##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
 Commission file number: 001-32723
 
 CNX GAS CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    20-3170639(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5 Penn Center West, Suite 401
Pittsburgh, PA 15276-0102
(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 six months ended June 30, 2007 and 2006
    
    3Consolidated Balance Sheets at June 30, 2007 and December 31, 2006
    
    4Consolidated Statements of Stockholders Equity for the six months ended June 30, 2007
    
    5Consolidated Statements of Cash Flows for the six months ended June 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
    
    30Item 6. Exhibits
    
    30EX-10.2EX-10.3EX-10.4EX-10.5EX-10.6EX-10.7EX-10.8EX-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 Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue and Other Income:Outside Sales
    
    $
    112,296
    
    
    $
    92,194
    
    
    $
    210,393
    
    
    $
    193,987Related Party Sales
    
    
    2,410
    
    
    
    1,404
    
    
    
    4,601
    
    
    
    3,034Royalty Interest Gas Sales
    
    
    14,484
    
    
    
    12,686
    
    
    
    26,666
    
    
    
    28,493Purchased Gas Sales
    
    
    1,317
    
    
    
    9,778
    
    
    
    2,476
    
    
    
    32,130Other Income
    
    
    2,964
    
    
    
    6,790
    
    
    
    4,467
    
    
    
    13,431Total Revenue and Other Income133,471
    
    
    
    122,852
    
    
    
    248,603
    
    
    
    271,075Costs and Expenses:Lifting Costs
    
    
    8,763
    
    
    
    7,765
    
    
    
    17,029
    
    
    
    16,340Gathering and Compression Costs
    
    
    16,842
    
    
    
    15,825
    
    
    
    31,310
    
    
    
    28,375Royalty Interest Gas Costs
    
    
    12,528
    
    
    
    10,267
    
    
    
    23,193
    
    
    
    23,683Purchased Gas Costs
    
    
    1,473
    
    
    
    9,986
    
    
    
    2,492
    
    
    
    32,751Other
    
    
    1,153
    
    
    
    (2
    )
    
    
    1,591
    
    
    
    (238
    )General and Administrative
    
    
    12,555
    
    
    
    7,702
    
    
    
    26,276
    
    
    
    15,007Depreciation, Depletion and Amortization
    
    
    11,979
    
    
    
    8,987
    
    
    
    24,077
    
    
    
    17,891Interest Expense
    
    
    1,246
    
    
    
    2
    
    
    
    2,465
    
    
    
    9Total Costs and Expenses
    
    
    66,539
    
    
    
    60,532
    
    
    
    128,433
    
    
    
    133,818Earnings Before Income Taxes
    
    
    66,932
    
    
    
    62,320
    
    
    
    120,170
    
    
    
    137,257Income Taxes
    
    
    25,444
    
    
    
    24,167
    
    
    
    45,686
    
    
    
    53,228Net Income
    
    $
    41,488
    
    
    $
    38,153
    
    
    $
    74,484
    
    
    $
    84,029Earnings per share:Basic
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    0.49
    
    
    $
    0.56Diluted
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    0.49
    
    
    $
    0.56Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,870,810
    
    
    
    150,833,334
    
    
    
    150,867,834
    
    
    
    150,833,334Dilutive
    
    
    151,145,174
    
    
    
    151,060,061
    
    
    
    151,107,413
    
    
    
    151,004,996
 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)June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    60,028
    
    
    $
    107,173Accounts Receivable:Trade
    
    
    41,426
    
    
    
    46,062Net Related Party
    
    
    1,541
    
    
    
    2,745Other
    
    
    2,350
    
    
    
    2,291Derivatives
    
    
    4,781
    
    
    
    10,548Other Current Assets
    
    
    2,070
    
    
    
    3,917Total Current Assets
    
    
    112,196
    
    
    
    172,736Property, Plant and Equipment, Net
    
    
    1,085,224
    
    
    
    918,162Other Assets
    
    
    9,646
    
    
    
    11,820Investments in Equity Affiliates
    
    
    53,472
    
    
    
    52,283TOTAL ASSETS
    
    $
    1,260,538
    
    
    $
    1,155,001LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts
Payable
    
    $
    15,288
    
    
    $
    27,872Accrued Royalties Payable
    
    
    13,079
    
    
    
    11,960Accrued Severance Taxes
    
    
    3,152
    
    
    
    2,576Accrued Income Taxes
    
    
    8,887
    
    
    
    2,191Deferred Taxes
    
    
    859
    
    
    
    3,091Other Current Liabilities
    
    
    12,330
    
    
    
    9,222Total Current Liabilities
    
    
    53,595
    
    
    
    56,912Long-Term Debt:Long-Term Debt (Note 6)
    
    
    4,142
    
    
    
    Total Long-Term Debt
    
    
    4,142
    
    
    
    Deferred Credits and Other Liabilities:Deferred Taxes
    
    
    145,927
    
    
    
    120,008Capital Lease Obligation
    
    
    62,536
    
    
    
    63,897Other Liabilities
    
    
    29,263
    
    
    
    15,977Well Plugging Liabilities
    
    
    3,351
    
    
    
    9,214Derivatives
    
    
    4,285
    
    
    
    6,465Postretirement Benefits Other Than Pension
    
    
    2,398
    
    
    
    2,313Total Deferred Credits and Other Liabilities
    
    
    247,760
    
    
    
    217,874Total Liabilities
    
    
    305,497
    
    
    
    274,786Stockholders EquityCommon Stock, $.01 par value; 200,000,000 Shares
Authorized, 150,875,426 Issued and Outstanding at
June 30, 2007 and 150,864,075 Issued and Outstanding
at December 31, 2006
    
    
    1,508
    
    
    
    1,508Capital in Excess of Par Value
    
    
    783,734
    
    
    
    781,960Retained Earnings
    
    
    168,768
    
    
    
    94,337Accumulated Other Comprehensive Income
    
    
    1,031
    
    
    
    2,410Total StockholdersEquity
    
    
    955,041
    
    
    
    880,215TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,260,538
    
    
    $
    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
    
    
    
    
    
    
    
    
    
    
    74,484
    
    
    
    
    
    
    
    74,484Gas Cash Flow Hedge (Net of $1,399 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,326
    )
    
    
    (1,326
    )Comprehensive Income (Loss) (a)
    
    
    
    
    
    
    
    
    
    
    74,484
    
    
    
    (1,326
    )
    
    
    73,158FASB Interpretation No. 48 Adoption
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )Stock Options Exercised
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    164Tax Benefit from Stock Based Compensation
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Amortization of Restricted Stock Unit Grants
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    301Amortization of Stock Based Compensation Awards
    
    
    
    
    
    
    1,283
    
    
    
    
    
    
    
    
    
    
    
    1,283Actuarial Salary OPEB revaluation (net of $30 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )Actuarial Pension revaluation (net of $4 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Balance at June 30, 2007
    
    $
    1,508
    
    
    $
    783,734
    
    
    $
    168,768
    
    
    $
    1,031
    
    
    $
    955,041
 
 (a)
    
    Of the ($1,326) net change in accumulated other comprehensive income (loss) in the period,
$4,030 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 Six Months EndedJune 30,2007
    
    
    2006Operating Activities:Net Income
    
    $
    74,484
    
    
    $
    84,029Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Depreciation,
Depletion and Amortization
    
    
    24,077
    
    
    
    17,891Compensation from Restricted Stock Unit Grants
    
    
    301
    
    
    
    258Compensation from Stock Option Grants
    
    
    1,283
    
    
    
    945Deferred Income Taxes
    
    
    28,275
    
    
    
    25,379Equity in (Earnings) of Affiliates
    
    
    (403
    )
    
    
    (772
    )Changes in Operating Assets:Accounts Receivable
    
    
    4,577
    
    
    
    12,485Related Party Receivable
    
    
    1,204
    
    
    
    (2,790
    )Other Current Assets
    
    
    1,847
    
    
    
    56Changes in Other Assets
    
    
    2,174
    
    
    
    (61
    )Changes in Operating Liabilities:Accounts Payable
    
    
    (9,326
    )
    
    
    (11,176
    )Income Taxes
    
    
    6,722
    
    
    
    (449
    )Other Current Liabilities
    
    
    2,893
    
    
    
    (758
    )Changes in Other Liabilities
    
    
    1,824
    
    
    
    1,511Other
    
    
    672
    
    
    
    285Net Cash Provided by Operating Activities
    
    
    140,604
    
    
    
    126,833Investing Activities:Capital Expenditures
    
    
    (125,442
    )
    
    
    (83,009
    )Acquisition of Mineral Rights
    
    
    (60,488
    )
    
    
    Capital
Expenditures of Variable Interest Entity
    
    
    (5,973
    )
    
    
    Investment in Equity Affiliates
    
    
    (786
    )
    
    
    104Proceeds From Sales of Assets
    
    
    40
    
    
    
    Net Cash (Used in) Investing Activities
    
    
    (192,649
    )
    
    
    (82,905
    )Financing Activities:Capital Lease Payments
    
    
    (1,263
    )
    
    
    Proceeds
from Debt of Variable Interest Entity
    
    
    5,973
    
    
    
    Short-Term Loan
    
    
    
    
    
    
    306Exercise of Stock Options
    
    
    164
    
    
    
    Tax Benefit from Stock Based Compensation
    
    
    26
    
    
    
    Net Cash Provided by Financing Activities
    
    
    4,900
    
    
    
    306Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (47,145
    )
    
    
    44,234Cash and Cash Equivalents at Beginning of Period
    
    
    107,173
    
    
    
    20,073Cash and Cash Equivalents at End of Period
    
    $
    60,028
    
    
    $
    64,307
 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 Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net Income
    
    $
    41,488
    
    
    $
    38,153
    
    
    $
    74,484
    
    
    $
    84,029Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,870,810
    
    
    
    150,833,334
    
    
    
    150,867,834
    
    
    
    150,833,334Effect of stock based compensation
    
    
    274,364
    
    
    
    226,727
    
    
    
    239,579
    
    
    
    171,662Dilutive
    
    
    151,145,174
    
    
    
    151,060,061
    
    
    
    151,107,413
    
    
    
    151,004,996Earnings per share:Basic
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    0.49
    
    
    $
    0.56Diluted
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    0.49
    
    
    $
    0.56
 Note 2Acquisitions:
    Note 3Pension and Other Postretirement Benefits:
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 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
    
    
    $
    130
    
    
    $
    140
    
    
    $
    62
    
    
    $
    46Interest costs
    
    
    3
    
    
    
    1
    
    
    
    35
    
    
    
    25
    
    
    
    6
    
    
    
    2
    
    
    
    70
    
    
    
    50Expected return on assets
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (4
    )
    
    
    
    
    
    
    Amortization of prior service costs credit
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    (86
    )Amortization of (gain) loss
    
    
    (6
    )
    
    
    (3
    )
    
    
    5
    
    
    
    
    
    
    
    (12
    )
    
    
    (6
    )
    
    
    10
    
    
    
    Benefit costs
    
    $
    62
    
    
    $
    66
    
    
    $
    28
    
    
    $
    5
    
    
    $
    125
    
    
    $
    132
    
    
    $
    56
    
    
    $
    10
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Note 4Income Taxes:
  For the Six Months Ended June 30,2007
    
    
    2006Dollars
    
    
    Rate
    
    
    Dollars
    
    
    RateStatutory U.S. Federal Income Tax Rate
    
    $
    42,060
    
    
    
    35.0
    %
    
    $
    48,040
    
    
    
    35.0
    %Net Effect of State Income Tax
    
    
    4,733
    
    
    
    3.9
    %
    
    
    6,080
    
    
    
    4.4
    %Other
    
    
    (1,107
    )
    
    
    (0.9
    )%
    
    
    (892
    )
    
    
    (0.6
    )%Income Tax Expense/Effective Rate
    
    $
    45,686
    
    
    
    38.0
    %
    
    $
    53,228
    
    
    
    38.8
    %
      Note 5Property, Plant and Equipment:
 June 30,
    
    
    December 31,2007
    
    
    2006Leasehold Improvements
    
    $
    783
    
    
    $
    Surface Lands
    
    
    55,931
    
    
    
    37,055Mineral Interests
    
    
    124,969
    
    
    
    55,623Wells and Related Equipment
    
    
    131,726
    
    
    
    112,009Intangible Drilling
    
    
    438,098
    
    
    
    383,605Gathering Assets
    
    
    552,814
    
    
    
    520,906Gas Well Plugging
    
    
    371
    
    
    
    5,652Capitalized Internal Software
    
    
    6,536
    
    
    
    6,433Total Property, Plant and Equipment
    
    
    1,311,228
    
    
    
    1,121,283Accumulated Depreciation, Depletion and Amortization
    
    
    (226,004
    )
    
    
    (203,121
    )Property, Plant and Equipment, Net
    
    $
    1,085,224
    
    
    $
    918,162
 9




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##### Table of Contents



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
    
    
    $
    152
    
    
    $
    14,781
    
    
    $
    
    
    
    $
    Total Letters of Credit
    
    $
    14,933
    
    
    $
    152
    
    
    $
    14,781
    
    
    $
    
    
    
    $
    Surety Bonds:Environmental
    
    $
    454
    
    
    $
    454
    
    
    $
    
    
    
    $
    
    
    
    $
    Other
    
    
    21,105
    
    
    
    21,105
    
    
    
    
    
    
    
    
    
    
    
    Total Surety Bonds
    
    $
    21,559
    
    
    $
    21,559
    
    
    $
    
    
    
    $
    
    
    
    $
    Other:Firm Transportation
    
    $
    52,505
    
    
    $
    7,402
    
    
    $
    14,597
    
    
    $
    11,148
    
    
    $
    19,358Guarantees
    
    
    17,270
    
    
    
    17,270
    
    
    
    
    
    
    
    
    
    
    
    Total Guarantees
    
    $
    69,775
    
    
    $
    24,672
    
    
    $
    14,597
    
    
    $
    11,148
    
    
    $
    19,358Total Commitments
    
    $
    106,267
    
    
    $
    46,383
    
    
    $
    29,378
    
    
    $
    11,148
    
    
    $
    19,358
  11




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Letters of Credit
    Surety Bonds
  Other Guarantees
   Variable Interest
    Note 7Segment Information:
  12




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CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &and Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    106,574
    
    
    $
    5,722
    
    
    $
    112,296
    
    
    $
    
    
    
    $
    
    
    
    $
    112,296Salesrelated parties
    
    
    2,393
    
    
    
    17
    
    
    
    2,410
    
    
    
    
    
    
    
    
    
    
    
    2,410Salesroyalty interest
    
    
    14,445
    
    
    
    39
    
    
    
    14,484
    
    
    
    
    
    
    
    
    
    
    
    14,484Salespurchased gas
    
    
    1,317
    
    
    
    
    
    
    
    1,317
    
    
    
    
    
    
    
    
    
    
    
    1,317Other revenue
    
    
    1,667
    
    
    
    
    
    
    
    1,667
    
    
    
    1,297
    
    
    
    
    
    
    
    2,964Intersegment revenues
    
    
    19,858
    
    
    
    742
    
    
    
    20,600
    
    
    
    
    
    
    
    (20,600
    )
    
    
    Total Revenue and Other Income
    
    $
    146,254
    
    
    $
    6,520
    
    
    $
    152,774
    
    
    $
    1,297
    
    
    $
    (20,600
    )
    
    $
    133,471Earnings (Loss) Before Income Taxes
    
    $
    68,820
    
    
    $
    (2,783
    )
    
    $
    66,037
    
    
    $
    895
    
    
    $
    
    
    
    $
    66,932
    (A)Segment assets
    
    $
    1,049,182
    
    
    $
    126,828
    
    
    $
    1,176,010
    
    
    $
    84,528
    
    
    $
    
    
    
    $
    1,260,538
    (B)(C)Depreciation, depletion and amortization
    
    $
    10,536
    
    
    $
    1,443
    
    
    $
    11,979
    
    
    $
    
    
    
    $
    
    
    
    $
    11,979Capital expenditures
    
    $
    107,138
    
    
    $
    27,230
    
    
    $
    134,368
    
    
    $
    
    
    
    $
    
    
    
    $
    134,368
 
 (A)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $360 and ($164) for
Central Appalachia and Corporate Segments, respectively.(B)
    
    Includes investments in unconsolidated equity affiliates of $28,972 and $24,500 for Central
Appalachia and Corporate Segments, respectively.(C)
    
    Includes cash of $60,028 in the Corporate Segment.  CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &and Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    87,282
    
    
    $
    4,912
    
    
    $
    92,194
    
    
    $
    
    
    
    $
    
    
    
    $
    92,194Salesrelated parties
    
    
    1,387
    
    
    
    17
    
    
    
    1,404
    
    
    
    
    
    
    
    
    
    
    
    1,404Salesroyalty interest
    
    
    12,627
    
    
    
    59
    
    
    
    12,686
    
    
    
    
    
    
    
    
    
    
    
    12,686Salespurchased gas
    
    
    9,778
    
    
    
    
    
    
    
    9,778
    
    
    
    
    
    
    
    
    
    
    
    9,778Other revenue
    
    
    6,047
    
    
    
    16
    
    
    
    6,063
    
    
    
    727
    
    
    
    
    
    
    
    6,790Intersegment revenues
    
    
    13,043
    
    
    
    172
    
    
    
    13,215
    
    
    
    
    
    
    
    (13,215
    )
    
    
    Total Revenue and Other Income
    
    $
    130,164
    
    
    $
    5,176
    
    
    $
    135,340
    
    
    $
    727
    
    
    $
    (13,215
    )
    
    $
    122,852Earnings Before Income Taxes
    
    $
    61,229
    
    
    $
    782
    
    
    $
    62,011
    
    
    $
    309
    
    
    $
    
    
    
    $
    62,320
    (D)Segment assets
    
    $
    809,518
    
    
    $
    54,046
    
    
    $
    863,564
    
    
    $
    89,097
    
    
    $
    
    
    
    $
    952,661
    (E)(F)Depreciation, depletion and amortization
    
    $
    8,340
    
    
    $
    647
    
    
    $
    8,987
    
    
    $
    
    
    
    $
    
    
    
    $
    8,987Capital expenditures
    
    $
    35,412
    
    
    $
    7,420
    
    
    $
    42,832
    
    
    $
    
    
    
    $
    
    
    
    $
    42,832
 
 (D)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $801 and ($176) for
Central Appalachia and Corporate Segments, respectively.(E)
    
    Includes investments in unconsolidated equity affiliates of $25,406 and $24,790 for Central
Appalachia and Corporate Segments, respectively.(F)
    
    Includes cash of $64,307 in the Corporate Segment. 13




---



##### Table of Contents



CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &And Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    198,437
    
    
    $
    11,956
    
    
    $
    210,393
    
    
    $
    
    
    
    $
    
    
    
    $
    210,393Salesrelated parties
    
    
    4,571
    
    
    
    30
    
    
    
    4,601
    
    
    
    
    
    
    
    
    
    
    
    4,601Salesroyalty interest
    
    
    26,593
    
    
    
    73
    
    
    
    26,666
    
    
    
    
    
    
    
    
    
    
    
    26,666Salespurchased gas
    
    
    2,476
    
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    
    
    
    
    2,476Other revenue
    
    
    1,733
    
    
    
    
    
    
    
    1,733
    
    
    
    2,734
    
    
    
    
    
    
    
    4,467Intersegment revenues
    
    
    39,337
    
    
    
    1,484
    
    
    
    40,821
    
    
    
    
    
    
    
    (40,821
    )
    
    
    Total Revenue and Other Income
    
    $
    273,147
    
    
    $
    13,543
    
    
    $
    286,690
    
    
    $
    2,734
    
    
    $
    (40,821
    )
    
    $
    248,603Earnings (Loss) Before Income Taxes
    
    $
    121,812
    
    
    $
    (3,636
    )
    
    $
    118,176
    
    
    $
    1,994
    
    
    $
    
    
    
    $
    120,170
    (G)Segment assets
    
    $
    1,049,182
    
    
    $
    126,828
    
    
    $
    1,176,010
    
    
    $
    84,528
    
    
    $
    
    
    
    $
    1,260,538
    (H)(I)Depreciation, depletion and amortization
    
    $
    21,173
    
    
    $
    2,904
    
    
    $
    24,077
    
    
    $
    
    
    
    $
    
    
    
    $
    24,077Capital expenditures
    
    $
    145,433
    
    
    $
    46,470
    
    
    $
    191,903
    
    
    $
    
    
    
    $
    
    
    
    $
    191,903
 
 (G)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $663 and ($260) for
Central Appalachia and Corporate Segments, respectively.(H)
    
    Includes investments in unconsolidated equity affiliates of $28,972 and $24,500 for Central
Appalachia and Corporate Segments, respectively.(I)
    
    Includes cash of $60,028 in the Corporate Segment.  CentralAppalachia
    
    
    Northern
    
    
    Total
    
    
    
    
    
    
    Adjustments &And Other
    
    
    Appalachia
    
    
    Gas
    
    
    Corporate
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    182,502
    
    
    $
    11,485
    
    
    $
    193,987
    
    
    $
    
    
    
    $
    
    
    
    $
    193,987Salesrelated parties
    
    
    2,981
    
    
    
    53
    
    
    
    3,034
    
    
    
    
    
    
    
    
    
    
    
    3,034Salesroyalty interest
    
    
    28,371
    
    
    
    122
    
    
    
    28,493
    
    
    
    
    
    
    
    
    
    
    
    28,493Salespurchased gas
    
    
    32,130
    
    
    
    
    
    
    
    32,130
    
    
    
    
    
    
    
    
    
    
    
    32,130Other revenue
    
    
    12,307
    
    
    
    27
    
    
    
    12,334
    
    
    
    1,097
    
    
    
    
    
    
    
    13,431Intersegment revenues
    
    
    25,861
    
    
    
    362
    
    
    
    26,223
    
    
    
    
    
    
    
    (26,223
    )
    
    
    Total Revenue and Other Income
    
    $
    284,152
    
    
    $
    12,049
    
    
    $
    296,201
    
    
    $
    1,097
    
    
    $
    (26,223
    )
    
    $
    271,075Earnings Before Income Taxes
    
    $
    133,658
    
    
    $
    3,385
    
    
    $
    137,043
    
    
    $
    214
    
    
    $
    
    
    
    $
    137,257
    (J)Segment assets
    
    $
    809,518
    
    
    $
    54,046
    
    
    $
    863,564
    
    
    $
    89,097
    
    
    $
    
    
    
    $
    952,661
    (K)(L)Depreciation, depletion and amortization
    
    $
    16,671
    
    
    $
    1,220
    
    
    $
    17,891
    
    
    $
    
    
    
    $
    
    
    
    $
    17,891Capital expenditures
    
    $
    68,473
    
    
    $
    14,536
    
    
    $
    83,009
    
    
    $
    
    
    
    $
    
    
    
    $
    83,009
 
 (J)
    
    Includes equity in earnings (loss) of unconsolidated affiliates of $1,170 and ($398) for
Central Appalachia and Corporate Segments, respectively.(K)
    
    Includes investments in unconsolidated equity affiliates of $25,406 and $24,790 for Central
Appalachia and Corporate Segments, respectively.(L)
    
    Includes cash of $64,307 in the Corporate Segment. Note 8Recent Accounting Pronouncements:
  14




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This Current Report on
Form 10-Q contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See Forward Looking Statements.
  Overview
    Operations & Outlook
   15




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##### Table of Contents



16




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##### Table of Contents



Results of Operations
 Three Months Ended June 30, 2007 compared with Three Months Ended June 30, 2006  (Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    112,296
    
    
    $
    92,194
    
    
    $
    20,102
    
    
    
    21.8
    %Related Party Sales
    
    
    2,410
    
    
    
    1,404
    
    
    
    1,006
    
    
    
    71.7
    %Royalty Interest Gas Sales
    
    
    14,484
    
    
    
    12,686
    
    
    
    1,798
    
    
    
    14.2
    %Purchased Gas Sales
    
    
    1,317
    
    
    
    9,778
    
    
    
    (8,461
    )
    
    
    (86.5
    )%Other Income
    
    
    2,964
    
    
    
    6,790
    
    
    
    (3,826
    )
    
    
    (56.3
    )%Total Revenue and Other Income
    
    
    133,471
    
    
    
    122,852
    
    
    
    10,619
    
    
    
    8.6
    %Costs and Expenses:Lifting Costs
    
    
    8,763
    
    
    
    7,765
    
    
    
    998
    
    
    
    12.9
    %Gathering and Compression Costs
    
    
    16,842
    
    
    
    15,825
    
    
    
    1,017
    
    
    
    6.4
    %Royalty Interest Gas Costs
    
    
    12,528
    
    
    
    10,267
    
    
    
    2,261
    
    
    
    22.0
    %Purchased Gas Costs
    
    
    1,473
    
    
    
    9,986
    
    
    
    (8,513
    )
    
    
    (85.2
    )%Other
    
    
    1,153
    
    
    
    (2
    )
    
    
    1,155
    
    
    
    57,750.0
    %General and Administrative
    
    
    12,555
    
    
    
    7,702
    
    
    
    4,853
    
    
    
    63.0
    %Depreciation, Depletion and Amortization
    
    
    11,979
    
    
    
    8,987
    
    
    
    2,992
    
    
    
    33.3
    %Interest Expense
    
    
    1,246
    
    
    
    2
    
    
    
    1,244
    
    
    
    62,200.0
    %Total Costs and Expenses
    
    
    66,539
    
    
    
    60,532
    
    
    
    6,007
    
    
    
    9.9
    %Earnings Before Income Taxes
    
    
    66,932
    
    
    
    62,320
    
    
    
    4,612
    
    
    
    7.4
    %Income Taxes
    
    
    25,444
    
    
    
    24,167
    
    
    
    1,277
    
    
    
    5.3
    %Net Income
    
    $
    41,488
    
    
    $
    38,153
    
    
    $
    3,335
    
    
    
    8.7
    %
  Revenue and Other Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    112,296
    
    
    $
    92,194
    
    
    $
    20,102
    
    
    
    21.8
    %Related Party Sales
    
    
    2,410
    
    
    
    1,404
    
    
    
    1,006
    
    
    
    71.7
    %Royalty Interest Gas Sales
    
    
    14,484
    
    
    
    12,686
    
    
    
    1,798
    
    
    
    14.2
    %Purchased Gas Sales
    
    
    1,317
    
    
    
    9,778
    
    
    
    (8,461
    )
    
    
    (86.5
    )%Other Income
    
    
    2,964
    
    
    
    6,790
    
    
    
    (3,826
    )
    
    
    (56.3
    )%Total Revenue and Other Income
    
    $
    133,471
    
    
    $
    122,852
    
    
    $
    10,619
    
    
    
    8.6
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.8
    
    
    
    13.7
    
    
    
    1.1
    
    
    
    8.0
    %Average Sales Price (per Mcf)
    
    $
    7.74
    
    
    $
    6.83
    
    
    $
    0.91
    
    
    
    13.3
    %
  17




---



##### Table of Contents



Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.9
    
    
    
    1.9
    
    
    
    0.0
    
    
    
    0.0
    %Average Sales Price (per Mcf)
    
    $
    7.82
    
    
    $
    6.82
    
    
    $
    1.00
    
    
    
    14.7
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    0.2
    
    
    
    1.4
    
    
    
    (1.2
    )
    
    
    (85.7
    )%Average Sales Price (per Mcf)
    
    $
    7.26
    
    
    $
    6.80
    
    
    $
    0.46
    
    
    
    6.8
    %
   Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeThird Party Gathering Revenue
    
    $
    1,581
    
    
    $
    343
    
    
    $
    1,238
    
    
    
    360.9
    %Interest Income
    
    
    1,297
    
    
    
    728
    
    
    
    569
    
    
    
    78.2
    %Other Miscellaneous
    
    
    86
    
    
    
    66
    
    
    
    20
    
    
    
    30.3
    %Insurance Settlements
    
    
    
    
    
    
    3,960
    
    
    
    (3,960
    )
    
    
    (100.0
    )%Royalty Income
    
    
    
    
    
    
    1,693
    
    
    
    (1,693
    )
    
    
    (100.0
    )%Total Other Income
    
    $
    2,964
    
    
    $
    6,790
    
    
    $
    (3,826
    )
    
    
    (56.3
    )%
      18




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    8,763
    
    
    $
    7,765
    
    
    $
    998
    
    
    
    12.9
    %Gathering and Compression Costs
    
    
    16,842
    
    
    
    15,825
    
    
    
    1,017
    
    
    
    6.4
    %Royalty Interest Gas Costs
    
    
    12,528
    
    
    
    10,267
    
    
    
    2,261
    
    
    
    22.0
    %Purchased Gas Costs
    
    
    1,473
    
    
    
    9,986
    
    
    
    (8,513
    )
    
    
    (85.2
    )%Other
    
    
    1,153
    
    
    
    (2
    )
    
    
    1,155
    
    
    
    57,750.0
    %General and Administrative
    
    
    12,555
    
    
    
    7,702
    
    
    
    4,853
    
    
    
    63.0
    %Depreciation, Depletion and Amortization
    
    
    11,979
    
    
    
    8,987
    
    
    
    2,992
    
    
    
    33.3
    %Interest Expense
    
    
    1,246
    
    
    
    2
    
    
    
    1,244
    
    
    
    62,200.0
    %Total Costs and Expenses
    
    $
    66,539
    
    
    $
    60,532
    
    
    $
    6,007
    
    
    
    9.9
    %
 Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.8
    
    
    
    13.7
    
    
    
    1.1
    
    
    
    8.0
    %Average Lifting Costs (per Mcf)
    
    $
    0.59
    
    
    $
    0.57
    
    
    $
    0.02
    
    
    
    3.5
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    14.8
    
    
    
    13.7
    
    
    
    1.1
    
    
    
    8.0
    %Average Gathering and Compression Costs (per Mcf)
    
    $
    1.14
    
    
    $
    1.16
    
    
    $
    (0.02
    )
    
    
    (1.7
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty Interest Cost Volumes (Bcf)
    
    
    1.9
    
    
    
    1.9
    
    
    
    0.0
    
    
    
    0.0
    %Average Cost (per Mcf)
    
    $
    6.76
    
    
    $
    5.52
    
    
    $
    1.24
    
    
    
    22.5
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas Cost Volumes (Bcf)
    
    
    0.2
    
    
    
    1.4
    
    
    
    (1.2
    )
    
    
    (85.7
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    6.58
    
    
    $
    6.94
    
    
    $
    (0.36
    )
    
    
    (5.2
    )%
  19




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##### Table of Contents



Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeExploration
    
    $
    1,532
    
    
    $
    1,073
    
    
    $
    459
    
    
    
    42.8
    %Imbalance
    
    
    (183
    )
    
    
    (450
    )
    
    
    267
    
    
    
    59.3
    %Equity in (Earnings) of Affiliates
    
    
    (196
    )
    
    
    (625
    )
    
    
    429
    
    
    
    68.6
    %Total Other Costs and Expenses
    
    $
    1,153
    
    
    $
    (2
    )
    
    $
    1,155
    
    
    
    57,750.0
    %
    Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeProduction
    
    $
    7,484
    
    
    $
    5,830
    
    
    $
    1,654
    
    
    
    28.4
    %Gathering
    
    
    4,495
    
    
    
    3,157
    
    
    
    1,338
    
    
    
    42.4
    %Total Depreciation, Depletion and Amortization
    
    $
    11,979
    
    
    $
    8,987
    
    
    $
    2,992
    
    
    
    33.3
    %
  Income Taxes
 Percentage2007
    
    2006
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    66,932
    
    
    $
    62,320
    
    
    $
    4,612
    
    
    
    7.4
    %Tax Expense
    
    $
    25,444
    
    
    $
    24,167
    
    
    $
    1,277
    
    
    
    5.3
    %Effective Income Tax Rate
    
    
    38.0
    %
    
    
    38.8
    %
    
    
    (0.8
    )%
  20




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##### Table of Contents



Results of Operations
 Six Months Ended June 30, 2007 compared with Six Months Ended June 30, 2006
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside
Sales
    
    $
    210,393
    
    
    $
    193,987
    
    
    $
    16,406
    
    
    
    8.5
    %Related Party
Sales
    
    
    4,601
    
    
    
    3,034
    
    
    
    1,567
    
    
    
    51.6
    %Royalty Interest Gas
Sales
    
    
    26,666
    
    
    
    28,493
    
    
    
    (1,827
    )
    
    
    (6.4
    )%Purchased Gas
Sales
    
    
    2,476
    
    
    
    32,130
    
    
    
    (29,654
    )
    
    
    (92.3
    )%Other
Income
    
    
    4,467
    
    
    
    13,431
    
    
    
    (8,964
    )
    
    
    (66.7
    )%Total
Revenue and
Other
Income
    
    
    248,603
    
    
    
    271,075
    
    
    
    (22,472
    )
    
    
    (8.3
    )%Costs and Expenses:Lifting
Costs
    
    
    17,029
    
    
    
    16,340
    
    
    
    689
    
    
    
    4.2
    %Gathering and
Compression
Costs
    
    
    31,310
    
    
    
    28,375
    
    
    
    2,935
    
    
    
    10.3
    %Royalty Interest Gas
Costs
    
    
    23,193
    
    
    
    23,683
    
    
    
    (490
    )
    
    
    (2.1
    )%Purchased Gas
Costs
    
    
    2,492
    
    
    
    32,751
    
    
    
    (30,259
    )
    
    
    (92.4
    )%Other
    
    
    1,591
    
    
    
    (238
    )
    
    
    1,829
    
    
    
    768.5
    %General and
Administrative
    
    
    26,276
    
    
    
    15,007
    
    
    
    11,269
    
    
    
    75.1
    %Depreciation,
Depletion and
Amortization
    
    
    24,077
    
    
    
    17,891
    
    
    
    6,186
    
    
    
    34.6
    %Interest
Expense
    
    
    2,465
    
    
    
    9
    
    
    
    2,456
    
    
    
    27,288.9
    %Total Costs
and
Expenses
    
    
    128,433
    
    
    
    133,818
    
    
    
    (5,385
    )
    
    
    (4.0
    )%Earnings Before Income
Taxes
    
    
    120,170
    
    
    
    137,257
    
    
    
    (17,087
    )
    
    
    (12.4
    )%Income
Taxes
    
    
    45,686
    
    
    
    53,228
    
    
    
    (7,542
    )
    
    
    (14.2
    )%Net
Income
    
    $
    74,484
    
    
    $
    84,029
    
    
    $
    (9,545
    )
    
    
    (11.4
    )%
  Revenue and Other Income
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside
Sales
    
    $
    210,393
    
    
    $
    193,987
    
    
    $
    16,406
    
    
    
    8.5
    %Related Party
Sales
    
    
    4,601
    
    
    
    3,034
    
    
    
    1,567
    
    
    
    51.6
    %Royalty Interest Gas
Sales
    
    
    26,666
    
    
    
    28,493
    
    
    
    (1,827
    )
    
    
    (6.4
    )%Purchased Gas
Sales
    
    
    2,476
    
    
    
    32,130
    
    
    
    (29,654
    )
    
    
    (92.3
    )%Other
Income
    
    
    4,467
    
    
    
    13,431
    
    
    
    (8,964
    )
    
    
    (66.7
    )%Total
Revenue and
Other
Income
    
    $
    248,603
    
    
    $
    271,075
    
    
    $
    (22,472
    )
    
    
    (8.3
    )%
  Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeSales Volumes
(Bcf)
    
    
    29.1
    
    
    
    27.3
    
    
    
    1.8
    
    
    
    6.6
    %Average Sales Price
(per
Mcf)
    
    $
    7.40
    
    
    $
    7.22
    
    
    $
    0.18
    
    
    
    2.5
    %
  21




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##### Table of Contents



Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty
Interest Sales
Volumes
(Bcf)
    
    
    3.7
    
    
    
    3.7
    
    
    
    0.0
    
    
    
    0.0
    %Average Sales Price
(per
Mcf)
    
    $
    7.22
    
    
    $
    7.71
    
    
    $
    (0.49
    )
    
    
    (6.4
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas
Sales Volumes
(Bcf)
    
    
    0.3
    
    
    
    4.0
    
    
    
    (3.7
    )
    
    
    (92.5
    )%Average Sales Price
(per
Mcf)
    
    $
    7.20
    
    
    $
    8.11
    
    
    $
    (0.91
    )
    
    
    (11.2
    )%
   Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeInterest
Income
    
    $
    2,733
    
    
    $
    1,098
    
    
    $
    1,635
    
    
    
    148.9
    %Third Party
Gathering
Revenue
    
    
    1,617
    
    
    
    666
    
    
    
    951
    
    
    
    142.8
    %Other
Miscellaneous
    
    
    117
    
    
    
    122
    
    
    
    (5
    )
    
    
    (4.1
    )%Insurance
Settlements
    
    
    0
    
    
    
    6,967
    
    
    
    (6,967
    )
    
    
    (100.0
    )%Royalty
Income
    
    
    0
    
    
    
    4,578
    
    
    
    (4,578
    )
    
    
    (100.0
    )%Total Other
Income
    
    $
    4,467
    
    
    $
    13,431
    
    
    $
    (8,964
    )
    
    
    (66.7
    )%
      22




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting
Costs
    
    $
    17,029
    
    
    $
    16,340
    
    
    $
    689
    
    
    
    4.2
    %Gathering and
Compression
Costs
    
    
    31,310
    
    
    
    28,375
    
    
    
    2,935
    
    
    
    10.3
    %Royalty
Interest Gas
Costs
    
    
    23,193
    
    
    
    23,683
    
    
    
    (490
    )
    
    
    (2.1
    )%Purchased Gas
Costs
    
    
    2,492
    
    
    
    32,751
    
    
    
    (30,259
    )
    
    
    (92.4
    )%Other
    
    
    1,591
    
    
    
    (238
    )
    
    
    1,829
    
    
    
    768.5
    %General &
Administrative
    
    
    26,276
    
    
    
    15,007
    
    
    
    11,269
    
    
    
    75.1
    %Depreciation,
Depletion &
Amortization
    
    
    24,077
    
    
    
    17,891
    
    
    
    6,186
    
    
    
    34.6
    %Interest
Expense
    
    
    2,465
    
    
    
    9
    
    
    
    2,456
    
    
    
    27,288.9
    %Total Costs and
Expenses
    
    $
    128,433
    
    
    $
    133,818
    
    
    $
    (5,385
    )
    
    
    (4.0
    )%
 Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes
(Bcf)
    
    
    29.1
    
    
    
    27.3
    
    
    
    1.8
    
    
    
    6.6
    %Average Lifting
Costs (per
Mcf)
    
    $
    0.59
    
    
    $
    0.60
    
    
    $
    (0.01
    )
    
    
    (1.7
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangeSales Volumes
(Bcf)
    
    
    29.1
    
    
    
    27.3
    
    
    
    1.8
    
    
    
    6.6
    %Average Gathering and
Compression Costs
(per
Mcf)
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.04
    
    
    
    3.8
    %
  Percentage2007
    
    2006
    
    Variance
    
    ChangeRoyalty
Interest Cost
Volumes
(Bcf)
    
    
    3.7
    
    
    
    3.7
    
    
    
    0.0
    
    
    
    0.0
    %Average Cost (per
Mcf)
    
    $
    6.28
    
    
    $
    6.41
    
    
    $
    (0.13
    )
    
    
    (2.0
    )%
  Percentage2007
    
    2006
    
    Variance
    
    ChangePurchased Gas
Cost Volumes
(Bcf)
    
    
    0.4
    
    
    
    4.0
    
    
    
    (3.6
    )
    
    
    (90.0
    )%Average Purchased
Gas Costs (per
Mcf)
    
    $
    6.45
    
    
    $
    8.27
    
    
    $
    (1.82
    )
    
    
    (22.0
    )%
  23




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##### Table of Contents



Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeExploration
    
    $
    1,994
    
    
    $
    1,405
    
    
    $
    589
    
    
    
    41.9
    %Imbalance
    
    
    0
    
    
    
    (871
    )
    
    
    871
    
    
    
    100.0
    %Equity in (Earnings) of Affiliates
    
    
    (403
    )
    
    
    (772
    )
    
    
    369
    
    
    
    47.8
    %Total Other Costs and Expenses
    
    $
    1,591
    
    
    $
    (238
    )
    
    $
    1,829
    
    
    
    768.5
    %
    Dollar
    
    
    Percentage2007
    
    
    2006
    
    
    Variance
    
    
    ChangeProduction
    
    $
    15,029
    
    
    $
    11,645
    
    
    $
    3,384
    
    
    
    29.1
    %Gathering
    
    
    9,048
    
    
    
    6,246
    
    
    
    2,802
    
    
    
    44.9
    %Total Depreciation,
Depletion and
Amortization
    
    $
    24,077
    
    
    $
    17,891
    
    
    $
    6,186
    
    
    
    34.6
    %
  Income Taxes
 Percentage2007
    
    2006
    
    Variance
    
    ChangeEarnings
Before Income
Taxes
    
    $
    120,170
    
    
    $
    137,257
    
    
    $
    (17,087
    )
    
    
    (12.4
    )%Tax
Expense
    
    $
    45,686
    
    
    $
    53,228
    
    
    $
    (7,542
    )
    
    
    (14.2
    )%Effective Income
Tax
Rate
    
    
    38.0
    %
    
    
    38.8
    %
    
    
    (0.8
    )%
  Liquidity and Capital Resources
    24




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##### Table of Contents



Cash Flows
 Year to Date
    
    Year to Date2007
    
    2006
    
    ChangeCash provided by operating activities
    
    $
    140,604
    
    
    $
    126,833
    
    
    $
    13,771Cash (used in) investing activities
    
    $
    (192,649
    )
    
    $
    (82,905
    )
    
    $
    (109,744
    )Cash provided by financing activities
    
    $
    4,900
    
    
    $
    306
    
    
    $
    4,594
 
    
    Cash provided by operating activities increased primarily as a result of higher average
sales prices and increased volumes, as previously discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
    
    Cash used in investing activities increased due to our expanded capital program,
including the acquisition of Peabody gas assets in the current period.
    
    Cash provided by financing activities increased primarily due
to the debt of the third
party contractor rigs, which was consolidated under FIN 46
during the quarter.
 Contractual Commitments
  Within
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong Term Debt Obligations (a)
    
    $
    5,973
    
    
    $
    1,831
    
    
    $
    4,142
    
    
    $
    
    
    
    $
    Capital (Finance) Lease Obligations (b)
    
    
    65,206
    
    
    
    2,670
    
    
    
    5,966
    
    
    
    6,908
    
    
    
    49,662Operating Lease Obligations
    
    
    6,112
    
    
    
    1,334
    
    
    
    2,138
    
    
    
    1,620
    
    
    
    1,020Other Long-Term Liabilities:Gas Firm Transportation Obligation
    
    
    52,505
    
    
    
    7,402
    
    
    
    14,597
    
    
    
    11,148
    
    
    
    19,358Other Liabilities (c)
    
    
    14,947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,947Well Plugging Liabilities
    
    
    3,351
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    3,284Pension
    
    
    274
    
    
    
    3
    
    
    
    13
    
    
    
    23
    
    
    
    235Postretirement Benefits Other than Pension
    
    
    2,409
    
    
    
    11
    
    
    
    68
    
    
    
    154
    
    
    
    2,176Total Contractual Obligations (d)
    
    $
    150,777
    
    
    $
    13,251
    
    
    $
    26,924
    
    
    $
    19,920
    
    
    $
    90,682
 
 (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 $65 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.(c)
    
    This item represents legal contingencies reflected on the balance sheet for potential
settlements for two of the cases referenced in 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. 25




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##### Table of Contents



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;
    
    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.
 26




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##### Table of Contents



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)
    
    $
    31.7
    
    
    $
    80.1
 
 (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 June 30, 2007, the
fair value of these contracts was a net gain of $303 (net of $193 deferred tax). We
continually evaluate the portfolio of derivative commodity instruments and adjust the strategy
to anticipated market conditions and risks accordingly. Hedging Volumes
  Three months
    
    
    Three months
    
    
    Three months
    
    
    Three monthsended
    
    
    ended
    
    
    ended
    
    
    endedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    Total Year2007 Fixed Price VolumesHedged Mcf
    
    
    3,247,423
    
    
    
    4,690,722
    
    
    
    4,742,268
    
    
    
    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
    
    
    
    479,381
    
    
    
    
    
    
    
    6,061,855Weighted Average Hedge Price/Mcf
    
    $
    8.82
    
    
    $
    8.08
    
    
    $
    8.10
    
    
    $
    
    
    
    $
    8.59
  27




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##### Table of Contents



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
    Nominee
    
    Votes For
    
    Votes Withheld
    
    %Votes ForPhilip W. Baxter
    
    
    147,312,071
    
    
    
    225,722
    
    
    
    99.85J. Brett Harvey
    
    
    139,376,534
    
    
    
    8,161,259
    
    
    
    94.47James E. Altmeyer, Sr.
    
    
    147,299,432
    
    
    
    238,361
    
    
    
    99.84William J. Lyons
    
    
    139,442,501
    
    
    
    8,095,292
    
    
    
    94.51Nicholas J. DeIuliis
    
    
    147,339,298
    
    
    
    198,495
    
    
    
    99.87John R. Pipski
    
    
    147,352,501
    
    
    
    185,292
    
    
    
    99.87Raj K. Gupta
    
    
    147,303,242
    
    
    
    234,551
    
    
    
    99.84Joseph T. Williams
    
    
    147,310,142
    
    
    
    227,651
    
    
    
    99.85
     29




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##### Table of Contents



ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 10.1
    
    The summary description of the base compensation and short-term incentive
opportunities for the executive officers of CNX Gas for 2007 is incorporated herein by reference
from Item 5.02 of the Current Report on Form 8-K filed by the CNX Gas on April 27, 2007.10.2
    
    Agreement of Sale entered into on June 8, 2007, by and between CNX Gas Company LLC, as
purchaser, and Consolidation Coal Company, as seller.10.3
    
    Asset Exchange Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among American Land Holdings of Indiana, LLC, et al and CNX Gas Company LLC.10.4
    
    Form Oil and Gas Deed, Assignment, And Assumption, which is Exhibit F to Asset Exchange
Agreement that is Exhibit 10.3, above.10.5
    
    Asset Purchase Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among American Land Holdings of Indiana, LLC, et al., as seller, and CNX Gas Company LLC, as buyer.10.6
    
    Form Oil and Gas Deed, Assignment, Assumption and Bill of Sale, which is Exhibit D to
Asset Purchase Agreement that is Exhibit 10.5, above.10.7
    
    Asset Purchase Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among CNX Gas Company LLC, as seller, and Cyprus Creek Land Resources, LLC, as buyer.10.8
    
    Asset Purchase Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among CNX Gas Company LLC, as seller, and Eastern Associated Coal, LLC, as buyer.10.9
    
    CNX Gas Corporation Equity Incentive Plan, as amended, is incorporated herein by
reference from the Companys Definitive Proxy Statement on Schedule 14A, filed with the Commission
on April 23, 2007.31.1
    
    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
  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)
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##### Table of Contents



EXHIBIT INDEX
 10.1
    
    The summary description of the base compensation and short-term incentive
opportunities for the executive officers of CNX Gas for 2007 is incorporated herein by reference
from Item 5.02 of the Current Report on Form 8-K filed by the CNX Gas on April 27, 2007.10.2
    
    Agreement of Sale entered into on June 8, 2007, by and between CNX Gas Company LLC, as
purchaser, and Consolidation Coal Company, as seller.10.3
    
    Asset Exchange Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among American Land Holdings of Indiana, LLC, et al and CNX Gas Company LLC.10.4
    
    Form Oil and Gas Deed, Assignment, And Assumption, which is Exhibit F to Asset Exchange
Agreement that is Exhibit 10.3, above.10.5
    
    Asset Purchase Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among American Land Holdings of Indiana, LLC, et al., as seller, and CNX Gas Company LLC, as buyer.10.6
    
    Form Oil and Gas Deed, Assignment, Assumption and Bill of Sale, which is Exhibit D to
Asset Purchase Agreement that is Exhibit 10.5, above.10.7
    
    Asset Purchase Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among CNX Gas Company LLC, as seller, and Cyprus Creek Land Resources, LLC, as buyer.10.8
    
    Asset Purchase Agreement entered into on June 20, 2007, but effective as of April 1, 2007,
among CNX Gas Company LLC, as seller, and Eastern Associated Coal, LLC, as buyer.
 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