##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from
 Commission file number: 001-32723
 
 CNX GAS CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    20-3170639
(I.R.S. Employer
Identification No.)
 4000 Brownsville Road
South Park, PA 15129
(412) 854-6719
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
 
 þ o
  o o þ
 o þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Condensed Financial StatementsConsolidated Statements of Income for the three and six months ended June 30, 2006 and June 30, 2005
    
    
    3Consolidated Balance Sheets at June 30, 2006 and December 31, 2005
    
    
    4Consolidated Statements of Stockholders Equity for the six months ended June 30, 2006
    
    
    5Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2
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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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue and Other Income:Outside Sales
    
    $
    92,194
    
    
    $
    53,311
    
    
    $
    193,987
    
    
    $
    121,197Related Party Sales
    
    
    1,404
    
    
    
    1,701
    
    
    
    3,034
    
    
    
    3,399Royalty Interest Gas Sales
    
    
    12,686
    
    
    
    9,066
    
    
    
    28,493
    
    
    
    18,742Purchased Gas Sales
    
    
    9,778
    
    
    
    44,975
    
    
    
    32,130
    
    
    
    69,257Other Income
    
    
    6,790
    
    
    
    2,019
    
    
    
    13,431
    
    
    
    4,527Total Revenue and Other Income
    
    
    122,852
    
    
    
    111,072
    
    
    
    271,075
    
    
    
    217,122Costs and Expenses:Lifting Costs
    
    
    7,016
    
    
    
    6,438
    
    
    
    14,695
    
    
    
    12,180Gathering and Compression Costs
    
    
    15,130
    
    
    
    10,451
    
    
    
    26,991
    
    
    
    19,222Royalty Interest Gas Costs
    
    
    10,267
    
    
    
    7,026
    
    
    
    23,683
    
    
    
    14,463Purchased Gas Costs
    
    
    9,986
    
    
    
    45,592
    
    
    
    32,751
    
    
    
    70,086Other
    
    
    2,035
    
    
    
    2,336
    
    
    
    3,864
    
    
    
    5,594Equity in (Earnings) Loss of Affiliates
    
    
    (625
    )
    
    
    (219
    )
    
    
    (772
    )
    
    
    132General and Administrative
    
    
    7,734
    
    
    
    3,706
    
    
    
    14,706
    
    
    
    7,472Depreciation, Depletion and Amortization
    
    
    8,987
    
    
    
    8,112
    
    
    
    17,891
    
    
    
    17,212Interest Expense
    
    
    2
    
    
    
    
    
    
    
    9
    
    
    
    Total Costs and Expenses
    
    
    60,532
    
    
    
    83,442
    
    
    
    133,818
    
    
    
    146,361Earnings Before Income Taxes
    
    
    62,320
    
    
    
    27,630
    
    
    
    137,257
    
    
    
    70,761Income Taxes
    
    
    24,167
    
    
    
    10,638
    
    
    
    53,228
    
    
    
    27,243Net Income
    
    $
    38,153
    
    
    $
    16,992
    
    
    $
    84,029
    
    
    $
    43,518Earnings per share:Basic
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.35Diluted
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.35Weighted Average Number of Common Shares
Outstanding:Basic
    
    
    150,833,334
    
    
    
    122,896,667
    
    
    
    150,833,334
    
    
    
    122,896,667Dilutive
    
    
    151,060,061
    
    
    
    122,988,359
    
    
    
    151,004,996
    
    
    
    122,988,359
 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 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    64,307
    
    
    $
    20,073Accounts
Receivable:Trade
    
    
    28,493
    
    
    
    41,121Related Party
    
    
    3,518
    
    
    
    728Other
    
    
    693
    
    
    
    550Derivatives
    
    
    3,923
    
    
    
    Deferred Taxes
    
    
    
    
    
    
    9,339Other Current Assets
    
    
    22,202
    
    
    
    18,067Total Current Assets
    
    
    123,136
    
    
    
    89,878Property, Plant and Equipment, Net
    
    
    786,679
    
    
    
    723,547Other Assets
    
    
    11,964
    
    
    
    11,903Investments in Equity Affiliates
    
    
    50,196
    
    
    
    49,528TOTAL ASSETS
    
    $
    971,975
    
    
    $
    874,856LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    11,365
    
    
    $
    22,541Accrued Royalties Payable
    
    
    11,051
    
    
    
    10,504Accrued Severance Taxes
    
    
    2,266
    
    
    
    2,747Accrued Income Taxes
    
    
    5,069
    
    
    
    5,518Derivatives
    
    
    
    
    
    
    23,777Deferred Taxes
    
    
    1,530
    
    
    
    Other Current Liabilities
    
    
    25,489
    
    
    
    21,071Total Current Liabilities
    
    
    56,770
    
    
    
    86,158Deferred Taxes
    
    
    78,673
    
    
    
    47,736Other Liabilities
    
    
    15,681
    
    
    
    14,310Well Plugging Liabilities
    
    
    8,328
    
    
    
    10,908Derivatives
    
    
    18,896
    
    
    
    32,909Postemployment Benefits Other Than Pension
    
    
    3,357
    
    
    
    3,363Total Liabilities
    
    
    181,705
    
    
    
    195,384Stockholders EquityCommon Stock, $.01 par value; 200,000,000 Shares
Authorized, 150,833,334 Issued and Outstanding at June
30, 2006 and December 31, 2005
    
    
    1,508
    
    
    
    1,508Capital in Excess of Par Value
    
    
    779,430
    
    
    
    779,509Retained Earnings (Deficit)
    
    
    18,499
    
    
    
    (65,530
    )Accumulated Other Comprehensive Loss
    
    
    (9,167
    )
    
    
    (34,733
    )Stock Based Compensation Awards
    
    
    
    
    
    
    (1,282
    )Total Stockholders Equity
    
    
    790,270
    
    
    
    679,472TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    971,975
    
    
    $
    874,856
 The accompanying notes are an integral part of these consolidated financial statements.
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CNX GAS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)  (Dollars in thousands)
 AccumulatedCapital in
    
    
    Retained
    
    
    Other
    
    
    Stock Based
    
    
    TotalCommon
    
    
    Excess of
    
    
    Earnings/
    
    
    Comprehensive
    
    
    Compensation
    
    
    StockholdersStock
    
    
    Par Value
    
    
    (Deficit)
    
    
    Income (Loss)
    
    
    Awards
    
    
    EquityBalance at December 31, 2005
    
    $
    1,508
    
    
    $
    779,509
    
    
    $
    (65,530
    )
    
    $
    (34,733
    )
    
    $
    (1,282
    )
    
    $
    679,472Net Income
    
    
    
    
    
    
    
    
    
    
    84,029
    
    
    
    
    
    
    
    
    
    
    
    84,029Gas Cash Flow Hedge (Net of
$(16,427) tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,566
    
    
    
    
    
    
    
    25,566Comprehensive Income (a)
    
    
    
    
    
    
    
    
    
    
    84,029
    
    
    
    25,566
    
    
    
    
    
    
    
    109,595Elimination of Unearned
Compensation on Restricted Stock
Units
    
    
    
    
    
    
    (1,282
    )
    
    
    
    
    
    
    
    
    
    
    1,282
    
    
    
    Amortization of Stock Based
Compensation Awards
    
    
    
    
    
    
    1,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203Balance at June 30, 2006
    
    $
    1,508
    
    
    $
    779,430
    
    
    $
    18,499
    
    
    $
    (9,167
    )
    
    $
    
    
    
    $
    790,270
 
 (a)
    
    Of the $25,566 net change in accumulated other comprehensive income in the period, $3,944
represents hedging gains recognized in net income for the portions of the financial hedges
that settled in the current period. Comprehensive loss for the period ended June 30, 2005 was
$9,348. 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 30,2006
    
    
    2005Operating Activities:Net Income
    
    $
    84,029
    
    
    $
    43,518Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:Depreciation, Depletion and Amortization
    
    
    17,891
    
    
    
    17,212Stock Based Compensation
    
    
    1,203
    
    
    
    Income Taxes
    
    
    (449
    )
    
    
    14,203Deferred Income Taxes
    
    
    25,379
    
    
    
    13,040Equity in (Earnings) Loss of Affiliates
    
    
    (772
    )
    
    
    132Changes in Operating Assets:Accounts Receivable
    
    
    12,485
    
    
    
    (605
    )Related Party Receivable
    
    
    (2,790
    )
    
    
    Other Current Assets
    
    
    56
    
    
    
    (4,068
    )Changes in Other Assets
    
    
    (61
    )
    
    
    374Changes in Operating Liabilities:Accounts Payable
    
    
    (11,176
    )
    
    
    (8,309
    )Other Current Liabilities
    
    
    (758
    )
    
    
    4,978Changes in Other Liabilities
    
    
    1,511
    
    
    
    1,160Other
    
    
    285
    
    
    
    128Net Cash Provided by Operating Activities
    
    
    126,833
    
    
    
    81,763Investing Activities:Capital Expenditures
    
    
    (83,009
    )
    
    
    (36,642
    )Investment in Equity Affiliates
    
    
    104
    
    
    
    (2,762
    )Net Cash Used in Investing Activities
    
    
    (82,905
    )
    
    
    (39,404
    )Financing Activities:Short-Term Loan
    
    
    306
    
    
    
    Payments to Parent
    
    
    
    
    
    
    (42,362
    )Net Cash Provided by (Used in) Financing Activities
    
    
    306
    
    
    
    (42,362
    )Net Increase in Cash and Cash Equivalents
    
    
    44,234
    
    
    
    (3
    )Cash and Cash Equivalents at Beginning of Period
    
    
    20,073
    
    
    
    3Cash and Cash Equivalents at End of Period
    
    $
    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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Income
    
    $
    38,153
    
    
    $
    16,992
    
    
    $
    84,029
    
    
    $
    43,518Weighted Average Number of Common Shares Outstanding:Basic
    
    
    150,833,334
    
    
    
    122,896,667
    
    
    
    150,833,334
    
    
    
    122,896,667Effect of stock options
    
    
    226,727
    
    
    
    91,692
    
    
    
    171,662
    
    
    
    91,692Diluted
    
    
    151,060,061
    
    
    
    122,988,359
    
    
    
    151,004,996
    
    
    
    122,988,359Earnings per share:Basic
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.35Diluted
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.35
 Note 2Stock-Based Compensation:
       8




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For the six monthsended June 30, 2006Weighted Average Fair Value of Grants
    
    $
    9.83Risk Free Interest Rate
    
    
    4.63
    %Dividend Yield
    
    
    Expected Volatility
    
    
    32.2
    %Expected life in years
    
    
    4.5
   WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicExercise
    
    
    Term
    
    
    ValueShares
    
    
    Price
    
    
    (in years)
    
    
    (in thousands)Outstanding at December 31, 2005
    
    
    1,040,576
    
    
    $
    16.05Granted
    
    
    460,994
    
    
    
    28.50Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (28,835
    )
    
    
    18.87Outstanding at June 30, 2006
    
    
    1,472,735
    
    
    $
    19.89
    
    
    
    9.32
    
    
    $
    14,882Vested and expected to vest at June 30, 2006
    
    
    1,472,735
    
    
    $
    19.89
    
    
    
    9.32
    
    
    $
    14,882
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Weighted AverageNumber of Shares
    
    
    Grant Date Fair ValueNonvested at December 31, 2005
    
    
    92,969
    
    
    $
    16.00Granted
    
    
    6,143
    
    
    
    28.50Nonvested at June 30, 2006
    
    
    99,112
    
    
    $
    16.77
 Note 3Pension and Other Postemployment Benefits:
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,Pension
    
    
    Other Benefits
    
    
    Pension
    
    
    Other Benefits2006
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2005Components of Net Periodic Benefit Costs:Service costs
    
    $
    70
    
    
    $
    23
    
    
    $
    32
    
    
    $
    140
    
    
    $
    46
    
    
    $
    64Interest costs
    
    
    1
    
    
    
    25
    
    
    
    41
    
    
    
    2
    
    
    
    50
    
    
    
    82Amortization of prior service costs credit
    
    
    (2
    )
    
    
    (43
    )
    
    
    (29
    )
    
    
    (4
    )
    
    
    (86
    )
    
    
    (58
    )Recognized net actuarial loss (gain)
    
    
    (3
    )
    
    
    
    
    
    
    16
    
    
    
    (6
    )
    
    
    
    
    
    
    32Benefit costs
    
    $
    66
    
    
    $
    5
    
    
    $
    60
    
    
    $
    132
    
    
    $
    10
    
    
    $
    120
   Note 4Income Taxes:
  For the Six Months Ended June 30,2006
    
    
    2005Dollars
    
    
    Rate
    
    
    Dollars
    
    
    RateStatutory U.S. Federal Income Tax Rate
    
    $
    48,040
    
    
    
    35.0
    %
    
    $
    24,766
    
    
    
    35.0
    %Net Effect of State Income Tax
    
    
    6,080
    
    
    
    4.4
    %
    
    
    2,972
    
    
    
    4.2
    %Other
    
    
    (892
    )
    
    
    (0.6
    )%
    
    
    (495
    )
    
    
    (0.7
    )%Income Tax Expense/ Effective Rate
    
    $
    53,228
    
    
    
    38.8
    %
    
    $
    27,243
    
    
    
    38.5
    %
  10




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Note 5Property, Plant and Equipment:
 June 30,
    
    
    December 31,2006
    
    
    2005Surface Lands
    
    $
    31,927
    
    
    $
    26,573Mineral Interests
    
    
    55,621
    
    
    
    55,621Wells and Related Equipment
    
    
    158,206
    
    
    
    141,959Intangible Drilling
    
    
    342,692
    
    
    
    312,467Gathering Assets
    
    
    373,026
    
    
    
    344,355Gas Well Plugging
    
    
    4,954
    
    
    
    7,680Other
    
    
    3,274
    
    
    
    36Total Property, Plant and Equipment
    
    
    969,700
    
    
    
    888,691Accumulated Depreciation, Depletion and Amortization
    
    
    (183,021
    )
    
    
    (165,144
    )Property and Equipment, net
    
    $
    786,679
    
    
    $
    723,547
 Note 6Credit Facility:
    Note 7Commitments and Contingent Liabilities:
    11




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TotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    BeyondCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 yearsLetters of Credit:Gas
    
    $
    16,847
    
    
    $
    16,847
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Letters of Credit
    
    $
    16,847
    
    
    $
    16,847
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety Bonds:Environmental
    
    $
    495
    
    
    $
    495
    
    
    $
    
    
    
    $
    
    
    
    $
    Other
    
    
    474
    
    
    
    439
    
    
    
    35
    
    
    
    
    
    
    
    Total Surety Bonds
    
    $
    969
    
    
    $
    934
    
    
    $
    35
    
    
    $
    
    
    
    $
    Other:Guarantees
    
    $
    6,100
    
    
    $
    5,000
    
    
    $
    1,100
    
    
    $
    
    
    
    $
    Total Guarantees
    
    $
    6,100
    
    
    $
    5,000
    
    
    $
    1,100
    
    
    $
    
    
    
    $
    Total Commitments
    
    $
    23,916
    
    
    $
    22,781
    
    
    $
    1,135
    
    
    $
    
    
    
    $
    
  Note 8Segment Information:
   CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    87,345
    
    
    $
    4,849
    
    
    $
    
    
    
    $
    92,194
    
    
    $
    
    
    
    $
    92,194Salesrelated parties
    
    
    1,387
    
    
    
    17
    
    
    
    
    
    
    
    1,404
    
    
    
    
    
    
    
    1,404Salesroyalty interest
    
    
    12,628
    
    
    
    58
    
    
    
    
    
    
    
    12,686
    
    
    
    
    
    
    
    12,686Salespurchased gas
    
    
    9,778
    
    
    
    
    
    
    
    
    
    
    
    9,778
    
    
    
    
    
    
    
    9,778Other revenue
    
    
    6,431
    
    
    
    16
    
    
    
    343
    
    
    
    6,790
    
    
    
    
    
    
    
    6,790Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    13,215
    
    
    
    13,215
    
    
    
    (13,215
    )
    
    
    Total Revenue and Other Income
    
    $
    117,569
    
    
    $
    4,940
    
    
    $
    13,558
    
    
    $
    136,067
    
    
    $
    (13,215
    )
    
    $
    122,852Earnings Before Income Taxes
    
    $
    57,610
    
    
    $
    712
    
    
    $
    3,998
    
    
    $
    62,320
    
    
    $
    
    
    
    $
    62,320
    (A)Segment assets
    
    $
    553,042
    
    
    $
    44,487
    
    
    $
    310,139
    
    
    $
    907,668
    
    
    $
    64,307
    
    
    $
    971,975
    (B)(C)Depreciation, depletion and amortization
    
    $
    5,251
    
    
    $
    647
    
    
    $
    3,089
    
    
    $
    8,987
    
    
    $
    
    
    
    $
    8,987Capital expenditures
    
    $
    22,348
    
    
    $
    5,853
    
    
    $
    14,631
    
    
    $
    42,832
    
    
    $
    
    
    
    $
    42,832
 
 (A)
    
    Central Appalachia and Tennessee segment includes equity in earnings of unconsolidated
affiliates of $625.(B)
    
    Central Appalachia and Tennessee segment includes investments in unconsolidated equity
affiliates of $50,196.(C)
    
    The $64,307 represents cash which is not allocated to individual segments. 13




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##### Table of Contents



CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    49,801
    
    
    $
    3,510
    
    
    $
    
    
    
    $
    53,311
    
    
    $
    
    
    
    $
    53,311Salesrelated parties
    
    
    1,687
    
    
    
    14
    
    
    
    
    
    
    
    1,701
    
    
    
    
    
    
    
    1,701Salesroyalty interest
    
    
    9,020
    
    
    
    46
    
    
    
    
    
    
    
    9,066
    
    
    
    
    
    
    
    9,066Salespurchased gas
    
    
    44,975
    
    
    
    
    
    
    
    
    
    
    
    44,975
    
    
    
    
    
    
    
    44,975Other revenue
    
    
    1,506
    
    
    
    13
    
    
    
    500
    
    
    
    2,019
    
    
    
    
    
    
    
    2,019Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    11,128
    
    
    
    11,128
    
    
    
    (11,128
    )
    
    
    Total Revenue and Other Income
    
    $
    106,989
    
    
    $
    3,583
    
    
    $
    11,628
    
    
    $
    122,200
    
    
    $
    (11,128
    )
    
    $
    111,072Earnings (Loss) Before Income Taxes
    
    $
    25,395
    
    
    $
    (290
    )
    
    $
    2,525
    
    
    $
    27,630
    
    
    $
    
    
    
    $
    27,630
    (D)Segment assets
    
    $
    413,612
    
    
    $
    25,510
    
    
    $
    307,667
    
    
    $
    746,789
    
    
    $
    
    
    
    $
    746,789
    (E)Depreciation, depletion and amortization
    
    $
    4,393
    
    
    $
    842
    
    
    $
    2,877
    
    
    $
    8,112
    
    
    $
    
    
    
    $
    8,112Capital expenditures
    
    $
    22,554
    
    
    $
    3,275
    
    
    $
    46
    
    
    $
    25,875
    
    
    $
    
    
    
    $
    25,875
 
 (D)
    
    Central Appalachia and Tennessee segment includes equity in earnings (loss) of
unconsolidated affiliates of $(219).(E)
    
    Central Appalachia and Tennessee segment includes investments in unconsolidated equity
affiliates of $50,003.  CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    182,502
    
    
    $
    11,485
    
    
    $
    
    
    
    $
    193,987
    
    
    $
    
    
    
    $
    193,987Salesrelated parties
    
    
    2,981
    
    
    
    53
    
    
    
    
    
    
    
    3,034
    
    
    
    
    
    
    
    3,034Salesroyalty interest
    
    
    28,372
    
    
    
    121
    
    
    
    
    
    
    
    28,493
    
    
    
    
    
    
    
    28,493Salespurchased gas
    
    
    32,130
    
    
    
    
    
    
    
    
    
    
    
    32,130
    
    
    
    
    
    
    
    32,130Other revenue
    
    
    12,738
    
    
    
    27
    
    
    
    666
    
    
    
    13,431
    
    
    
    
    
    
    
    13,431Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    26,223
    
    
    
    26,223
    
    
    
    (26,223
    )
    
    
    Total Revenue and Other Income
    
    $
    258,723
    
    
    $
    11,686
    
    
    $
    26,889
    
    
    $
    297,298
    
    
    $
    (26,223
    )
    
    $
    271,075Earnings (Loss) Before Income Taxes
    
    $
    125,669
    
    
    $
    3,385
    
    
    $
    8,203
    
    
    $
    137,257
    
    
    $
    
    
    
    $
    137,257
    (F)Segment assets
    
    $
    553,042
    
    
    $
    44,487
    
    
    $
    310,139
    
    
    $
    907,668
    
    
    $
    64,307
    
    
    $
    971,975
    (G)(H)Depreciation, depletion and amortization
    
    $
    10,491
    
    
    $
    1,221
    
    
    $
    6,179
    
    
    $
    17,891
    
    
    $
    
    
    
    $
    17,891Capital expenditures
    
    $
    44,636
    
    
    $
    12,504
    
    
    $
    25,869
    
    
    $
    83,009
    
    
    $
    
    
    
    $
    83,009
 
 (F)
    
    Central Appalachia and Tennessee segment includes equity in earnings of unconsolidated
affiliates of $772.(G)
    
    Central Appalachia and Tennessee segment includes investments in unconsolidated equity
affiliates of $50,196.(H)
    
    The $64,307 represents cash which is not allocated to individual segments. 14




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##### Table of Contents



CentralAppalachia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporateand
    
    
    Northern
    
    
    
    
    
    
    Total
    
    
    Adjustments &Tennessee
    
    
    Appalachia
    
    
    Gathering
    
    
    Gas
    
    
    Eliminations
    
    
    ConsolidatedSalesoutside
    
    $
    114,606
    
    
    $
    6,591
    
    
    $
    
    
    
    $
    121,197
    
    
    $
    
    
    
    $
    121,197Salesrelated parties
    
    
    3,372
    
    
    
    27
    
    
    
    
    
    
    
    3,399
    
    
    
    
    
    
    
    3,399Salesroyalty interest
    
    
    18,686
    
    
    
    56
    
    
    
    
    
    
    
    18,742
    
    
    
    
    
    
    
    18,742Salespurchased gas
    
    
    69,257
    
    
    
    
    
    
    
    
    
    
    
    69,257
    
    
    
    
    
    
    
    69,257Other revenue
    
    
    3,997
    
    
    
    30
    
    
    
    500
    
    
    
    4,527
    
    
    
    
    
    
    
    4,527Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    23,172
    
    
    
    23,172
    
    
    
    (23,172
    )
    
    
    Total Revenue and Other Income
    
    $
    209,918
    
    
    $
    6,704
    
    
    $
    23,672
    
    
    $
    240,294
    
    
    $
    (23,172
    )
    
    $
    217,122Earnings (Loss) Before Income Taxes
    
    $
    66,247
    
    
    $
    (56
    )
    
    $
    4,570
    
    
    $
    70,761
    
    
    $
    
    
    
    $
    70,761
    (I)Segment assets
    
    $
    413,612
    
    
    $
    25,510
    
    
    $
    307,667
    
    
    $
    746,789
    
    
    $
    
    
    
    $
    746,789
    (J)Depreciation, depletion and amortization
    
    $
    10,229
    
    
    $
    1,228
    
    
    $
    5,755
    
    
    $
    17,212
    
    
    $
    
    
    
    $
    17,212Capital expenditures
    
    $
    30,999
    
    
    $
    5,542
    
    
    $
    101
    
    
    $
    36,642
    
    
    $
    
    
    
    $
    36,642
 
 (I)
    
    Central Appalachia and Tennessee segment includes equity in earnings (loss) of
unconsolidated affiliates of $(132).(J)
    
    Central Appalachia and Tennessee segment includes investments in unconsolidated equity
affiliates of $50,003. Note 9Recent Accounting Pronouncements:
  15




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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
   16




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##### Table of Contents



Results of Operations
 Three Months Ended June 30, 2006 compared with Three Months Ended June 30, 2005
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    92,194
    
    
    $
    53,311
    
    
    $
    38,883
    
    
    
    72.9
    %Related Party Sales
    
    
    1,404
    
    
    
    1,701
    
    
    
    (297
    )
    
    
    (17.5
    )%Royalty Interest Gas Sales
    
    
    12,686
    
    
    
    9,066
    
    
    
    3,620
    
    
    
    39.9
    %Purchased Gas Sales
    
    
    9,778
    
    
    
    44,975
    
    
    
    (35,197
    )
    
    
    (78.3
    )%Other Income
    
    
    6,790
    
    
    
    2,019
    
    
    
    4,771
    
    
    
    236.3
    %Total Revenue and Other Income
    
    
    122,852
    
    
    
    111,072
    
    
    
    11,780
    
    
    
    10.6
    %Costs and Expenses:Lifting Costs
    
    
    7,016
    
    
    
    6,438
    
    
    
    578
    
    
    
    9.0
    %Gathering and Compression Costs
    
    
    15,130
    
    
    
    10,451
    
    
    
    4,679
    
    
    
    44.8
    %Royalty Interest Gas Costs
    
    
    10,267
    
    
    
    7,026
    
    
    
    3,241
    
    
    
    46.1
    %Purchased Gas Costs
    
    
    9,986
    
    
    
    45,592
    
    
    
    (35,606
    )
    
    
    (78.1
    )%Other
    
    
    2,035
    
    
    
    2,336
    
    
    
    (301
    )
    
    
    (12.9
    )%Equity in Earnings of Affiliates
    
    
    (625
    )
    
    
    (219
    )
    
    
    (406
    )
    
    
    (185.4
    )%General and Administrative
    
    
    7,734
    
    
    
    3,706
    
    
    
    4,028
    
    
    
    108.7
    %Depreciation, Depletion and Amortization
    
    
    8,987
    
    
    
    8,112
    
    
    
    875
    
    
    
    10.8
    %Interest Expense
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    100.0
    %Total Costs and Expenses
    
    
    60,532
    
    
    
    83,442
    
    
    
    (22,910
    )
    
    
    (27.5
    )%Earnings Before Income Taxes
    
    
    62,320
    
    
    
    27,630
    
    
    
    34,690
    
    
    
    125.6
    %Income Taxes
    
    
    24,167
    
    
    
    10,638
    
    
    
    13,529
    
    
    
    127.2
    %Net Income
    
    $
    38,153
    
    
    $
    16,992
    
    
    $
    21,161
    
    
    
    124.5
    %
  Revenue and Other Income
  Dollar
    
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    92,194
    
    
    $
    53,311
    
    
    $
    38,883
    
    
    
    72.9
    %Related Party Sales
    
    
    1,404
    
    
    
    1,701
    
    
    
    (297
    )
    
    
    (17.5
    )%Royalty Interest Gas Sales
    
    
    12,686
    
    
    
    9,066
    
    
    
    3,620
    
    
    
    39.9
    %Purchased Gas Sales
    
    
    9,778
    
    
    
    44,975
    
    
    
    (35,197
    )
    
    
    (78.3
    )%Other Income
    
    
    6,790
    
    
    
    2,019
    
    
    
    4,771
    
    
    
    236.3
    %Total Revenue and Other Income
    
    $
    122,852
    
    
    $
    111,072
    
    
    $
    11,780
    
    
    
    10.6
    %
 17




---



##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    13.7
    
    
    
    11.2
    
    
    
    2.5
    
    
    
    22.3
    %Average Sales Price (per Mcf)
    
    $
    6.83
    
    
    $
    4.91
    
    
    $
    1.92
    
    
    
    39.1
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.9
    
    
    
    1.6
    
    
    
    0.3
    
    
    
    18.8
    %Average Sales Price (per Mcf)
    
    $
    6.82
    
    
    $
    5.66
    
    
    $
    1.16
    
    
    
    20.5
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    1.4
    
    
    
    6.4
    
    
    
    (5.0
    )
    
    
    (78.1
    )%Average Sales Price (per Mcf)
    
    $
    6.80
    
    
    $
    7.03
    
    
    $
    (0.23
    )
    
    
    (3.3
    )%
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeInsurance Settlements
    
    $
    3,960
    
    
    $
    
    
    
    $
    3,960
    
    
    
    100.0
    %Royalty Income
    
    
    1,693
    
    
    
    1,685
    
    
    
    8
    
    
    
    0.5
    %Interest Income
    
    
    728
    
    
    
    
    
    
    
    728
    
    
    
    100.0
    %Third Party Gathering Revenue
    
    
    343
    
    
    
    283
    
    
    
    60
    
    
    
    21.2
    %Other Miscellaneous
    
    
    66
    
    
    
    51
    
    
    
    15
    
    
    
    29.4
    %Total Other Income
    
    $
    6,790
    
    
    $
    2,019
    
    
    $
    4,771
    
    
    
    236.3
    %
 18




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    7,016
    
    
    $
    6,438
    
    
    $
    578
    
    
    
    9.0
    %Gathering and Compression Costs
    
    
    15,130
    
    
    
    10,451
    
    
    
    4,679
    
    
    
    44.8
    %Royalty Interest Gas Costs
    
    
    10,267
    
    
    
    7,026
    
    
    
    3,241
    
    
    
    46.1
    %Purchased Gas Costs
    
    
    9,986
    
    
    
    45,592
    
    
    
    (35,606
    )
    
    
    (78.1
    )%Other
    
    
    2,035
    
    
    
    2,336
    
    
    
    (301
    )
    
    
    (12.9
    )%Equity in (Earnings) of Affiliates
    
    
    (625
    )
    
    
    (219
    )
    
    
    (406
    )
    
    
    (185.4
    )%General & Administrative
    
    
    7,734
    
    
    
    3,706
    
    
    
    4,028
    
    
    
    108.7
    %Depreciation, Depletion & Amortization
    
    
    8,987
    
    
    
    8,112
    
    
    
    875
    
    
    
    10.8
    %Interest Expense
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    100.0
    %Total Costs and Expenses
    
    $
    60,532
    
    
    $
    83,442
    
    
    $
    (22,910
    )
    
    
    (27.5
    )%
 Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    13.7
    
    
    
    11.2
    
    
    
    2.5
    
    
    
    22.3
    %Average Lifting Costs (per Mcf)
    
    $
    0.51
    
    
    $
    0.57
    
    
    $
    (0.06
    )
    
    
    (10.5)
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    13.7
    
    
    
    11.2
    
    
    
    2.5
    
    
    
    22.3
    %Average Gathering and Compression Costs (per Mcf)
    
    $
    1.10
    
    
    $
    0.93
    
    
    $
    0.17
    
    
    
    18.3
    %
  19




---



##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    1.9
    
    
    
    1.6
    
    
    
    0.3
    
    
    
    18.8
    %Average Cost (per Mcf)
    
    $
    5.52
    
    
    $
    4.39
    
    
    $
    1.13
    
    
    
    25.7
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    1.4
    
    
    
    6.4
    
    
    
    (5.0
    )
    
    
    (78.1
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    6.94
    
    
    $
    7.13
    
    
    $
    (0.19
    )
    
    
    (2.7
    )%
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeWell Site General Maintenance
    
    $
    920
    
    
    $
    779
    
    
    $
    141
    
    
    
    18.1
    %Gob Gas Collection Costs
    
    
    695
    
    
    
    708
    
    
    
    (13
    )
    
    
    (1.8
    )%Miscellaneous
    
    
    527
    
    
    
    143
    
    
    
    384
    
    
    
    268.5
    %Land Related
    
    
    343
    
    
    
    226
    
    
    
    117
    
    
    
    51.8
    %Imbalance
    
    
    (450
    )
    
    
    (40
    )
    
    
    (410
    )
    
    
    (1,025.0
    )%Accounts Receivable Securitization Fees
    
    
    
    
    
    
    520
    
    
    
    (520
    )
    
    
    (100.0
    )%Total Other Costs and Expenses
    
    $
    2,035
    
    
    $
    2,336
    
    
    $
    (301
    )
    
    
    (12.9
    )%
      20




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##### Table of Contents



Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeKnox Energy
    
    $
    (742
    )
    
    $
    (269
    )
    
    $
    (473
    )
    
    
    (175.8
    )%Coalfield Pipeline
    
    
    (59
    )
    
    
    (3
    )
    
    
    (56
    )
    
    
    (1,866.7
    )%Buchanan Generation
    
    
    176
    
    
    
    53
    
    
    
    123
    
    
    
    232.1
    %Total Equity in (Earnings) Loss of Affiliates
    
    $
    (625
    )
    
    $
    (219
    )
    
    $
    (406
    )
    
    
    (185.4
    )%
      Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeProduction
    
    $
    5,830
    
    
    $
    5,235
    
    
    $
    595
    
    
    
    11.4
    %Gathering
    
    
    3,157
    
    
    
    2,877
    
    
    
    280
    
    
    
    9.7
    %Total Depreciation, Depletion and Amortization
    
    $
    8,987
    
    
    $
    8,112
    
    
    $
    875
    
    
    
    10.8
    %
  Income Taxes
 Percentage2006
    
    2005
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    62,320
    
    
    $
    27,630
    
    
    $
    34,690
    
    
    
    125.6
    %Tax Expense
    
    $
    24,167
    
    
    $
    10,638
    
    
    $
    13,529
    
    
    
    127.2
    %Effective Income Tax Rate
    
    
    38.8
    %
    
    
    38.5
    %
    
    
    0.3
    %
  21




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##### Table of Contents



Results of Operations
 Six Months Ended June 30, 2006 compared with Six Months Ended June 30, 2005
(Amounts reported in thousands)
 Net Income
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    193,987
    
    
    $
    121,197
    
    
    $
    72,790
    
    
    
    60.1
    %Related Party Sales
    
    
    3,034
    
    
    
    3,399
    
    
    
    (365
    )
    
    
    (10.7)
    %Royalty Interest Gas Sales
    
    
    28,493
    
    
    
    18,742
    
    
    
    9,751
    
    
    
    52.0
    %Purchased Gas Sales
    
    
    32,130
    
    
    
    69,257
    
    
    
    (37,127
    )
    
    
    (53.6)
    %Other Income
    
    
    13,431
    
    
    
    4,527
    
    
    
    8,904
    
    
    
    196.7
    %Total Revenue and Other Income
    
    
    271,075
    
    
    
    217,122
    
    
    
    53,953
    
    
    
    24.8
    %Costs and Expenses:Lifting Costs
    
    
    14,695
    
    
    
    12,180
    
    
    
    2,515
    
    
    
    20.6
    %Gathering and Compression Costs
    
    
    26,991
    
    
    
    19,222
    
    
    
    7,769
    
    
    
    40.4
    %Royalty Interest Gas Costs
    
    
    23,683
    
    
    
    14,463
    
    
    
    9,220
    
    
    
    63.7
    %Purchased Gas Costs
    
    
    32,751
    
    
    
    70,086
    
    
    
    (37,335
    )
    
    
    (53.3)
    %Other
    
    
    3,864
    
    
    
    5,594
    
    
    
    (1,730
    )
    
    
    (30.9)
    %Equity in (Earnings) Loss of Affiliates
    
    
    (772
    )
    
    
    132
    
    
    
    (904
    )
    
    
    (684.8)
    %General and Administrative
    
    
    14,706
    
    
    
    7,472
    
    
    
    7,234
    
    
    
    96.8
    %Depreciation, Depletion and Amortization
    
    
    17,891
    
    
    
    17,212
    
    
    
    679
    
    
    
    3.9
    %Interest Expense
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    100.0
    %Total Costs and Expenses
    
    
    133,818
    
    
    
    146,361
    
    
    
    (12,543
    )
    
    
    (8.6)
    %Earnings Before Income Taxes
    
    
    137,257
    
    
    
    70,761
    
    
    
    66,496
    
    
    
    94.0
    %Income Taxes
    
    
    53,228
    
    
    
    27,243
    
    
    
    25,985
    
    
    
    95.4
    %Net Income
    
    $
    84,029
    
    
    $
    43,518
    
    
    $
    40,511
    
    
    
    93.1
    %
  Revenue and Other Income
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeRevenue and Other Income:Outside Sales
    
    $
    193,987
    
    
    $
    121,197
    
    
    $
    72,790
    
    
    
    60.1
    %Related Party Sales
    
    
    3,034
    
    
    
    3,399
    
    
    
    (365
    )
    
    
    (10.7)
    %Royalty Interest Gas Sales
    
    
    28,493
    
    
    
    18,742
    
    
    
    9,751
    
    
    
    52.0
    %Purchased Gas Sales
    
    
    32,130
    
    
    
    69,257
    
    
    
    (37,127
    )
    
    
    (53.6)
    %Other Income
    
    
    13,431
    
    
    
    4,527
    
    
    
    8,904
    
    
    
    196.7
    %Total Revenue and Other Income
    
    
    271,075
    
    
    
    217,122
    
    
    
    53,953
    
    
    
    24.8
    %
 22




---



##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    27.3
    
    
    
    23.5
    
    
    
    3.8
    
    
    
    16.2
    %Average Sales Price (per Mcf)
    
    $
    7.22
    
    
    $
    5.31
    
    
    $
    1.91
    
    
    
    36.0
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    3.7
    
    
    
    3.4
    
    
    
    0.3
    
    
    
    8.8
    %Average Sales Price (per Mcf)
    
    $
    7.71
    
    
    $
    5.59
    
    
    $
    2.12
    
    
    
    37.9
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Sales Volumes (Bcf)
    
    
    4.0
    
    
    
    10.2
    
    
    
    (6.2
    )
    
    
    (60.8)
    %Average Sales Price (per Mcf)
    
    $
    8.11
    
    
    $
    6.77
    
    
    $
    1.34
    
    
    
    19.8
    %
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeInsurance Proceeds
    
    $
    6,967
    
    
    $
    
    
    
    $
    6,967
    
    
    
    100.0
    %Royalty Income
    
    
    4,578
    
    
    
    3,901
    
    
    
    677
    
    
    
    17.4
    %Interest Income
    
    
    1,098
    
    
    
    
    
    
    
    1,098
    
    
    
    100.0
    %Third Party Gathering Revenue
    
    
    666
    
    
    
    500
    
    
    
    166
    
    
    
    33.2
    %Other Miscellaneous
    
    
    122
    
    
    
    126
    
    
    
    (4
    )
    
    
    (3.2)
    %Total Other Income
    
    $
    13,431
    
    
    $
    4,527
    
    
    $
    8,904
    
    
    
    196.7
    %
  23




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##### Table of Contents



Costs and Expenses
  Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeCosts and Expenses:Lifting Costs
    
    $
    14,695
    
    
    $
    12,180
    
    
    $
    2,515
    
    
    
    20.6
    %Gathering and Compression Costs
    
    
    26,991
    
    
    
    19,222
    
    
    
    7,769
    
    
    
    40.4
    %Royalty Interest Gas Costs
    
    
    23,683
    
    
    
    14,463
    
    
    
    9,220
    
    
    
    63.7
    %Purchased Gas Costs
    
    
    32,751
    
    
    
    70,086
    
    
    
    (37,335
    )
    
    
    (53.3)
    %Other
    
    
    3,864
    
    
    
    5,594
    
    
    
    (1,730
    )
    
    
    (30.9)
    %Equity in (Earnings) Loss of Affiliates
    
    
    (772
    )
    
    
    132
    
    
    
    (904
    )
    
    
    (684.8)
    %General & Administrative
    
    
    14,706
    
    
    
    7,472
    
    
    
    7,234
    
    
    
    96.8
    %Depreciation, Depletion & Amortization
    
    
    17,891
    
    
    
    17,212
    
    
    
    679
    
    
    
    3.9
    %Interest Expense
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    100.0
    %Total Costs and Expenses
    
    $
    133,818
    
    
    $
    146,361
    
    
    $
    (12,543
    )
    
    
    (8.6)
    %
 Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    27.3
    
    
    
    23.5
    
    
    
    3.8
    
    
    
    16.2
    %Average Lifting Costs (per Mcf)
    
    $
    0.54
    
    
    $
    0.52
    
    
    $
    0.02
    
    
    
    3.8
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangeSales Volumes (Bcf)
    
    
    27.3
    
    
    
    23.5
    
    
    
    3.8
    
    
    
    16.2
    %Average Gathering and Compression Costs (per Mcf)
    
    $
    0.99
    
    
    $
    0.82
    
    
    $
    0.17
    
    
    
    20.7
    %
  24




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##### Table of Contents



Percentage2006
    
    2005
    
    Variance
    
    ChangeRoyalty Interest Sales Volumes (Bcf)
    
    
    3.7
    
    
    
    3.4
    
    
    
    0.3
    
    
    
    8.8
    %Average Cost (per Mcf)
    
    $
    6.41
    
    
    $
    4.32
    
    
    $
    2.09
    
    
    
    48.4
    %
  Percentage2006
    
    2005
    
    Variance
    
    ChangePurchased Gas Cost Volumes (Bcf)
    
    
    4.0
    
    
    
    10.2
    
    
    
    (6.2
    )
    
    
    (60.8
    )%Average Purchased Gas Costs (per Mcf)
    
    $
    8.27
    
    
    $
    6.85
    
    
    $
    1.42
    
    
    
    20.7
    %
   Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeWell Site General Maintenance
    
    $
    1,800
    
    
    $
    1,550
    
    
    $
    250
    
    
    
    16.1
    %Gob Gas Collection Costs
    
    
    1,384
    
    
    
    1,416
    
    
    
    (32
    )
    
    
    (2.3
    )%Land Related
    
    
    586
    
    
    
    465
    
    
    
    121
    
    
    
    26.0
    %Capital Stock & Franchise Tax
    
    
    273
    
    
    
    125
    
    
    
    148
    
    
    
    118.4
    %Miscellaneous
    
    
    692
    
    
    
    65
    
    
    
    627
    
    
    
    964.6
    %Imbalance
    
    
    (871
    )
    
    
    844
    
    
    
    (1,715
    )
    
    
    (203.2
    )%Accounts Receivable Securitization Fees
    
    
    
    
    
    
    1,129
    
    
    
    (1,129
    )
    
    
    (100.0
    )%Total Other Costs and Expenses
    
    $
    3,864
    
    
    $
    5,594
    
    
    $
    (1,730
    )
    
    
    (30.9
    )%
       25




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##### Table of Contents



Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeKnox Energy
    
    $
    (1,166
    )
    
    $
    8
    
    
    $
    (1,174
    )
    
    
    (14,675.0
    )%Coalfield Pipeline
    
    
    (4
    )
    
    
    (19
    )
    
    
    15
    
    
    
    78.9
    %Buchanan Generation
    
    
    398
    
    
    
    143
    
    
    
    255
    
    
    
    178.3
    %Total Equity in (Earnings) Loss of Affiliates
    
    $
    (772
    )
    
    $
    132
    
    
    $
    (904
    )
    
    
    (684.8
    )%
      Dollar
    
    
    Percentage2006
    
    
    2005
    
    
    Variance
    
    
    ChangeProduction
    
    $
    11,645
    
    
    $
    11,458
    
    
    $
    187
    
    
    
    1.6
    %Gathering
    
    
    6,246
    
    
    
    5,754
    
    
    
    492
    
    
    
    8.6
    %Total Depreciation, Depletion and Amortization
    
    $
    17,891
    
    
    $
    17,212
    
    
    $
    679
    
    
    
    3.9
    %
  Income Taxes
 Percentage2006
    
    2005
    
    Variance
    
    ChangeEarnings Before Income Taxes
    
    $
    137,257
    
    
    $
    70,761
    
    
    $
    66,496
    
    
    
    94.0
    %Tax Expense
    
    $
    53,228
    
    
    $
    27,243
    
    
    $
    25,985
    
    
    
    95.4
    %Effective Income Tax Rate
    
    
    38.8
    %
    
    
    38.5
    %
    
    
    0.3
    %
  Liquidity and Capital Resources
   26




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##### Table of Contents



Cash Flows (in thousands)
 Year to Date
    
    Year to Date2006
    
    2005
    
    ChangeCash provided by operating activities
    
    $
    126,833
    
    
    $
    81,763
    
    
    $
    45,070Cash used in investing activities
    
    $
    (82,905
    )
    
    $
    (39,404
    )
    
    $
    (43,501
    )Cash provided by (used in) financing activities
    
    $
    306
    
    
    $
    (42,362
    )
    
    $
    42,668
    Contractual Commitments
  Within
    
    
    1-3
    
    
    3-5
    
    
    More than(In thousands)
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong Term Debt Obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital (Finance) Lease Obligations
    
    
    67,090
    
    
    
    6,952
    
    
    
    12,345
    
    
    
    10,815
    
    
    
    36,978Operating Lease Obligations
    
    
    4,398
    
    
    
    907
    
    
    
    1,325
    
    
    
    1,325
    
    
    
    841Other Long-Term Liabilities:Gas Firm Transportation Obligation
    
    
    19,652
    
    
    
    3,431
    
    
    
    6,772
    
    
    
    5,843
    
    
    
    3,606Other Liabilities (a)
    
    
    13,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,248Well Plugging Liabilities
    
    
    8,328
    
    
    
    378
    
    
    
    756
    
    
    
    756
    
    
    
    6,438Pension
    
    
    332
    
    
    
    1
    
    
    
    8
    
    
    
    35
    
    
    
    288Postretirement Benefits Other than Pension
    
    
    3,357
    
    
    
    5
    
    
    
    44
    
    
    
    104
    
    
    
    3,204Total Contractual Obligations
    
    $
    116,405
    
    
    $
    11,674
    
    
    $
    21,250
    
    
    $
    18,878
    
    
    $
    64,603
 
 (a)
    
    This item represents legal contingencies reflected on the balance sheet for potential
settlements for two of the cases referenced in Note 7 of our quarterly financial statements.
Due to the uncertainty surrounding these settlements, it is difficult to predict if and when a
payout may take place. Off-Balance Sheet Transactions
  27




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    our business strategy;
    
    our financial position;
    
    our cash flow and liquidity;
    
    declines in the prices we receive for our gas affecting our operating results and cash flow;
    
    uncertainties in estimating our gas reserves;
    
    replacing our gas reserves;
    
    uncertainties in exploring for and producing gas;
    
    our inability to obtain additional financing necessary in order to fund our operations,
capital expenditures and to meet our other obligations;
    
    disruptions, capacity constraints in or other limitations on the pipeline systems which deliver our gas;
    
    competition in the gas industry;
    
    the availability of personnel and equipment;
    
    increased costs;
    
    our inability to retain and attract key personnel;
    
    our joint venture arrangements;
    
    the effects of government regulation and permitting and other legal requirements;
    
    legal uncertainties relating to the ownership of CBM;
    
    costs associated with perfecting title for gas rights in some of our properties;
    
    our need to use unproven technologies to extract CBM in some properties;
    
    our relationships and arrangements with CONSOL Energy; and
    
    other factors discussed under Risk Factors in the 10-K for the year ended December 31, 2005.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    28




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##### Table of Contents



Incremental Decrease in Pre-tax Income Assuming aHypothetical Price Change of:10%
    
    25%(In millions)Natural Gas
(1)
    
    $
    20.0
    
    
    $
    46.9
 
 (1)
    
    CNX Gas remains at risk for possible changes in the market value of these derivative
instruments, however, such risk should be reduced by price changes in the underlying hedged
item. The effect of this offset is not reflected in the sensitivity analyses. CNX Gas entered
into derivative instruments to convert the market prices related to portions of the 2006
through 2008 anticipated sales of natural gas to fixed prices. The sensitivity analyses
reflect an inverse relationship between increases in commodity prices and a benefit to
earnings. When commodity prices increase, pretax income decreases. As of June 30, 2006, the
fair value of these contracts was a net loss of $14,973, net of $8,899 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 Year2006 Fixed Price VolumesHedged Mcf
    
    
    3,654,822
    
    
    
    4,619,289
    
    
    
    4,670,051
    
    
    
    4,050,761
    
    
    
    16,994,923Weighted Average
Hedge Price/Mcf
    
    $
    6.88
    
    
    $
    7.73
    
    
    $
    7.73
    
    
    $
    7.21
    
    
    $
    7.422007 Fixed Price VolumesHedged Mcf
    
    
    1,827,411
    
    
    
    1,847,716
    
    
    
    1,868,020
    
    
    
    1,868,020
    
    
    
    7,411,167Weighted Average
Hedge Price/Mcf
    
    $
    7.67
    
    
    $
    7.67
    
    
    $
    7.67
    
    
    $
    7.67
    
    
    $
    7.672008 Fixed Price VolumesHedged Mcf
    
    
    1,847,716
    
    
    
    1,847,716
    
    
    
    1,868,020
    
    
    
    1,868,020
    
    
    
    7,431,472Weighted Average
Hedge Price/Mcf
    
    $
    7.20
    
    
    $
    7.20
    
    
    $
    7.20
    
    
    $
    7.20
    
    
    $
    7.20
   29




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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.
  30




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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
   (i)
    
    Elected the following persons to serve as directors for a one-year term
expiring at the companys annual meeting of stockholders in 2007 as follows:
 Director
    
    Shares Voted For
    
    Shares WithheldPhilip W. Baxter
    
    
    147,605,853
    
    
    
    618,053James E. Altmeyer, Sr.
    
    
    146,785,653
    
    
    
    1,438,253Nicholas J. DeIuliis
    
    
    146,714,758
    
    
    
    1,509,148William J. Lyons
    
    
    142,684,718
    
    
    
    5,539,188Raj K. Gupta
    
    
    147,605,853
    
    
    
    618,053J. Brett Harvey
    
    
    142,684,518
    
    
    
    5,539,388John R. Pipski
    
    
    147,605,653
    
    
    
    618,253
 (ii)
    
    Ratified the selection of PricewaterhouseCoopers LLP, as independent
registered public accounting firm for the year ended December 31, 2006. The vote
was 148,163,828 votes for ratification and 53,804 votes against ratification.
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 10.1
    
    Firm Transportation Agreement, dated as of April 27th, 2006, between CNX Gas Company, LLC, a
wholly-owned subsidiary of CNX Gas, and East Tennessee Natural Gas, LLC.10.2
    
    Firm Lateral Transportation Agreement, dated as of April 27th, 2006, between CNX Gas Company, LLC, a
wholly-owned subsidiary of CNX Gas, and East Tennessee Natural Gas, LLC.10.3
    
    The summary description of the base compensation and short-term incentive opportunities for the
executive officers of CNX Gas for 2006 is incorporated herein by reference from Item 1.01 of the
Current Report on Form 8-K filed by the CNX Gas on May 1, 2006. *10.4
    
    The initial election grant of options to purchase common stock of CNX Gas to Joseph T. Williams,
upon his election to the Board of Directors on July 10, 2006, is incorporated herein by reference
from Item 1.01 of the Current Report on Form 8-K filed by CNX Gas on July 11, 2006.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 31




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31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
  
 *
    
    Management compensatory contract or arrangement. 32




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##### Table of Contents



SIGNATURES
   CNX Gas CorporationBy:
    
    /s/ Nicholas J. DeIuliisNicholas J. DeIuliisPresident and Chief Executive Officer(Duly Authorized Officer)By:
    
    /s/ Gary J. BenchGary J. BenchSenior Vice President and Chief Financial Officer(Principal Financial Officer)
 33




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##### Table of Contents



EXHIBIT INDEX
 10.1
    
    Firm Transportation Agreement, dated as of April 27th, 2006, between CNX Gas Company, LLC, a
wholly-owned subsidiary of CNX Gas, and East Tennessee Natural Gas, LLC.10.2
    
    Firm Lateral Transportation Agreement, dated as of April 27th, 2006, between CNX Gas Company, LLC, a
wholly-owned subsidiary of CNX Gas, and East Tennessee Natural Gas, LLC.10.3
    
    The summary description of the base compensation and short-term incentive opportunities for the
executive officers of CNX Gas for 2006 is incorporated herein by reference from Item 1.01 of the
Current Report on Form 8-K filed by the CNX Gas on May 1, 2006. *10.4
    
    The initial election grant of options to purchase common stock of CNX Gas to Joseph T. Williams,
upon his election to the Board of Directors on July 10, 2006, is incorporated herein by reference
from Item 1.01 of the Current Report on Form 8-K filed by CNX Gas on July 11, 2006.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
  
 *
    
    Management compensatory contract or arrangement. 34