidated equity affiliates of $31,095 and $24,777 for Central
Appalachia and Corporate Segments, respectively.(I)
    
    Includes cash of $58,403 in the Corporate Segment.  CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &And Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    270,138
    
    
    $
    16,356
    
    
    $
    286,494
    
    
    $
    
    
    
    $
    
    
    
    $
    286,494Salesrelated parties
    
    
    5,680
    
    
    
    73
    
    
    
    5,753
    
    
    
    
    
    
    
    
    
    
    
    5,753Salesroyalty interest
    
    
    41,574
    
    
    
    140
    
    
    
    41,714
    
    
    
    
    
    
    
    
    
    
    
    41,714Salespurchased gas
    
    
    41,206
    
    
    
    
    
    
    
    41,206
    
    
    
    
    
    
    
    
    
    
    
    41,206Other revenue
    
    
    17,268
    
    
    
    38
    
    
    
    17,306
    
    
    
    2,169
    
    
    
    
    
    
    
    19,475Intersegment revenues
    
    
    40,992
    
    
    
    695
    
    
    
    41,687
    
    
    
    
    
    
    
    (41,687
    )
    
    
    Total Revenue and Other Income
    
    $
    416,858
    
    
    $
    17,302
    
    
    $
    434,160
    
    
    $
    2,169
    
    
    $
    (41,687
    )
    
    $
    394,642Earnings Before Income Taxes
    
    $
    194,371
    
    
    $
    3,685
    
    
    $
    198,056
    
    
    $
    998
    
    
    $
    
    
    
    $
    199,054
    
    
    
    (J)Segment assets
    
    $
    844,073
    
    
    $
    51,186
    
    
    $
    895,259
    
    
    $
    132,311
    
    
    $
    
    
    
    $
    1,027,570
    
    
    
    (K)(L)Depreciation, depletion and amortization
    
    $
    25,488
    
    
    $
    1,949
    
    
    $
    27,437
    
    
    $
    
    
    
    $
    
    
    
    $
    27,437Capital expenditures
    
    $
    94,424
    
    
    $
    22,613
    
    
    $
    117,037
    
    
    $
    
    
    
    $
    
    
    
    $
    117,037
 
 (J)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $1,179 and ($452) for
Central Appalachia and Corporate Segments, respectively.(K)
    
    Includes investments in unconsolidated equity affiliates of $26,923 and $24,735 for Central
Appalachia and Corporate Segments, respectively.(L)
    
    Includes cash of $107,576 in the Corporate Segment. 14




---



##### Table of Contents



Note 8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




---



##### Table of Contents



Operations & Outlook
    
    
    In our Virginia operations, we drilled 63 wells bringing the nine-month total to 214
wells. As of September 30, Virginia Operations is on schedule to drill its 278 planned wells
in 2007. These figures are exclusive of gob wells. CNX Gas is preparing for a 300-well
program in Virginia in 2008.
    
    The Mountaineer play in Northern Appalachia is also on schedule, having drilled 45 of the
57 planned wells in 2007, including 21 in the third quarter. Mountaineer now has five rigs
running. The average per well peak production from fully de-watered wells continues to meet
expectations. Additional rigs are due to arrive in Mountaineer during 2008, with an average
rig count for the year expected to be eight. CNX Gas is preparing for a 100-well program in
Mountaineer in 2008. Processing plant availability at Mountaineer was at a record high in
the third quarter, at 93.5%. The six days of unplanned outages in the third quarter were
down from nine days in the second quarter, and 25 in the first quarter. The company remains
focused on this issue.
    
    In Nittany, the companys exploratory CBM play in central Pennsylvania, CNX Gas is
advancing the start-up date to November 1. At that time, CNX Gas will flow gas into two
compressor stations and a 48,000-foot gathering system. Nittany represents the first totally
new step-out opportunity for CNX Gas since its inception in 2005. CNX Gas is actively
preparing for a 100-well program in Nittany in 2008 expected to be completed with one or two rigs.
    
    In Cardinal, the companys exploratory New Albany Shale play in the Illinois Basin, two
vertical wells were drilled in western Kentucky. A third vertical well in Kentucky was
re-drilled as a horizontal well and fraced using a multi-stage technique. Gas began flowing
from that well in mid-October, although it is not tied into production.
    16




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##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2007 compared with Three Months Ended September 30, 2006
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    96,222
    
    
    $
    92,507
    
    
    $
    3,715
    
    
    
    4.0
    %Related Party Sales
    
    
    2,379
    
    
    
    2,719
    
    
    
    (340
    )
    
    
    (12.5
    )%Royalty Interest Gas Sales
    
    
    10,175
    
    
    
    13,221
    
    
    
    (3,046
    )
    
    
    (23.0
    )%Purchased Gas Sales
    
    
    821
    
    
    
    9,076
    
    
    
    (8,255
    )
    
    
    (91.0
    )%Other Income
    
    
    208
    
    
    
    6,044
    
    
    
    (5,836
    )
    
    
    (96.6
    )%Total Revenue and Other Income
    
    
    109,805
    
    
    
    123,567
    
    
    
    (13,762
    )
    
    
    (11.1
    )%Costs and Expenses:Lifting Costs
    
    
    8,588
    
    
    
    7,775
    
    
    
    813
    
    
    
    10.5
    %Gathering and Compression Costs
    
    
    15,283
    
    
    
    14,646
    
    
    
    637
    
    
    
    4.3
    %Royalty Interest Gas Costs
    
    
    8,543
    
    
    
    10,808
    
    
    
    (2,265
    )
    
    
    (21.0
    )%Purchased Gas Costs
    
    
    495
    
    
    
    9,340
    
    
    
    (8,845
    )
    
    
    (94.7
    )%Other
    
    
    (1,363
    )
    
    
    1,021
    
    
    
    (2,384
    )
    
    
    (233.5
    )%General and Administrative
    
    
    12,793
    
    
    
    8,634
    
    
    
    4,159
    
    
    
    48.2
    %Depreciation, Depletion and Amortization
    
    
    12,248
    
    
    
    9,546
    
    
    
    2,702
    
    
    
    28.3
    %Interest Expense
    
    
    1,221
    
    
    
    
    
    
    
    1,221
    
    
    
    100.0
    %Total Costs and Expenses
    
    
    57,808
    
    
    
    61,770
    
    
    
    (3,962
    )
    
    
    (6.4
    )%Earnings Before Income Taxes
    
    
    51,997
    
    
    
    61,797
    
    
    
    (9,800
    )
    
    
    (15.9
    )%Income Taxes
    
    
    20,701
    
    
    
    24,204
    
    
    
    (3,503
    )
    
    
    (14.5
    )%Net Income
    
    $
    31,296
    
    
    $
    37,593
    
    
    $
    (6,297
    )
    
    
    (16.8
    )%
  Revenue and Other Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    96,222
    
    
    $
    92,507
    
    
    $
    3,715
    
    
    
    4.0
    %Related Party Sales
    
    
    2,379
    
    
    
    2,719
    
    
    
    (340
    )
    
    
    (12.5
    )%Royalty Interest Gas Sales
    
    
    10,175
    
    
    
    13,221
    
    
    
    (3,046
    )
    
    
    (23.0
    )%Purchased Gas Sales
    
    
    821
    
    
    
    9,076
    
    
    
    (8,255
    )
    
    
    (91.0
    )%Other Income
    
    
    208
    
    
    
    6,044
    
    
    
    (5,836
    )
    
    
    (96.6
    )%Total Revenue and Other Income
    
    $
    109,805
    
    
    $
    123,567
    
    
    $
    (13,762
    )
    
    
    (11.1
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.3
    
    
    
    14.4
    
    
    
    (0.1
    )
    
    
    (0.7
    )%Average Sales Price (per Mcf)
    
    $
    6.87
    
    
    $
    6.62
    
    
    $
    0.25
    
    
    
    3.8
    %
  17




---



##### Table of Contents



Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.8
    
    
    
    1.9
    
    
    
    (0.1
    )
    
    
    (5.3
    )%Average Sales Price (per Mcf)
    
    $
    5.81
    
    
    $
    6.85
    
    
    $
    (1.04
    )
    
    
    (15.2
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    0.1
    
    
    
    1.4
    
    
    
    (1.3
    )
    
    
    (92.9
    )%Average Sales Price (per Mcf)
    
    $
    6.13
    
    
    $
    6.45
    
    
    $
    (0.32
    )
    
    
    (5.0
    )%
   Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeInterest Income
    
    $
    630
    
    
    $
    1,071
    
    
    $
    (441
    )
    
    
    (41.2
    )%Other Miscellaneous
    
    
    24
    
    
    
    (159
    )
    
    
    183
    
    
    
    115.1
    %Third Party Gathering Revenue
    
    
    (446
    )
    
    
    391
    
    
    
    (837
    )
    
    
    (214.1
    )%Insurance Settlements
    
    
    
    
    
    
    2,121
    
    
    
    (2,121
    )
    
    
    (100.0
    )%Royalty Income
    
    
    
    
    
    
    2,620
    
    
    
    (2,620
    )
    
    
    (100.0
    )%Total Other Income
    
    $
    208
    
    
    $
    6,044
    
    
    $
    (5,836
    )
    
    
    (96.6
    )%
      18




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    8,588
    
    
    $
    7,775
    
    
    $
    813
    
    
    
    10.5
    %Gathering and Compression Costs
    
    
    15,283
    
    
    
    14,646
    
    
    
    637
    
    
    
    4.3
    %Royalty Interest Gas Costs
    
    
    8,543
    
    
    
    10,808
    
    
    
    (2,265
    )
    
    
    (21.0
    )%Purchased Gas Costs
    
    
    495
    
    
    
    9,340
    
    
    
    (8,845
    )
    
    
    (94.7
    )%Other
    
    
    (1,363
    )
    
    
    1,021
    
    
    
    (2,384
    )
    
    
    (233.5
    )%General and Administrative
    
    
    12,793
    
    
    
    8,634
    
    
    
    4,159
    
    
    
    48.2
    %Depreciation, Depletion and Amortization
    
    
    12,248
    
    
    
    9,546
    
    
    
    2,702
    
    
    
    28.3
    %Interest Expense
    
    
    1,221
    
    
    
    
    
    
    
    1,221
    
    
    
    100.0
    %Total Costs and Expenses
    
    $
    57,808
    
    
    $
    61,770
    
    
    $
    (3,962
    )
    
    
    (6.4
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.3
    
    
    
    14.4
    
    
    
    (0.1
    )
    
    
    (0.7
    )%Average Lifting Costs (per Mcf)
    
    $
    0.60
    
    
    $
    0.54
    
    
    $
    0.06
    
    
    
    11.1
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.3
    
    
    
    14.4
    
    
    
    (0.1
    )
    
    
    (0.7
    )%Average Gathering and Compression Costs (per Mcf)
    
    $
    1.07
    
    
    $
    1.02
    
    
    $
    0.05
    
    
    
    4.9
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Gas Cost Volumes (Bcf)
    
    
    1.8
    
    
    
    1.9
    
    
    
    (0.1
    )
    
    
    (5.3
    )%Average Cost (per Mcf)
    
    $
    4.88
    
    
    $
    5.60
    
    
    $
    (0.72
    )
    
    
    (12.9
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Cost Volumes (Bcf)
    
    
    0.1
    
    
    
    1.4
    
    
    
    (1.3
    )
    
    
    (92.9
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    4.76
    
    
    $
    6.64
    
    
    $
    (1.88
    )
    
    
    (28.3
    )%
  19




---



##### Table of Contents



Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeExploration
    
    $
    (436
    )
    
    $
    687
    
    
    $
    (1,123
    )
    
    
    (163.5
    )%Imbalance
    
    
    
    
    
    
    289
    
    
    
    (289
    )
    
    
    (100.0
    )%Equity in (Earnings) Loss of Affiliates
    
    
    (927
    )
    
    
    45
    
    
    
    (972
    )
    
    
    (2,160.0
    )%Total Other Costs and Expenses
    
    $
    (1,363
    )
    
    $
    1,021
    
    
    $
    (2,384
    )
    
    
    (233.5
    )%
    Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeProduction
    
    $
    7,764
    
    
    $
    6,357
    
    
    $
    1,407
    
    
    
    22.1
    %Gathering
    
    
    4,484
    
    
    
    3,189
    
    
    
    1,295
    
    
    
    40.6
    %Total Depreciation, Depletion and Amortization
    
    $
    12,248
    
    
    $
    9,546
    
    
    $
    2,702
    
    
    
    28.3
    %
   Income Taxes
 Percentage2007
    
    2006
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    51,997
    
    
    $
    61,797
    
    
    $
    (9,800
    )
    
    
    (15.9
    )%Tax Expense
    
    $
    20,701
    
    
    $
    24,204
    
    
    $
    (3,503
    )
    
    
    (14.5
    )%Effective Income Tax Rate
    
    
    39.8
    %
    
    
    39.2
    %
    
    
    0.6
    %
  20




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##### Table of Contents



Results of Operations
 Nine Months Ended September 30, 2007 compared with Nine Months Ended September 30, 2006
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    306,615
    
    
    $
    286,494
    
    
    $
    20,121
    
    
    
    7.0
    %Related Party Sales
    
    
    6,980
    
    
    
    5,753
    
    
    
    1,227
    
    
    
    21.3
    %Royalty Interest Gas Sales
    
    
    36,841
    
    
    
    41,714
    
    
    
    (4,873
    )
    
    
    (11.7
    )%Purchased Gas Sales
    
    
    3,297
    
    
    
    41,206
    
    
    
    (37,909
    )
    
    
    (92.0
    )%Other Income
    
    
    4,675
    
    
    
    19,475
    
    
    
    (14,800
    )
    
    
    (76.0
    )%Total Revenue and Other Income
    
    
    358,408
    
    
    
    394,642
    
    
    
    (36,234
    )
    
    
    (9.2
    )%Costs and Expenses:Lifting Costs
    
    
    25,617
    
    
    
    24,115
    
    
    
    1,502
    
    
    
    6.2
    %Gathering and Compression Costs
    
    
    46,593
    
    
    
    43,021
    
    
    
    3,572
    
    
    
    8.3
    %Royalty Interest Gas Costs
    
    
    31,736
    
    
    
    34,491
    
    
    
    (2,755
    )
    
    
    (8.0
    )%Purchased Gas Costs
    
    
    2,987
    
    
    
    42,091
    
    
    
    (39,104
    )
    
    
    (92.9
    )%Other
    
    
    228
    
    
    
    783
    
    
    
    (555
    )
    
    
    (70.9
    )%General and Administrative
    
    
    39,069
    
    
    
    23,641
    
    
    
    15,428
    
    
    
    65.3
    %Depreciation, Depletion and Amortization
    
    
    36,325
    
    
    
    27,437
    
    
    
    8,888
    
    
    
    32.4
    %Interest Expense
    
    
    3,686
    
    
    
    9
    
    
    
    3,677
    
    
    
    40,855.6
    %Total Costs and Expenses
    
    
    186,241
    
    
    
    195,588
    
    
    
    (9,347
    )
    
    
    (4.8
    )%Earnings Before Income Taxes
    
    
    172,167
    
    
    
    199,054
    
    
    
    (26,887
    )
    
    
    (13.5
    )%Income Taxes
    
    
    66,387
    
    
    
    77,432
    
    
    
    (11,045
    )
    
    
    (14.3
    )%Net Income
    
    $
    105,780
    
    
    $
    121,622
    
    
    $
    (15,842
    )
    
    
    (13.0
    )%
  Revenue and Other Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    306,615
    
    
    $
    286,494
    
    
    $
    20,121
    
    
    
    7.0
    %Related Party Sales
    
    
    6,980
    
    
    
    5,753
    
    
    
    1,227
    
    
    
    21.3
    %Royalty Interest Gas Sales
    
    
    36,841
    
    
    
    41,714
    
    
    
    (4,873
    )
    
    
    (11.7
    )%Purchased Gas Sales
    
    
    3,297
    
    
    
    41,206
    
    
    
    (37,909
    )
    
    
    (92.0
    )%Other Income
    
    
    4,675
    
    
    
    19,475
    
    
    
    (14,800
    )
    
    
    (76.0
    )%Total Revenue and Other Income
    
    $
    358,408
    
    
    $
    394,642
    
    
    $
    (36,234
    )
    
    
    (9.2
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes
(Bcf)
    
    
    43.4
    
    
    
    41.7
    
    
    
    1.7
    
    
    
    4.1
    %Average Sales Price (per
Mcf)
    
    $
    7.22
    
    
    $
    7.01
    
    
    $
    0.21
    
    
    
    3.0
    %
  21




---



##### Table of Contents



Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Sales
Volumes (Bcf)
    
    
    5.4
    
    
    
    5.6
    
    
    
    (0.2
    )
    
    
    (3.6
    )%Average Sales Price (per
Mcf)
    
    $
    6.77
    
    
    $
    7.42
    
    
    $
    (0.65
    )
    
    
    (8.8
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Sales
Volumes (Bcf)
    
    
    0.5
    
    
    
    5.4
    
    
    
    (4.9
    )
    
    
    (90.7
    )%Average Sales Price (per
Mcf)
    
    $
    6.90
    
    
    $
    7.67
    
    
    $
    (0.77
    )
    
    
    (10.0
    )%
   Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeInterest Income
    
    $
    3,363
    
    
    $
    2,169
    
    
    $
    1,194
    
    
    
    55.0
    %Third Party Gathering Revenue
    
    
    1,171
    
    
    
    1,057
    
    
    
    114
    
    
    
    10.8
    %Other Miscellaneous
    
    
    141
    
    
    
    (37
    )
    
    
    178
    
    
    
    481.1
    %Insurance Settlements
    
    
    0
    
    
    
    9,088
    
    
    
    (9,088
    )
    
    
    (100.0
    )%Royalty Income
    
    
    0
    
    
    
    7,198
    
    
    
    (7,198
    )
    
    
    (100.0
    )%Total Other Income
    
    $
    4,675
    
    
    $
    19,475
    
    
    $
    (14,800
    )
    
    
    (76.0
    )%
      22




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    25,617
    
    
    $
    24,115
    
    
    $
    1,502
    
    
    
    6.2
    %Gathering and Compression Costs
    
    
    46,593
    
    
    
    43,021
    
    
    
    3,572
    
    
    
    8.3
    %Royalty Interest Gas Costs
    
    
    31,736
    
    
    
    34,491
    
    
    
    (2,755
    )
    
    
    (8.0
    )%Purchased Gas Costs
    
    
    2,987
    
    
    
    42,091
    
    
    
    (39,104
    )
    
    
    (92.9
    )%Other
    
    
    228
    
    
    
    783
    
    
    
    (555
    )
    
    
    (70.9
    )%General and Administrative
    
    
    39,069
    
    
    
    23,641
    
    
    
    15,428
    
    
    
    65.3
    %Depreciation, Depletion and Amortization
    
    
    36,325
    
    
    
    27,437
    
    
    
    8,888
    
    
    
    32.4
    %Interest Expense
    
    
    3,686
    
    
    
    9
    
    
    
    3,677
    
    
    
    40,855.6
    %Total Costs and Expenses
    
    $
    186,241
    
    
    $
    195,588
    
    
    $
    (9,347
    )
    
    
    (4.8
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    43.4
    
    
    
    41.7
    
    
    
    1.7
    
    
    
    4.1
    %Average Lifting Costs (per Mcf)
    
    $
    0.59
    
    
    $
    0.58
    
    
    $
    0.01
    
    
    
    1.7
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    43.4
    
    
    
    41.7
    
    
    
    1.7
    
    
    
    4.1
    %Average Gathering and
Compression Costs (per Mcf)
    
    $
    1.07
    
    
    $
    1.03
    
    
    $
    0.04
    
    
    
    3.9
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Gas Cost Volumes (Bcf)
    
    
    5.4
    
    
    
    5.6
    
    
    
    (0.2
    )
    
    
    (3.6
    )%Average Cost (per Mcf)
    
    $
    5.83
    
    
    $
    6.13
    
    
    $
    (0.30
    )
    
    
    (4.9
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Cost
Volumes (Bcf)
    
    
    0.5
    
    
    
    5.4
    
    
    
    (4.9
    )
    
    
    (90.7
    )%Average Purchased Gas
Costs (per Mcf)
    
    $
    6.09
    
    
    $
    7.84
    
    
    $
    (1.75
    )
    
    
    (22.3
    )%
  23




---



##### Table of Contents



Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeExploration
    
    $
    1,558
    
    
    $
    2,092
    
    
    $
    (534
    )
    
    
    (25.5
    )%Imbalance
    
    
    
    
    
    
    (582
    )
    
    
    582
    
    
    
    100.0
    %Equity in (Earnings) of Affiliates
    
    
    (1,330
    )
    
    
    (727
    )
    
    
    (603
    )
    
    
    (82.9
    )%Total Other Costs and Expenses
    
    $
    228
    
    
    $
    783
    
    
    $
    (555
    )
    
    
    (70.9
    )%
    Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeProduction
    
    $
    22,793
    
    
    $
    18,002
    
    
    $
    4,791
    
    
    
    26.6
    %Gathering
    
    
    13,532
    
    
    
    9,435
    
    
    
    4,097
    
    
    
    43.4
    %Total Depreciation,
Depletion and Amortization
    
    $
    36,325
    
    
    $
    27,437
    
    
    $
    8,888
    
    
    
    32.4
    %
   Income Taxes
 Percentage2007
    
    2006
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    172,167
    
    
    $
    199,054
    
    
    $
    (26,887
    )
    
    
    (13.5
    )%Tax Expense
    
    $
    66,387
    
    
    $
    77,432
    
    
    $
    (11,045
    )
    
    
    (14.3
    )%Effective Income Tax Rate
    
    
    38.6
    %
    
    
    38.9
    %
    
    
    (0.3
    )%
  Liquidity and Capital Resources
   24




---



##### Table of Contents



Cash Flows
 Year to Date
    
    Year to Date2007
    
    2006
    
    ChangeCash provided by operating activities
    
    $
    211,075
    
    
    $
    205,943
    
    
    $
    5,132Cash (used in) investing activities
    
    $
    (267,188
    )
    
    $
    (118,440
    )
    
    $
    (148,748
    )Cash provided by financing activities
    
    $
    7,343
    
    
    $
    
    
    
    $
    7,343
 
    
    Cash provided by operating activities increased due to various changes in operating
assets, operating liabilities, other assets and other liabilities which occurred throughout
both periods, partially offset by a decrease in net income.
    
    Cash used in investing activities increased due to our expanded capital program,
including the acquisition of Peabody gas assets.
    
    Cash provided by financing activities increased primarily due to the debt of the third
party contractor rigs, which were consolidated under FIN 46.
 Contractual Commitments
  Within
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong Term Debt Obligations (a)
    
    $
    9,000
    
    
    $
    2,760
    
    
    $
    6,240
    
    
    $
    
    
    
    $
    Capital (Finance) Lease Obligations (b)
    
    
    64,557
    
    
    
    2,719
    
    
    
    6,076
    
    
    
    7,036
    
    
    
    48,726Operating Lease Obligations
    
    
    7,359
    
    
    
    1,512
    
    
    
    2,578
    
    
    
    1,963
    
    
    
    1,306Other Long-Term Liabilities:Gas Firm Transportation Obligation
    
    
    50,655
    
    
    
    7,392
    
    
    
    14,554
    
    
    
    10,482
    
    
    
    18,227Other Liabilities (c)
    
    
    15,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,612Well Plugging Liabilities
    
    
    3,402
    
    
    
    
    
    
    
    333
    
    
    
    604
    
    
    
    2,465Pension
    
    
    105
    
    
    
    3
    
    
    
    13
    
    
    
    23
    
    
    
    66Postretirement Benefits Other than Pension
    
    
    2,447
    
    
    
    11
    
    
    
    68
    
    
    
    154
    
    
    
    2,214Total Contractual Obligations (d)
    
    $
    153,137
    
    
    $
    14,397
    
    
    $
    29,862
    
    
    $
    20,262
    
    
    $
    88,616
 
 (a)
    
    The long term debt obligation relates to the debt of a third party contractor guaranteed by
CNX Gas and consolidated as a variable interest entity. See Note 6 for further information.(b)
    
    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 $64,557. 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.(c)
    
    This item represents legal contingencies reflected on the balance sheet for potential
settlements for two of the cases referenced in 25




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##### Table of Contents



Note 6 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.(d)
    
    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
  
    
    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;
 26




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##### Table of Contents




    
    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
       Incremental decrease in pre-tax income assuming aHypothetical price increase of:10%
    
    25%(In millions)Natural Gas (1)
    
    $
    27.9
    
    
    $
    70.4
 
 (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 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 September 30, 2007,
the fair value of these contracts was a net gain of $8,221 (net of $5,233 deferred tax). We
continually evaluate the portfolio of derivative commodity instruments and adjust the strategy
to anticipated market conditions and risks accordingly. 27




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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 Year2007 Fixed Price VolumesHedged Mcf
    
    
    3,247,423
    
    
    
    4,690,722
    
    
    
    4,742,268
    
    
    
    5,685,566
    
    
    
    18,365,979Weighted Average Hedge Price/Mcf
    
    $
    7.77
    
    
    $
    8.00
    
    
    $
    8.00
    
    
    $
    8.18
    
    
    $
    8.022008 Fixed Price VolumesHedged Mcf
    
    
    6,097,938
    
    
    
    6,097,939
    
    
    
    6,164,948
    
    
    
    6,164,948
    
    
    
    24,525,773Weighted Average Hedge Price/Mcf
    
    $
    8.39
    
    
    $
    8.24
    
    
    $
    8.29
    
    
    $
    8.29
    
    
    $
    8.302009 Fixed Price VolumesHedged Mcf
    
    
    4,175,258
    
    
    
    1,407,216
    
    
    
    1,422,681
    
    
    
    479,381
    
    
    
    7,484,536Weighted Average Hedge Price/Mcf
    
    $
    8.82
    
    
    $
    8.08
    
    
    $
    8.15
    
    
    $
    8.06
    
    
    $
    8.51
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls Over Financial Reporting.
  28




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##### Table of Contents



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
 3.1
    
    Second Amended and Restated Bylaws of CNX Gas Corporation are incorporated herein by reference
from Exhibit 3.1 of the Registrants Current Report on Form 8-K filed on August 16, 2007.10.1
    
    Offer letter to Dr. DeAnn Craig dated June 18, 200710.2
    
    Schedule of Compensation of Non-Employee Directors.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
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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) 30




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##### Table of Contents



EXHIBIT INDEX
 3.1
    
    Second Amended and Restated Bylaws of CNX Gas Corporation are incorporated herein by reference
from Exhibit 3.1 of the Registrants Current Report on Form 8-K filed on August 16, 2007.10.1
    
    Offer letter to Dr. DeAnn Craig dated June 18, 200710.2
    
    Schedule of Compensation of Non-Employee Directors.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
  31