Edgar Filing: CONSOL ENERGY INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	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

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-14901

CONSOL Energy Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		51-0337383
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

1800 Washington Road Pittsburgh, Pennsylvania		15241
(Address of Principal Executive Offices)		(Zip Code)

(412) 831-4000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class		Shares outstanding as of July 20, 2007
Common stock, $0.01 par value		182,409,940

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION


		Page
ITEM 1.	CONDENSED FINANCIAL STATEMENTS

	Consolidated Statements of Income for the three months and six months ended June 30, 2007 and June 30, 2006	1

	Consolidated Balance Sheets at June 30, 2007 and December 31, 2006	2

	Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2007	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and June 30, 2006	5

	Notes to Consolidated Financial Statements	6

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55

ITEM 4.	CONTROLS AND PROCEDURES	57

	PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	58

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	58

ITEM 6.	EXHIBITS	59

PART I

FINANCIAL INFORMATION

ITEM 1.

CONDENSED FINANCIAL STATEMENTS

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Sales—Outside	$	879,300		$	824,234		$	1,712,427		$	1,693,251
Sales—Gas Royalty Interests		14,484			12,686			26,666			28,493
Sales—Purchased Gas		1,317			9,778			2,476			32,130
Freight—Outside		43,667			37,689			87,300			74,768
Other Income		121,230			47,876			146,314			89,509

Total Revenue and Other Income		1,059,998			932,263			1,975,183			1,918,151
Cost of Goods Sold and Other
Operating Charges (exclusive of depreciation, depletion and amortization shown below)		591,157			537,393			1,110,406			1,072,325
Gas Royalty Interests’ Costs		12,500			10,235			23,138			23,619
Purchased Gas Costs		1,473			9,986			2,492			32,751
Freight Expense		43,667			37,689			87,300			74,768
Selling, General and Administrative Expense		26,539			21,911			52,548			41,991
Depreciation, Depletion and Amortization		75,689			74,448			152,478			146,264
Interest Expense		6,174			6,253			13,437			12,106
Taxes Other Than Income		62,474			66,156			130,752			138,156

Total Costs		819,673			764,071			1,572,551			1,541,980

Earnings Before Income Taxes and Minority Interest		240,325			168,192			402,632			376,171
Income Taxes		79,524			50,632			122,458			115,359

Earnings Before Minority Interest		160,801			117,560			280,174			260,812
Minority Interest		(7,684	)		(7,066	)		(13,795	)		(15,562	)

Net Income	$	153,117		$	110,494		$	266,379		$	245,250

Basic Earnings Per Share	$	0.84		$	0.60		$	1.46		$	1.33

Dilutive Earnings Per Share	$	0.83		$	0.59		$	1.44		$	1.32

Weighted Average Number of Common Shares Outstanding:
Basic		182,195,390			183,286,425			182,282,857			183,775,190

Dilutive		185,000,122			185,820,234			184,788,415			186,156,863

Dividends Paid Per Share	$	0.07		$	0.07		$	0.14		$	0.14

The accompanying notes are an integral part of these financial statements.

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	(Unaudited) June 30, 2007		December 31, 2006
ASSETS

Current Assets:
Cash and Cash Equivalents	$	306,505	$	223,883
Accounts and Notes Receivable:
Trade		293,648		303,175
Other Receivables		47,358		51,890
Inventories		164,305		149,307
Deferred Income Taxes		123,292		117,231
Recoverable Income Taxes		—		1,278
Prepaid Expenses		50,423		67,732

Total Current Assets		985,531		914,496
Property, Plant and Equipment:
Property, Plant and Equipment		8,152,659		7,849,936
Less—Accumulated Depreciation, Depletion and Amortization		3,901,792		3,809,649

Total Property, Plant and Equipment—Net		4,250,867		4,040,287
Other Assets:
Deferred Income Taxes		487,339		507,996
Investment in Affiliates		89,192		84,219
Other		99,816		116,334

Total Other Assets		676,347		708,549

TOTAL ASSETS	$	5,912,745	$	5,663,332

The accompanying notes are an integral part of these financial statements.

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	(Unaudited) June 30, 2007			December 31, 2006
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	173,248		$	225,060
Current Portion of Long-Term Debt		14,923			59,518
Accrued Income Taxes		20,071			—
Other Accrued Liabilities		470,912			455,546

Total Current Liabilities		679,154			740,124
Long-Term Debt:
Long-Term Debt		397,415			391,983
Capital Lease Obligations		95,860			100,762

Total Long-Term Debt		493,275			492,745
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		2,256,213			2,252,115
Pneumoconiosis Benefits		188,940			184,424
Mine Closing		391,330			389,896
Workers’ Compensation		133,000			121,337
Deferred Revenue		6,022			13,106
Salary Retirement		114,292			113,944
Reclamation		28,235			26,461
Other		169,361			127,370

Total Deferred Credits and Other Liabilities		3,287,393			3,228,653
Minority Interest		150,962			135,659

Total Liabilities and Minority Interest		4,610,784			4,597,181
Stockholders’ Equity:
Common Stock, $.01 par value; 500,000,000 Shares Authorized, 185,126,526 Issued and 182,323,255 Outstanding at June 30, 2007; 185,126,526 Issued and 182,654,629 Outstanding at December 31, 2006		1,851			1,851
Preferred Stock, 15,000,000 Shares Authorized; None Issued and Outstanding		—			—
Capital in Excess of Par Value		941,656			921,881
Retained Earnings		829,886			600,541
Other Comprehensive Loss		(376,868	)		(375,717	)
Common Stock in Treasury, at Cost—2,803,271 Shares at June 30, 2007 and 2,471,897 Shares at December 31, 2006		(94,564	)		(82,405	)

Total Stockholders’ Equity		1,301,961			1,066,151

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,912,745		$	5,663,332

The accompanying notes are an integral part of these financial statements.

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)


	Common Stock		Capital in Excess of Par Value		Retained Earnings (Deficit)			Other Compre- hensive Income (Loss)			Treasury Stock			Total Stock- holders’ Equity
Balance—December 31, 2006	$	1,851	$	921,881	$	600,541		$	(375,717	)	$	(82,405	)	$	1,066,151

(Unaudited)
Net Income		—		—		266,379			—			—			266,379
Treasury Rate Lock (Net of $26 tax)		—		—		—			(41	)		—			(41	)
Amortization of Prior Service Costs and Actuarial Gains (Loss) (Net of $906 tax)		—		—		—			(1,818	)		—			(1,818	)
Pension Settlement Accounting (Net of $1,062 tax)		—		—		—			2,132			—			2,132
Minority Interest in Other Comprehensive Income and Stock-based Compensation of Gas		—		—		—			263			—			263
Gas Cash Flow Hedge (Net of $1,399 tax)		—		—		—			(1,326	)		—			(1,326	)
FAS 158 Long-Term Liability Deferred Tax Adjustments		—		—		—			(361	)		—			(361	)

Comprehensive Income (Loss)		—		—		266,379			(1,151	)		—			265,228
Cumulative Effect of FASB Interpretation No. 48 Adoption		—		—		(3,202	)		—			—			(3,202	)
Issuance of Treasury Stock		—		—		(8,306	)		—			13,459			5,153
Purchases of Treasury Stock		—		—		—			—			(25,618	)		(25,618	)
Tax Benefit from Stock-Based Compensation		—		4,643		—			—			—			4,643
Amortization of Stock-Based Compensation Awards		—		15,132		—			—			—			15,132
Dividends ($0.14 per share)		—		—		(25,526	)		—			—			(25,526	)

Balance—June 30, 2007	$	1,851	$	941,656	$	829,886		$	(376,868	)	$	(94,564	)	$	1,301,961

The accompanying notes are an integral part of these financial statements.

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Six Months Ended June 30,
	2007			2006
Operating Activities:
Net Income	$	266,379		$	245,250
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization		152,478			146,264
Stock-based Compensation		16,717			6,259
Gain on the Sale of Assets		(106,541	)		(3,112	)
Change in Minority Interest		13,795			15,562
Amortization of Mineral Leases		3,465			3,397
Deferred Income Taxes		57,034			17,293
Equity in Earnings of Affiliates		(2,733	)		(719	)
Changes in Operating Assets:
Accounts and Notes Receivable		14,059			(8,156	)
Inventories		(14,998	)		(43,097	)
Prepaid Expenses		11,542			(436	)
Changes in Other Assets		16,518			(2,019	)
Changes in Operating Liabilities:
Accounts Payable		(39,195	)		(51,097	)
Other Operating Liabilities		36,107			(33,614	)
Changes in Other Liabilities		29,078			51,081
Other		765			6,228

Net Cash Provided by Operating Activities		454,470			349,084

Investing Activities:
Capital Expenditures		(335,748	)		(319,134	)
Additions to Mineral Leases		(8,851	)		(4,190	)
Net Investment in Equity Affiliates		(2,240	)		103
Proceeds from Sales of Assets		61,055			39,374

Net Cash Used in Investing Activities		(285,784	)		(283,847	)

Financing Activities:
Proceeds from (Payments on) Miscellaneous Borrowings		284			(83	)
Payments on Long Term Notes		(45,000	)		—
Tax Benefit from Stock-Based Compensation		4,643			35,796
Dividends Paid		(25,526	)		(25,784	)
Issuance of Treasury Stock		5,153			11,730
Purchases of Treasury Stock		(25,618	)		(83,631	)
Stock Options Exercised		—			1,362

Net Cash Used in Financing Activities		(86,064	)		(60,610	)

Net Increase in Cash and Cash Equivalents		82,622			4,627
Cash and Cash Equivalents at Beginning of Period		223,883			340,640

Cash and Cash Equivalents at End of Period	$	306,505		$	345,267

The accompanying notes are an integral part of these financial statements.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Dollars in thousands, except per share data)

NOTE 1—BASIS OF PRESENTATION:

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements at that date but does not include all the notes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and related notes for the year ended December 31, 2006 included in CONSOL Energy’s Form 10-K.

In September 2006, the FASB issued Financial Accounting Standards Board Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (FSP AUG AIR-1), which amended certain provisions in the American Institute of Certified Public Accountants (AICPA) Industry Audit Guide, Audits of Airlines (Airline Guide), and Accounting Principles Board Opinion No. 28: Interim Financial Reporting. The Board rescinded the accrue-in-advance method of accounting for planned major maintenance activities as it results in the recognition of liabilities that do not meet the definition of a liability in FASB Concepts Statement No. 6, Elements of Financial Statements, because it causes the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity. The guidance in FSP AUG AIR-1 has been applied to the three and six month periods ended June 30, 2007 using the direct expense method of accounting for planned major maintenance activities. The guidance in FSP AUG AIR-1 also requires this approach to be applied retrospectively for all financial statements presented, unless it is impracticable to do so. Accordingly, we have reflected these adjustments in the financial statements presented. The following represents the changes that were made from the previously reported June 30, 2006 financial information:


	For the Three Months Ended June 30, 2006							For the Six Months Ended June 30, 2006
	As Previously Presented		Adjustment			Restated Amounts		As Previously Presented		Adjustment			Restated Amounts
Income Statement Changes:
Cost of Goods Sold and Other Operating Charges	$	543,938	$	(6,545	)	$	537,393	$	1,093,520	$	(21,195	)	$	1,072,325
Total Costs	$	770,616	$	(6,545	)	$	764,071	$	1,563,175	$	(21,195	)	$	1,541,980
Earnings Before Income Taxes and Minority Interest	$	161,647	$	6,545		$	168,192	$	354,976	$	21,195		$	376,171
Income Taxes	$	48,647	$	1,985		$	50,632	$	109,034	$	6,325		$	115,359
Earnings Before Minority Interest	$	113,000	$	4,560		$	117,560	$	245,942	$	14,870		$	260,812
Net Income	$	105,934	$	4,560		$	110,494	$	230,380	$	14,870		$	245,250
Earnings Per Share:
Basic	$	0.58	$	0.02		$	0.60	$	1.25	$	0.08		$	1.33
Dilutive	$	0.57	$	0.02		$	0.59	$	1.24	$	0.08		$	1.32

								At June 30, 2006
Balance Sheet Changes:
Deferred Income Taxes Current								$	144,914	$	183		$	145,097
Total Current Assets								$	1,034,843	$	183		$	1,035,026
Deferred Income Taxes Long-Term								$	336,144	$	(2,799	)	$	333,345
Total Other Assets								$	526,394	$	(2,799	)	$	523,595
Total Assets								$	5,287,624	$	(2,616	)	$	5,285,008
Accrued Income Taxes								$	24,206	$	3,708		$	27,914
Other Accrued Liabilities								$	566,531	$	(21,194	)	$	545,337
Total Current Liabilities								$	795,177	$	(17,486	)	$	777,691
Total Liabilities and Minority Interests								$	4,068,562	$	(17,486	)	$	4,051,076
Retained Earnings								$	454,907	$	14,870		$	469,777
Total Stockholders’ Equity								$	1,219,062	$	14,870		$	1,233,932

Although this guidance affects the 2006 interim financial results of CONSOL Energy, it will not affect the 2006 annual financial results. The adjustments did not change previously reported June 30, 2006 net cash provided by or used in operating, investing or financing activities on the Consolidated Statement of Cash Flows.

Certain reclassifications of 2006 data have been made to conform to the six months ended June 30, 2007 classifications. The reclassifications include the netting of firm transportation obligations previously reported in prepaid expenses and other accrued liabilities.

Basic earnings per share are computed by dividing net income by the weighted average shares outstanding during the reporting period. Dilutive earnings per share are computed similarly to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the effect of dilutive potential common shares outstanding during the period as calculated in accordance with Statement of Financial Accounting Standards No. 123R (SFAS 123R). The number of additional shares is calculated by assuming that restricted stock units and performance share units were converted and outstanding stock options were exercised and that the proceeds from such activity were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 137,963 shares and 1,179,871 shares of common stock were outstanding for the three and six month periods ended June 30, 2007, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Options to purchase 740,916 shares and 751,654 shares of common stock were outstanding for the three and six month periods ended June 30, 2006, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive.

The computations for basic and dilutive earnings per share from continuing operations are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Net Income	$	153,117	$	110,494	$	266,379	$	245,250

Average shares of common stock outstanding:
Basic		182,195,390		183,286,425		182,282,857		183,775,190
Effect of stock options		2,804,732		2,533,809		2,505,558		2,381,673

Dilutive		185,000,122		185,820,234		184,788,415		186,156,863

Earnings per share:
Basic	$	0.84	$	0.60	$	1.46	$	1.33

Dilutive	$	0.83	$	0.59	$	1.44	$	1.32

NOTE 2—ACQUISITIONS AND DISPOSITIONS:

In June 2007, CONSOL Energy, through a subsidiary, exchanged certain coal assets in Northern Appalachia with Peabody Energy for coalbed methane and gas rights. This transaction was accounted for as a non-monetary exchange under Statement of Financial Accounting Standards No. 153 resulting in a pre-tax gain of $50,060.

In June 2007, CONSOL Energy, through a subsidiary, acquired certain coalbed methane and gas rights from Peabody Energy for a cash payment of $15,000 plus approximately $1,500 of various other acquisition costs.

In June 2007, CONSOL Energy, through a subsidiary, sold the rights to certain western Kentucky coal in the Illinois Basin to Alliance Resource Partners, L.P. for $53,309. This transaction resulted in a pre-tax gain of $49,868.

In December 2006, CONSOL Energy, through a subsidiary, completed a sale/lease-back transaction for its future headquarters property. Cash proceeds were $9,548 which did not result in a gain or loss on the sale. The initial lease term is twenty years and includes an option to renew the lease term for an additional five-year period and a subsequent four-and-one-half year lease term. The lease is accounted for as a capital lease during the construction period, in accordance with the guidance provided by the Emerging Issues Task Force (“EITF”) on Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction.” After construction, the lease will be accounted for as an operating lease. Estimated monthly rental payments of $462 will be made for the period August 1, 2008 through July 31, 2010; $552 for the period August 1, 2010 through July 31, 2018; and $581 for the period August 1, 2018 through July 31, 2028.

In November 2006, CONSOL Energy, through a subsidiary, acquired a 50% interest in a specialty contracting company for a cash payment of $29,500. The specialty contracting company provides drilling services to the government, commercial, mining and public utility industries. The acquisition was accounted for under the equity method of accounting.

In March 2006, CONSOL Energy, through a subsidiary, completed a sale/lease-back of longwall equipment. Cash proceeds from the sale were $36,363 which was equal to our basis in the equipment. Accordingly, no gain or loss was recorded on the transaction. The lease has been accounted for as a capital lease. The lease term is five years.

In January 2006, CONSOL Energy, through a subsidiary, completed the acquisition of Mon River Towing and J.A.R. Barge Lines, LLC, from The Guttman Group for a cash payment of $24,750. The acquisition included 13 towboats and more than 350 barges with the capacity to transport 13 million tons of coal annually. Mon River Towing transports coal, limestone and other bulk commodities to various locations along the navigable rivers of Pennsylvania, Ohio, West Virginia and Kentucky. J.A.R. Barge Lines, LLC charters motor vessels and barges to other river transportation firms along the inland waterways.

NOTE 3—COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS NET PERIODIC BENEFIT COSTS:

Components of net periodic costs for the three and six months ended June 30 are as follows:


	Pension Benefits												Other Benefits
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006			2007			2006			2007			2006
Service cost	$	2,754		$	3,951		$	5,507		$	7,903		$	2,747		$	2,523		$	5,494		$	5,046
Interest cost		7,139			7,061			14,277			14,123			34,791			32,416			69,582			64,833
Expected return on plan assets		(7,624	)		(6,531	)		(15,248	)		(13,062	)		—			—			—			—
Settlement loss		—			—			3,192			—			—			—			—			—
Amortization of prior service costs (credit)		(279	)		(271	)		(557	)		(542	)		(12,750	)		(14,155	)		(25,500	)		(28,310	)
Recognized net actuarial loss		3,122			4,171			6,244			8,342			15,307			16,077			30,615			32,152

Net periodic cost	$	5,112		$	8,381		$	13,415		$	16,764		$	40,095		$	36,861		$	80,191		$	73,721

Our defined benefit pension plan for salaried employees allows such employees to receive a lump-sum distribution in lieu of annual payments when they retire from CONSOL Energy. Statement of Financial Accounting Standards (SFAS) No. 88, “Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” requires that when the lump-sum distributions made for a plan year, which for CONSOL Energy is October 1 to September 30, exceed the total of the service cost and interest cost for the plan year, an adjustment equaling the unrecognized actuarial gain or loss resulting from each individual who received a lump sum in that year be recognized. There was no settlement loss recognized in the three months ended June 30, 2007. CONSOL Energy recognized a settlement loss of $3,192 in the six months ended June 30, 2007. The settlement loss was included in costs of goods sold and other operating charges and selling, general and administrative expenses.

For the three month and six month periods ended June 30, 2007, $121 and $4,099 of pension benefits have been paid. CONSOL Energy presently anticipates contributing a total of $80,000 to the pension trust in 2007.

We do not expect to contribute to the other post employment benefit plan in 2007. We intend to pay benefit claims as they become due. For the three and six month periods ended June 30, 2007, $33,237 and $67,553 of other post employment benefits have been paid.

NOTE 4—COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS:

Components of net periodic costs (benefits) for the three and six months ended June 30 are as follows:


	CWP												Workers’ Compensation
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006			2007			2006			2007			2006
Service cost	$	1,412		$	1,490		$	2,822		$	2,981		$	7,414		$	7,574		$	14,829		$	15,147
Interest cost		2,851			3,018			5,701			6,035			2,079			2,092			4,157			4,184
Amortization of actuarial gain		(5,776	)		(5,462	)		(11,550	)		(10,925	)		(988	)		(692	)		(1,976	)		(1,384	)
State administrative fees and insurance bond premiums		—			—			—			—			1,661			1,685			3,879			3,303
Legal and administrative costs		675			675			1,350			1,350			815			872			1,630			1,744

Net periodic (benefit) cost	$	(838	)	$	(279	)	$	(1,677	)	$	(559	)	$	10,981		$	11,531		$	22,519		$	22,994

CONSOL Energy does not expect to contribute to the CWP plan in 2007. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2007, $3,223 and $5,168 of CWP benefit claims have been paid.

CONSOL Energy does not expect to contribute to the workers’ compensation plan in 2007. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2007, $9,845 and $20,478 of workers’ compensation benefits, state administrative fees and surety bond premiums have been paid.

NOTE 5—INCOME TAXES:

The following is a reconciliation, stated in dollars and as a percentage of pretax income, of the U. S. statutory federal income tax rate to CONSOL Energy’s effective tax rate:


	For the Six Months Ended June 30,
	2007					2006
	Amount			Percent		Amount			Percent
Statutory U.S. federal income tax rate	$	140,921		35.0	%	$	131,660		35.0	%
Excess tax depletion		(34,872	)	(8.7	)		(29,492	)	(7.8	)
Effect of domestic production activities deduction		(2,361	)	(0.6	)		(2,093	)	(0.6	)
Effect of medicare prescription drug, improvement and modernization act of 2003		878		0.2			1,063		0.3
Net effect of state tax		16,169		4.0			13,913		3.7
Other		1,723		0.5			308		0.1

Income Tax Expense / Effective Rate	$	122,458		30.4	%	$	115,359		30.7	%

The effective tax rate for the six months ended June 30, 2007 was calculated using the effective rate projection on recurring earnings and also includes tax expense related to certain discrete transactions. The effective tax rate for the six months ended June 30, 2006 was calculated using the effective rate projection on recurring earnings.

CONSOL adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an increase of $3,202 in the liability for unrecognized tax benefits upon adoption, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. During the three months ended June 30, 2007, the Company recognized an increase of $1,000 in the liability for unrecognized tax benefits as a result of tax positions taken during the current period. The increase in the liability was accounted for as additional state income tax expense.

The total amount of unrecognized tax benefits as of June 30, 2007 and January 1, 2007 were $51,000 and $50,000 respectively. If these unrecognized tax benefits were recognized, $10,600 and $10,000, respectively would affect CONSOL’s effective income tax rate. Currently, we do not anticipate a significant change in this liability in the next twelve months.

CONSOL Energy Inc. and its subsidiaries file income tax returns in the U. S. federal, various states and Canadian jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (IRS) commenced an examination of CONSOL’s U.S. 2004 and 2005 income tax returns in 2006 that is anticipated to be completed by the end of 2008. As of June 30, 2007, the IRS has not proposed any significant adjustments relating to CONSOL Energy’s tax positions.

The IRS’ examination of the Company’s 2002 and 2003 tax returns has been substantially completed with one issue currently under review by the Appeals Division. Management is currently evaluating the merits of its

position regarding the issue in dispute, and does not anticipate that the adjustment would result in a material change to its financial statements. However, the Company anticipates that it is reasonably possible that an additional payment of approximately $1,600 of interest related to the issue will be made by the end of 2007.

CONSOL Energy recognizes interest accrued related to unrecognized tax benefits in its interest expense. As of June 30, 2007 and January 1, 2007 the Company had an accrued liability of $7,100 and $5,000 respectively for interest related to uncertain tax positions. The accrued interest liability includes approximately $2,100 that was recorded in the Company’s statement of operations for the six months ended June 30, 2007.

CONSOL Energy recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. As of June 30, 2007 and January 1, 2007, CONSOL had an accrued liability of approximately $1,200 for potential tax penalties.

NOTE 6—INVENTORIES:

Inventory components consist of the following:


	June 30, 2007		December 31, 2006
Coal	$	60,172	$	51,238
Merchandise for resale		16,504		18,298
Supplies		87,629		79,771

Total Inventories	$	164,305	$	149,307

NOTE 7—ACCOUNTS RECEIVABLE SECURITIZATION

In April 2007, CONSOL Energy and certain of our U.S. subsidiaries amended their existing trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. The amended facility allows CONSOL Energy to receive on a revolving basis, up to $150,000, a $25,000 increase over the previous facility. The amended facility also allows for the issuance of letters of credit against the $150,000 capacity. At June 30, 2007, letters of credit outstanding against the facility were $127,271. At June 30, 2007, no accounts receivable were removed from the consolidated balance sheet because CNX Funding retained the total eligible accounts receivable.

CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.

The cost of funds under this facility is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $112 and $189 for the three and six months ended June 30, 2007, respectively. Costs associated with the receivables facility totaled $123 and $253 for the three and six months ended June 30, 2006, respectively. These costs have been recorded as financing fees, which are included in Cost of Goods Sold and Other Operating Charges in the Consolidated Statements of Income. No servicing asset or liability has been recorded. The receivables facility expires in April 2012.

At June 30, 2007 and December 31, 2006, eligible accounts receivable totaled approximately $137,500 and $119,900, respectively. The subordinated retained interest approximated $137,500 and $119,900 at June 30, 2007 and December 31, 2006, respectively.

The key economic assumptions used to measure the retained interest at the date of the securitization for all such sales completed in 2007 were a discount rate of 5.66% and an estimated life of 31 days. At June 30, 2007 an increase in the discount rate or estimated life of 10% and 20% would have reduced the fair value of the retained interest by $67 and $134, respectively. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumption to the change in fair value may not be linear. Also, in this example, the effect of a variation in a particular assumption on the fair value of the subordinated retained interest is calculated without changing any other assumption. Changes in any one factor may result in changes in others.

NOTE 8—PROPERTY, PLANT AND EQUIPMENT:

The components of property, plant and equipment are as follows:


	June 30, 2007		December 31, 2006
Plant & equipment	$	4,703,497	$	4,548,030
Coal properties and surface lands		1,204,881		1,118,083
Airshafts		911,746		885,103
Mine development		513,884		488,808
Leased coal lands		457,337		451,585
Advance mining royalties		361,314		358,327

Total gross		8,152,659		7,849,936
Less: Accumulated depreciation, depletion and amortization		3,901,792		3,809,649

Total Net Property, Plant and Equipment	$	4,250,867	$	4,040,287

NOTE 9—DEBT:

On June 27, 2007, CONSOL Energy entered into an Amended and Restated five-year $1,000,000 senior secured credit facility, which replaces the $750,000 credit facility entered into on April 1, 2005. The facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries and collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. The Agreement does provide for the release of collateral upon the achievement of certain credit ratings. Fees and interest rate spreads are based on a ratio of financial covenant debt to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), measured quarterly. The facility includes a minimum interest coverage ratio of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 17.15 to 1.00 at June 30, 2007. The facility also includes a maximum leverage ratio of not more than 3.25 to 1.00, measured quarterly. The leverage ratio was 0.25 to 1.00 at June 30, 2007. Affirmative and negative covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock, pay dividends and merge with another corporation. At June 30, 2007, the $1,000,000 facility had no borrowings outstanding and $123,301 of letters of credit outstanding, leaving $876,699 of capacity available for borrowings and the issuance of letters of credit.

In October 2005, CNX Gas entered into a five-year $200,000 unsecured credit agreement. The agreement contains a negative pledge provision, whereas CNX Gas assets cannot be used to secure other obligations. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Covenants in the facility limit CNX Gas’ ability to dispose of assets, make investments, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. The facility includes a maximum leverage ratio covenant of not more than 3.0 to 1.0, measured quarterly. The leverage ratio was met at June 30, 2007. The facility also includes a minimum interest coverage ratio of no less than 3.0 to 1.0, measured quarterly. This ratio was met at June 30, 2007. At June 30, 2007, the CNX Gas credit agreement had no borrowings outstanding and $14,933 of letters of credit outstanding, leaving $185,067 of capacity available for borrowings and the issuance of letters of credit.

NOTE 10—COMMITMENTS AND CONTINGENCIES:

CONSOL Energy is subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes, and other claims and actions arising out of the normal course of business. Our current estimates related to these pending claims, individually and in the aggregate, are immaterial to the financial position, results of operations or cash flows of CONSOL Energy. However, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations or cash flows of CONSOL Energy.

One of our subsidiaries, Fairmont Supply Company (Fairmont), which distributes industrial supplies, currently is named as a defendant in approximately 25,000 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, Mississippi and New Jersey. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time and, in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. For the three and six months ended June 30, 2007, payments by Fairmont with respect to asbestos cases have not been material. Our current estimates related to these asbestos claims, individually and in the aggregate, are immaterial to the financial position, results of operations and cash flows of CONSOL Energy. However, it is reasonably possible that payments in the future with respect to pending or future asbestos cases may be material to the financial position, results of operations or cash flows of CONSOL Energy.

In October 2005, CDX Gas, LLC (CDX) alleged that certain of our vertical to horizontal CBM drilling methods infringe several patents which they own. CDX demanded that we enter into a business arrangement with them to use its patented technology. Alternatively, CDX informally demanded a royalty of nine to ten percent of the gross production from the wells we drill utilizing the technology allegedly covered by their patents. We believe that approximately 35 of our producing wells to date could be covered by their claim. We deny all of these allegations and we are vigorously contesting them. On November 14, 2005, we filed a complaint for declaratory judgment in the U.S. District Court for the Western District of Pennsylvania (C.A. No. 05-1574), seeking a judicial determination that we do not infringe any claim of any valid and enforceable CDX patent. CDX filed an answer and counterclaim denying our allegations of invalidity and alleging that we infringe certain claims of their patents. A hearing was held before a Court-appointed Special Master with regard to the scope of the asserted CDX patents and the Special Master’s report and recommendations was adopted by order of the Court on October 13, 2006. As a result of that order and subject to appellate review, certain of our wells may be found to infringe certain of the CDX claims of the patents in suit, if those patents are ultimately determined to be valid and enforceable. The report of CDX’s damages expert suggests that CDX will seek (i) reasonable royalty damages on production from allegedly infringing wells at a royalty rate of 10%, or approximately $1,900 based on projected production through June 2007, and (ii) “lost profits” damages of approximately $23,600 for allegedly infringing wells drilled through August 2006, which assumes that CNX Gas would have no choice but to have entered into a joint operating arrangement with CDX. We believe that there is no valid basis in the law as applied to the facts of this case for this “lost profits” theory. Further, if infringement were to be found of a valid, enforceable claim of a CDX patent, the report of CNX Gas’ damages expert indicates that any potential damages award would be based on a royalty of 5%, or approximately $400. We continue to believe that we do not infringe any properly construed claim of any valid, enforceable patent. However, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations or cash flows of CONSOL Energy.

CONSOL Energy was notified in November 2004 by the United States Environmental Protection Agency (EPA) that it is a potentially responsible party (PRP) under Superfund legislation with respect to the Ward

Transformer site in Wake County, North Carolina. At that time, the EPA also identified 38 other PRPs for the Ward Transformer site. On September 16, 2005, the EPA, CONSOL Energy and two other PRPs entered into an administrative Settlement Agreement and Order of Consent, requiring those PRPs to undertake and complete a PCB soil removal action, at and in the vicinity of the Ward Transformer property. In December 2005, the EPA approved the PRPs’ work plan, and field work began the first week of January 2006. On March 12, 2007, another party joined the participating PRPs and reduced CONSOL Energy’s interim allocation from 46% to 32%. Accordingly, CONSOL Energy recognized a reduction in the previously recognized liability related to this matter. The current estimated cost of remedial action including payment of the EPA’s past and future cost is approximately $20,000. There was $448 of expense recognized in the three months ended June 30, 2007 and $1,420 reduction of expense recognized in the six months ended June 30, 2007 related to this matter. CONSOL Energy funded $2,503 in the year ended December 31, 2006 to an independent trust established for this remediation. The remaining liability of $3,898 is included in other accrued liabilities at June 30, 2007. CONSOL Energy and the other participating PRPs are investigating contribution claims against other, non-participating PRPs, and such claims will be brought to recover a share of the costs incurred. To date, CONSOL Energy’s portion of probable recoveries are estimated to be $3,420, of which $16 has been collected to date. Accordingly, an asset has been included in other assets for these claims. The net cost of the liability and the asset has been included in Cost of Goods Sold and Other Charges. CONSOL Energy had no additional funding to the independent trust in the six months ended June 30, 2007. CONSOL Energy expects the majority of payments related to this liability to be made over the next twelve to fifteen months. In addition, the EPA has advised the PRPs that it is investigating additional areas of potential contamination allegedly related to the Ward Transformer site. Currently, it is not probable that these additional areas will result in a liability.

On October 21, 2003 a complaint was filed in the United States District Court for the Western District of Pennsylvania on behalf of Seth Moorhead against CONSOL Energy, J. Brett Harvey and William J. Lyons. The complaint alleged, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act and that during the period between January 24, 2002 and July 18, 2002 the defendants issued false and misleading statements to the public that failed to disclose or misrepresented the following, among other things that: (a) CONSOL utilized an aggressive approach regarding its spot market sales by reserving 20% of its production to that market, and that by increasing its exposure to the spot market, CONSOL Energy was subjecting itself to increased risk and uncertainty as the price and demand for coal could be volatile; (b) CONSOL Energy was experiencing difficulty selling the production that it had allocated to the spot market, and, nonetheless, CONSOL Energy maintained its production levels which caused its coal inventory to increase; (c) CONSOL Energy’s increasing coal inventory was causing its expenses to rise dramatically, thereby weakening its financial condition; (d) CONSOL Energy’s production problems and costs thereof were also weakening its financial condition; and (e) based on the foregoing, defendants’ positive statements regarding CONSOL Energy’s earnings and prospects were lacking in a reasonable basis at all times and therefore were materially false and misleading. The complaint asked the court to (1) award unspecified damages to plaintiff and (2) award plaintiff reasonable costs and expenses incurred in connection with this action, including counsel fees and expert fees. Notwithstanding the defendants’ belief that the lawsuit was meritless, defendants entered into an agreement to settle the case as a class action under terms which are not material to CONSOL Energy. The Court certified the case as a class action, approved the settlement and dismissed the case on May 14, 2007. The dismissal terminated the case.

As part of conducting mining activities at the Buchanan Mine, our subsidiary, Consolidation Coal Company (“CCC”), has to remove water from the mine. Several actions have arisen with respect to the untreated water removed from the Buchanan Mine:

Yukon Pocahontas Coal Company, Buchanan Coal Company, and Sayers-Pocahontas Coal Company filed an action on March 22, 2004 against CCC which is presently pending in the Circuit Court of Buchanan County, Virginia (the "Yukon Action"). The action related to untreated water in connection with mining activities at CCC’s Buchanan Mine being deposited in the void spaces of nearby mines of one of our other subsidiaries, Island Creek Coal Company (“ICCC”). The plaintiffs are seeking to stop CCC from depositing any additional

water in these areas, to require CCC to remove the water that is stored there along with any remaining impurities, to recover $300,000 of compensatory and trebled damages and to recover punitive damages. Plaintiffs have amended the original complaint to assert additional damage claims of $3,252,000 against CCC and have added CONSOL Energy, CNX Gas Company, LLC and ICCC as additional defendants asserting additional damage claims of $150,000 against those defendants. With respect to this action, we believe we had, and continue to have, the right to store water in these areas. The named defendants deny liability and intend to vigorously defend this action; consequently, we have not recognized any liability related to these claims. However, it is reasonably possible that payments in the future, or the issuance of an injunction, with respect to the pending claims may be material to the financial position, results of operations or cash flows of CONSOL Energy.

Levisa Coal Company filed an action on July 10, 2006 against CCC in the Circuit Court of Buchanan County, Virginia (the “Levisa Action”). The action is for injunctive relief and declaratory judgment and sought a court order prohibiting CCC from depositing water from its Buchanan Mine into the void spaces of ICCC’s VP3 mine, part of which is under lease from Levisa Coal Company. The plaintiff claimed the water would adversely affect its remaining coal reserves and coalbed methane production, thereby impacting the plaintiff’s future royalties. In mid-November 2006, Levisa Coal Company petitioned the Court for a temporary restraining order prohibiting the further depositing of water into the void spaces which, after a two-day hearing, the Court denied. Subsequently, the court entered an order declaring the parties’ rights under lease, deciding that CCC has the right to store water in the VP3 mine void and dismissed the action. Levisa Coal Company has petitioned the Virginia Supreme Court to allow an appeal of that order. CCC has filed a motion to dismiss the appeal. We believe that CCC has the right to deposit the water in that void area. CCC intends to vigorously defend any appeal of this action; consequently, we have not recognized any liability related to this action. However, if an injunction were to be issued, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

CCC has obtained revisions to its environmental permit from the Division of Mined Land Reclamation (“DMLR”) of the Virginia Department of Mines, Minerals and Energy (“DMME”) to deposit water from its Buchanan Mine into void spaces of VP3, and to permit it in the future to discharge mine water into the nearby Levisa River under controlled conditions. Plaintiffs in the Yukon Action and the Levisa Action along with the Town of Grundy, Virginia, Buchanan County, and others have requested the DMME to reconsider the permit revision issued by DMLR. Requests for temporary relief to prevent CCC from constructing and operating pursuant to the permit revisions pending a final hearing before the DMME have been rejected by the Director of DMME. The hearing to be conducted by the Director of the DMME through a Hearing Officer appointed by the Supreme Court of Virginia has been postponed indefinitely pending the outcome of an interlocutory appeal by Buchanan County to the Circuit Court of Buchanan County on procedural rulings rendered by the Director. In addition, the Virginia Marine Resources Commission (the “VMRC”) conducted a public hearing and issued a permit authorizing CCC to install a “diffuser” buried on the bottom of the Levisa River, which was the last permit required before the discharge could commence. The diffuser and related project elements have been constructed and no appeal was taken from the decision of the VMRC. The plaintiffs in the Yukon Action on June 13, 2006 also filed an action against the DMME in the Circuit Court of Buchanan County, Virginia seeking to enjoin DMLR and DMME from issuing the permit revisions, which were ultimately issued in September 2006 and are the subject of the administrative appeal to the Director of DMME described above. The Levisa Action plaintiff filed a nearly identical action. In addition, both the Levisa and Yukon Plaintiffs filed suits against DMME after the DMLR permit revisions were issued in September 2006, and after motions to dismiss were filed, the Plaintiffs’ actions were subsequently nonsuited. However, by letter of December 31, 2006 the plaintiffs in the Yukon action notified DMME that they will file a similar action challenging DMME’s issuance of the revised permit and the VP3 permit. CONSOL will likely seek to intervene in any such action, if filed, which has not occurred to date. In addition, Buchanan County, Virginia on August 31, 2006 commenced an action against CCC in the Circuit Court of Buchanan County, Virginia seeking to enjoin any discharge by CCC of mine water into the Levisa River notwithstanding the permit issued to CCC by DMME. That action was removed to the United States District Court for the Western District of Virginia and was subsequently nonsuited without prejudice by the plaintiff.

We believe that CCC had and continues to have the right to deposit mine water from Buchanan Mine into void spaces at nearby mines, including VP3. We also believe DMME properly issued environmental permits to CCC with respect to depositing water into VP3 as well as discharging water into the Levisa River. CCC and the other CONSOL defendants deny all liability and intend to vigorously defend the actions filed against them. CCC also intends to vigorously defend the environmental permits issued to it. Consequently, we have not recognized any liability related to these actions. However, if a temporary restraining order or an injunction were to be issued against CCC, if the environmental permits were temporarily suspended or revoked, or if damages were awarded to plaintiffs, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

On October 24, 2006 CONSOL Energy and CCC were served with a summons in the name of the Commonwealth of Virginia with the Circuit Court of Buchanan County, Virginia regarding a special grand jury presentment in response to citizens’ complaints that noise resulting from the ventilation fan at the Buchanan Mine constitutes a public nuisance. CONSOL Energy and CCC deny that the operation of the ventilation fan is a public nuisance and intend to vigorously defend this proceeding. However, if the operation of the ventilation fan is ordered to be stopped, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

CNX Gas Company LLC is a party to a case captioned Geomet Operating Company, Inc. and Pocahontas Mining Limited Liability Company v. CNX Gas Company LLC in the Circuit Court for Buchanan County, Virginia (Case No. 337-06). CNX Gas has a coalseam gas lease with Pocahontas Mining in southwest Virginia and southern West Virginia. With the agreement of Pocahontas Mining, GeoMet constructed a pipeline on the property. CNX Gas sought a judicial determination that under the terms of the lease, CNX Gas has the exclusive right to construct and operate pipelines on the property. On May 23, 2007, the Circuit Court entered an Order granting CNX Gas’ motion for summary judgment against GeoMet and Pocahontas Mining. The Order provided that CNX Gas has exclusive rights to construct and operate pipelines on the property and prohibited GeoMet from owning, operating, or maintaining its pipeline on the property. The Court stayed the portion of its Order that required GeoMet to remove its pipeline, pending GeoMet’s appeal of the decision to the Virginia Supreme Court. Geomet filed an emergency appeal to the Virginia Supreme Court, which on June 20, 2007, overturned the provision of the Circuit Court’s Order requiring GeoMet to remove its pipeline, as well as the related stay and the conditions thereof. Pocahontas Mining has amended its complaint to seek rescission or reformation of the lease. We cannot predict the ultimate outcome of this litigation; however, payments in the future with respect to this lawsuit may be material to the financial position, results of operations or cash flows of CONSOL Energy.

On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against CNX Gas Company LLC and Island Creek Coal Company, a subsidiary of CONSOL Energy, in the Circuit Court for the County of Tazewell, Virginia. The lawsuit alleges that CNX Gas conspired with Island Creek and has violated the Virginia Antitrust Act and has tortiously interfered with GeoMet’s contractual relations, prospective contracts and business expectancies. GeoMet seeks injunctive relief, actual damages of $561,000, treble damages and punitive damages in the amount of $350. CNX Gas and Island Creek have filed motions to dismiss all counts of the complaint. CNX Gas believes this lawsuit to be without merit and intends to vigorously defend it. However, it is reasonably possible that payments in the future with respect to this lawsuit may be material to the financial position, results of operations or cash flows of CONSOL Energy.

We expensed and paid approximately $28,000 to the Combined Fund for the plan year beginning October 1, 2003 as a result of the higher per beneficiary premium rate calculated by the Commissioner of Social Security and retroactively imposed by the Combined Benefit Fund for beneficiaries assigned to CONSOL Energy. Additionally, CONSOL Energy expensed approximately $2,000 related to the higher per beneficiary premium rate for the plan year beginning October 1, 2004. The higher per beneficiary premium rate was imposed as a result of court decisions issued prior to June 10, 2003 arising from litigation over the formula used in the calculation of the annual per beneficiary premium rate owed by assigned operators, including subsidiaries of CONSOL Energy, to the Combined Benefit Fund. In August 2005, after additional litigation cases had been filed concerning the calculation and imposition of the higher per beneficiary premium rate, the United States District

Court for the District of Maryland ruled that the calculation by the Commissioner of Social Security was improper, arbitrary and capricious. Subsequently, on December 31, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the decision of the District Court.

On March 28, 2007, the assigned operators, including the subsidiaries of CONSOL Energy, and the Combined Benefit Fund entered into a settlement agreement that resolved all issues relating to the calculation and imposition of the higher per beneficiary premium rate. The settlement agreement provides for full reimbursement of the higher per beneficiary premium rate calculated and imposed on the subsidiaries of CONSOL Energy and for the payment of interest on all amounts to be reimbursed. As previously disclosed, CONSOL Energy received reimbursement of approximately $33,400, which includes the reduction of $2,255 related to the unassigned beneficiary premium liability previously accrued.

In January 2003, Mine 84, near Washington, Pennsylvania experienced a fire along several hundred feet of the conveyor belt servicing the longwall section of the mine. The fire was extinguished approximately two weeks later. Recognized insurance recovery for damages of approximately $1,034 was reflected in Other Receivables at June 30, 2007 and December 31, 2006. CONSOL Energy received $1,785 of insurance proceeds related to this incident in the year ended December 31, 2005. CONSOL Energy has filed suit against one of the underwriter insurance carriers for insurance proceeds and bad faith settlement practices.

Certain excise taxes paid on export sales of coal were determined to be unconstitutional. CONSOL Energy filed claims with the Internal Revenue Service (IRS) seeking refunds of these excise taxes that were paid during the period 1991 through 1999. Accordingly, CONSOL Energy recognized receivables for these claims in 2001. The IRS completed an audit of CONSOL’s refund claims and confirmed the validity of the claim filed for the period 1994 through 1999. CONSOL received the refunds for this portion of the claim in 2003 and 2002. The United States Supreme Court denied review of the refund claim under the Tucker Act, which allows refunds of taxes for the period 1991 through 1993. CONSOL Energy recorded a receivable of $26,006, which excludes an interest component, for this portion of the claim classified in Other Assets at June 30, 2007 and December 31, 2006. CONSOL also recorded a payable of $1,914 related to this claim classified in Other Liabilities at June 30, 2007 and December 31, 2006. Litigation has been filed with the Department of Justice regarding interest on the claims for the 1991 through 1993 period. On January 2, 2007, a three-judge panel of the U.S. Court of Appeals confirmed the previous court decision which allowed recovery of black lung excise taxes for the Tucker Act period, and granted interest on these claims. The Government filed a petition for a rehearing of the tax refund and applicable interest issues before the entire U.S. Court of Appeals on March 7, 2007 following the January 2, 2007 confirmation of the lower court’s decision. During the three months ended June 30, 2007, the U.S. Court of Appeals confirmed the decision of its three-judge panel that the excise taxes and applicable interest were owing to claimants. It is likely that the Government will further appeal the tax and/or interest issues by filing a Petition for Certiorari with the U.S. Supreme Court. The Court then has the option to either hear the case, or reject the Petition thereby granting the refund of the excise tax and applicable interest. Although we believe it is probable the tax will be refunded, the timetable for receipt of the monies is not clear. There is no assurance that CONSOL Energy will receive interest on the tax refund.

At June 30, 2007, CONSOL Energy and certain subsidiaries have provided the following financial guarantees. We believe that these guarantees will expire without being funded, and therefore, the commitments will not have a material adverse effect on financial condition. The fair value of all liabilities associated with these guarantees have been properly recorded and reported in the financial statements.


	Total Amounts Committed		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Letters of Credit:
Employee-Related	$	163,671	$	161,852	$	1,819	$	—	$	—
Environmental		77,399		72,110		5,289		—		—
Gas		14,933		152		14,781		—		—
Other		9,503		8,750		753		—		—

Total Letters of Credit	$	265,506	$	242,864	$	22,642	$	—	$	—

Surety Bonds:
Employee-Related	$	235,546	$	235,546	$	—	$	—	$	—
Environmental		242,872		242,869		—		3		—
Gas		21,559		21,559		—		—		—
Other		8,205		8,177		28		—		—

Total Surety Bonds	$	508,182	$	508,151	$	28	$	3	$	—

Guarantees:
Coal	$	121,665	$	46,293	$	37,231	$	33,838	$	4,303
Gas		33,370		30,270		—		—		3,100
Gas—Firm Transportation		52,505		7,402		14,597		11,148		19,358
Other		199,993		23,158		43,104		20,607		113,124

Total Guarantees	$	407,533	$	107,123	$	94,932	$	65,593	$	139,885

Total Commitments	$	1,181,221	$	858,138	$	117,602	$	65,596	$	139,885

Employee-related financial guarantees have primarily been extended to support various state workers’ compensation self-insurance programs and the United Mine Workers’ of America’s 1992 Benefit Plan. Environmental financial guarantees have primarily been extended to support various performance bonds related to reclamation and other environmental issues. Gas financial guarantees have primarily been provided to support various performance bonds related to land usage and restorative issues. Other contingent liabilities have been extended to support insurance policies, legal matters and various other items necessary in the normal course of business.

CONSOL Energy and certain of its subsidiaries have also provided guarantees for the delivery of specific quantities of coal and gas to various customers. These guarantees are several or joint and several. Other guarantees have also been provided to promise the full and timely payments to lessors of mining equipment and support various other items necessary in the normal course of business.

NOTE 11—FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions were used to estimate the fair values of financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value due to the short maturity of these instruments.

Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses, based on CONSOL Energy’s current incremental borrowing rates for similar types of borrowing arrangements.

Capital Leases: The carrying amount reported in the balance sheet for capital leases approximates its fair value due to recording the obligation at the present value of minimum lease payments.

The carrying amounts and fair values of financial instruments, excluding derivative financial instruments disclosed in Item 3—Quantitative and Qualitative Disclosure About Market Risk, are as follows:


	June 30, 2007						December 31, 2006
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	306,505		$	306,505		$	223,883		$	223,883
Long-term debt	$	(402,753	)	$	(411,492	)	$	(442,232	)	$	(456,242	)
Capital leases	$	(105,445	)	$	(105,445	)	$	(110,031	)	$	(110,031	)

NOTE 12—SEGMENT INFORMATION:

CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the three and six months ended June 30, 2007, the Northern Appalachian aggregated segment includes the following mines: Shoemaker, Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork, Mine 84 and Mahoning Valley. For the three and six months ended June 30, 2007, the Central Appalachian aggregated segment includes the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the three and six months ended June 30, 2007, the Metallurgical aggregated segment includes the Buchanan and Amonate mines. The Other Coal segment includes our purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to each individual mine. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energy’s All Other classification is made up of the Company’s terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations.

Industry segment results for the three months ended June 30, 2007:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal		Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	524,074	$	56,947	$	99,866	$	32,972	$	713,859	$	113,369	$	52,072	$	—		$	879,300
Sales—gas royalty interests		—		—		—		—		—		14,484		—		—			14,484
Sales—purchased gas		—		—		—		—		—		1,317		—		—			1,317
Freight—outside		—		—		—		43,667		43,667		—		—		—			43,667
Intersegment transfers		—		—		—		—		—		1,337		34,835		(36,172	)		—

Total Sales and Freight	$	524,074	$	56,947	$	99,866	$	76,639	$	757,526	$	130,507	$	86,907	$	(36,172	)	$	938,768

Earnings (Loss) Before Income Taxes	$	92,887	$	4,768	$	40,173	$	59,075	$	196,903	$	65,672	$	4,968	$	(27,218	)	$	240,325	(A)

Segment assets									$	3,137,787	$	1,258,997	$	655,549	$	860,412		$	5,912,745	(B)

Depreciation, depletion and amortization									$	59,234	$	11,979	$	4,476	$	—		$	75,689

Capital Expenditures (Including acquisitions)									$	95,886	$	90,130	$	3,579	$	—		$	189,595

(A)	Includes equity in earnings of unconsolidated affiliates of $299, $196 and $1,359 for Coal, Gas and All Other, respectively.

(B)	Includes investments in unconsolidated equity affiliates of $2,292, $53,472 and $33,428 for Coal, Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

Industry segment results for the three months ended June 30, 2006:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	467,653	$	62,479	$	87,532	$	61,822		$	679,486	$	92,592	$	52,156	$	—		$	824,234
Sales—gas royalty interests		—		—		—		—			—		12,686		—		—			12,686
Sales—purchased gas		—		—		—		—			—		9,778		—		—			9,778
Freight—outside		—		—		—		37,689			37,689		—		—		—			37,689
Intersegment transfers		—		—		—		—			—		1,006		34,440		(35,446	)		—

Total Sales and Freight	$	467,653	$	62,479	$	87,532	$	99,511		$	717,175	$	116,062	$	86,596	$	(35,446	)	$	884,387

Earnings (Loss) Before Income Taxes	$	104,344	$	2,156	$	33,945	$	(21,633	)	$	118,812	$	61,354	$	3,479	$	(15,453	)	$	168,192	(C)

Segment assets										$	3,392,222	$	949,143	$	181,056	$	762,587		$	5,285,008	(D)

Depreciation, depletion and amortization										$	61,089	$	8,987	$	4,372	$	—		$	74,448

Capital Expenditures (Including acquisitions)										$	98,578	$	42,832	$	7,872	$	—		$	149,282

(C)	Includes equity in earnings (losses) of unconsolidated affiliates of $625 and ($12) for Gas and All Other, respectively.

(D)	Includes investments in unconsolidated equity affiliates of $50,196 and $2,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

Industry segment results for the six months ended June 30, 2007:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal		Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	1,030,946	$	104,019	$	185,782	$	74,270	$	1,395,017	$	212,578	$	104,832	$	—		$	1,712,427
Sales—gas royalty interests		—		—		—		—		—		26,666		—		—			26,666
Sales—purchased gas		—		—		—		—		—		2,476		—		—			2,476
Freight—outside		—		—		—		87,300		87,300		—		—		—			87,300
Intersegment transfers		—		—		—		—		—		2,416		69,638		(72,054	)		—

Total Sales and Freight	$	1,030,946	$	104,019	$	185,782	$	161,570	$	1,482,317	$	244,136	$	174,470	$	(72,054	)	$	1,828,869

Earnings (Loss) Before Income Taxes	$	221,782	$	11,273	$	76,384	$	19,346	$	328,785	$	117,909	$	8,230	$	(52,292	)	$	402,632	(E)

Segment assets									$	3,137,787	$	1,258,997	$	655,549	$	860,412		$	5,912,745	(F)

Depreciation, depletion and amortization									$	119,407	$	24,077	$	8,994	$	—		$	152,478

Capital Expenditures (Including acquisitions)									$	181,699	$	147,665	$	6,384	$	—		$	335,748

(E)	Includes equity in earnings of unconsolidated affiliates of $438, $403 and $1,892 for Coal, Gas and All Other, respectively.

(F)	Includes investments in unconsolidated equity affiliates of $2,292, $53,472 and $33,428 for Coal, Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

Industry segment results for the six months ended June 30, 2006:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	969,123	$	129,118	$	174,280	$	127,674		$	1,400,195	$	194,604	$	98,452	$	—		$	1,693,251
Sales—gas royalty interests		—		—		—		—			—		28,493		—		—			28,493
Sales—purchased gas		—		—		—		—			—		32,130		—		—			32,130
Freight—outside		—		—		—		74,768			74,768		—		—		—			74,768
Intersegment transfers		—		—		—		—			—		2,417		70,477		(72,894	)		—

Total Sales and Freight	$	969,123	$	129,118	$	174,280	$	202,442		$	1,474,963	$	257,644	$	168,929	$	(72,894	)	$	1,828,642

Earnings (Loss) Before Income Taxes	$	210,180	$	11,027	$	79,097	$	(35,902	)	$	264,402	$	134,882	$	6,042	$	(29,155	)	$	376,171	(G)

Segment assets										$	3,392,222	$	949,143	$	181,056	$	762,587		$	5,285,008	(H)

Depreciation, depletion and amortization										$	119,653	$	17,891	$	8,720	$	—		$	146,264

Capital Expenditures (Including acquisitions)										$	199,280	$	83,009	$	36,845	$	—		$	319,134

(G)	Includes equity in earnings (losses) of unconsolidated affiliates of $772 and ($53) for Gas and All Other, respectively.

(H)	Includes investments in unconsolidated equity affiliates of $50,196 and $2,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

Earnings Before Income Taxes:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2007			2006			2007			2006
Segment earnings before income taxes for total reportable business segments	$	262,575		$	180,166		$	446,694		$	399,284
Segment earnings (loss) before income taxes for all other businesses		4,968			3,479			8,230			6,042
Incentive compensation (A)		(16,205	)		(7,193	)		(25,973	)		(13,038	)
Stock Based Compensation (A)		(4,358	)		(2,857	)		(15,132	)		(5,057	)
Interest income (expense), net and other non-operating activity (A)		(6,655	)		(5,403	)		(11,187	)		(11,060	)

Earnings Before Income Taxes	$	240,325		$	168,192		$	402,632		$	376,171

(A)	Excludes amounts specifically related to the Gas segment.

Total Assets:


	June 30,
	2007		2006
Segment assets for total reportable business segments	$	4,396,784	$	4,341,365
Segment assets for all other businesses		655,549		181,056
Items excluded from segment assets:
Cash and other investments (A)		248,232		282,226
Deferred tax assets		610,631		478,442
Bond issuance costs		1,549		1,919

Total Consolidated Assets	$	5,912,745	$	5,285,008

(A)	Excludes amounts specifically related to the Gas segment.

NOTE 13—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:

The payment obligations under the $250,000 7.875 percent Notes due 2012 issued by CONSOL Energy in 2002 are jointly and severally and also fully and unconditionally guaranteed by several subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separate financial information with respect to the parent, CNX Gas, an 81.5% owned guarantor subsidiary, the remaining 100% owned guarantor subsidiaries and the non-guarantor subsidiaries. CNX Gas is presented in a separate column in accordance with SEC Regulation S-X Rule 3-10. CNX Gas Corporation is a reporting company under Section 12(b) of the Securities Exchange Act of 1933, and as such, CNX Gas Corporation files its own financial statements with the Securities and Exchange Commission and those financial statements, when filed, are publicly available on EDGAR. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent and a guarantor subsidiary manage several assets and liabilities of all of their 100% owned subsidiaries. For example, these include deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

Income Statement for the Three Months Ended June 30, 2007:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	114,706	$	723,551		$	42,380	$	(1,337	)	$	879,300
Sales—Purchased Gas		—			1,317		—			—		—			1,317
Sales—Gas Royalty Interests		—			14,484		—			—		—			14,484
Freight—Outside		—			—		43,667			—		—			43,667
Other Income (including equity earnings)		174,914			2,964		106,531			10,398		(173,577	)		121,230

Total Revenue and Other Income		174,914			133,471		873,749			52,778		(174,914	)		1,059,998
Cost of Goods Sold and Other Operating Charges		26,326			26,758		480,030			3,531		54,512			591,157
Purchased Gas Costs		—			1,473		—			—		—			1,473
Gas Royalty Interests’ Costs		—			12,528		(28	)		—		—			12,500
Related Party Activity		(819	)		—		17,405			38,063		(54,649	)		—
Freight Expense		—			—		43,667			—		—			43,667
Selling, General and Administrative Expense		—			12,555		12,441			1,543		—			26,539
Depreciation, Depletion and Amortization		1,895			11,979		59,339			2,494		(18	)		75,689
Interest Expense		5,026			1,246		(238	)		140		—			6,174
Taxes Other Than Income		1,237			—		59,631			1,606		—			62,474

Total Costs		33,665			66,539		672,247			47,377		(155	)		819,673

Earnings (Loss) Before Income Taxes and Minority Interest		141,249			66,932		201,502			5,401		(174,759	)		240,325
Income Tax Expense (Benefit)		(11,868	)		25,444		64,058			1,890		—			79,524

Earnings (Loss) before Minority Interest		153,117			41,488		137,444			3,511		(174,759	)		160,801
Minority Interest		—			—		—			—		(7,684	)		(7,684	)

Net Income (Loss)	$	153,117		$	41,488	$	137,444		$	3,511	$	(182,443	)	$	153,117

Balance Sheet at June 30, 2007:


	Parent Issuer		CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	241,690	$	60,028		$	17		$	4,770	$	—		$	306,505
Accounts and Notes Receivable:
Trade		—		41,426			—			252,222		—			293,648
Other		4,450		3,891			11,207			29,351		(1,541	)		47,358
Inventories		—		—			140,372			23,933		—			164,305
Deferred Income Taxes		124,151		(859	)		—			—		—			123,292
Prepaid Expenses		17,820		6,851			24,661			1,091		—			50,423

Total Current Assets		388,111		111,337			176,257			311,367		(1,541	)		985,531
Property, Plant and Equipment:
Property, Plant and Equipment		92,450		1,313,719			6,663,824			82,666		—			8,152,659
Less-Accumulated Depreciation, Depletion and Amortization		48,234		226,004			3,592,940			34,614		—			3,901,792

Property, Plant and Equipment—Net		44,216		1,087,715			3,070,884			48,052		—			4,250,867
Other Assets:
Deferred Income Taxes		633,266		(145,927	)		—			—		—			487,339
Investment in Affiliates		2,545,773		53,472			1,233,609			—		(3,743,662	)		89,192
Other		14,122		7,155			66,904			11,635		—			99,816

Total Other Assets		3,193,161		(85,300	)		1,300,513			11,635		(3,743,662	)		676,347

Total Assets	$	3,625,488	$	1,113,752		$	4,547,654		$	371,054	$	(3,745,203	)	$	5,912,745

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	41,414	$	15,288		$	102,544		$	15,543	$	(1,541	)	$	173,248
Accounts Payable (Recoverable)—Related Parties		1,732,832		6,500			(1,993,114	)		253,782		—			—
Current Portion of Long-Term Debt		—		2,799			10,124			2,000		—			14,923
Accrued Income Taxes		11,184		8,887			—			—		—			20,071
Other Accrued Liabilities		89,618		23,930			350,787			6,577		—			470,912

Total Current Liabilities		1,875,048		57,404			(1,529,659	)		277,902		(1,541	)		679,154
Long-Term Debt		258,741		69,405			155,144			9,985		—			493,275
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		2,398			2,253,815			—		—			2,256,213
Pneumoconiosis		—		—			188,940			—		—			188,940
Mine Closing		—		—			380,053			11,277		—			391,330
Workers’ Compensation		—		—			133,000			—		—			133,000
Deferred Revenue		—		—			6,022			—		—			6,022
Salary Retirement		114,018		274			—			—		—			114,292
Reclamation		—		—			11,709			16,526		—			28,235
Other		75,720		29,230			43,584			20,827		—			169,361

Total Deferred Credits and Other Liabilities		189,738		31,902			3,017,123			48,630		—			3,287,393
Minority Interest		—		—			150,962			—		—			150,962
Stockholders’ Equity		1,301,961		955,041			2,754,084			34,537		(3,743,662	)		1,301,961

Total Liabilities and Stockholders’ Equity	$	3,625,488	$	1,113,752		$	4,547,654		$	371,054	$	(3,745,203	)	$	5,912,745

Income Statement for the Three Months Ended June 30, 2006:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	93,598	$	682,553		$	53,818	$	(5,735	)	$	824,234
Sales—Purchased Gas		—			9,778		—			—		—			9,778
Sales—Gas Royalty Interests		—			12,686		—			—		—			12,686
Freight—Outside		—			—		37,689			—		—			37,689
Other Income (including equity earnings)		139,449			6,790		28,292			8,993		(135,648	)		47,876

Total Revenue and Other Income		139,449			122,852		748,534			62,811		(141,383	)		932,263
Cost of Goods Sold and Other Operating Charges		11,884			23,588		446,916			16,751		38,254			537,393
Purchased Gas Costs		—			9,986		—			—		—			9,986
Gas Royalty Interests’ Costs		—			10,267		(32	)		—		—			10,235
Related Party Activity		(1,027	)		—		7,488			35,229		(41,690	)		—
Freight Expense		—			—		37,689			—		—			37,689
Selling, General and Administrative Expense		—			7,702		13,250			959		—			21,911
Depreciation, Depletion and Amortization		1,654			8,987		61,851			2,114		(158	)		74,448
Interest Expense		5,039			2		922			290		—			6,253
Taxes Other Than Income		1,417			—		62,508			2,231		—			66,156

Total Costs		18,967			60,532		630,592			57,574		(3,594	)		764,071

Earnings (Loss) Before Income Taxes and Minority Interest		120,482			62,320		117,942			5,237		(137,789	)		168,192
Income Tax Expense (Benefit)		9,988			24,167		15,202			1,275		—			50,632

Earnings (Loss) before Minority Interest		110,494			38,153		102,740			3,962		(137,789	)		117,560
Minority Interest		—			—		—			—		(7,066	)		(7,066	)

Net Income (Loss)	$	110,494		$	38,153	$	102,740		$	3,962	$	(144,855	)	$	110,494

Balance Sheet at December 31, 2006:


	Parent Issuer		CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	111,545	$	107,173		$	121		$	5,044	$	—		$	223,883
Accounts and Notes Receivable:
Trade		—		46,062			10,073			247,040		—			303,175
Other		3,552		5,036			17,603			28,444		(2,745	)		51,890
Inventories		—		185			127,033			22,089		—			149,307
Deferred Income Taxes		120,322		(3,091	)		—			—		—			117,231
Recoverable Income Taxes		3,469		(2,191	)		—			—		—			1,278
Prepaid Expenses		18,038		14,280			30,724			4,690		—			67,732

Total Current Assets		256,926		167,454			185,554			307,307		(2,745	)		914,496
Property, Plant and Equipment:
Property, Plant and Equipment		89,688		1,123,774			6,553,908			82,566		—			7,849,936
Less-Accumulated Depreciation, Depletion and Amortization		44,563		203,121			3,531,594			30,371		—			3,809,649

Property, Plant and Equipment—Net		45,125		920,653			3,022,314			52,195		—			4,040,287
Other Assets:
Deferred Income Taxes		628,004		(120,008	)		—			—		—			507,996
Investment in Affiliates		2,134,962		52,283			1,170,725			—		(3,273,751	)		84,219
Other		32,177		9,329			63,238			11,590		—			116,334

Total Other Assets		2,795,143		(58,396	)		1,233,963			11,590		(3,273,751	)		708,549

Total Assets	$	3,097,194	$	1,029,711		$	4,441,831		$	371,092	$	(3,276,496	)	$	5,663,332

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	62,290	$	27,872		$	111,642		$	26,001	$	(2,745	)	$	225,060
Accounts Payable (Recoverable)—Related Parties		1,482,497		—			(1,736,580	)		254,083		—			—
Current Portion of Long-Term Debt		—		2,701			54,817			2,000		—			59,518
Other Accrued Liabilities		80,839		21,057			343,657			9,993		—			455,546

Total Current Liabilities		1,625,626		51,630			(1,226,464	)		292,077		(2,745	)		740,124
Long-Term Debt		258,666		64,793			158,301			10,985		—			492,745

Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		2,313			2,249,802			—		—			2,252,115
Pneumoconiosis		—		—			184,424			—		—			184,424
Mine Closing		—		—			379,153			10,743		—			389,896
Workers’ Compensation		—		—			121,337			—		—			121,337
Deferred Revenue		—		—			13,106			—		—			13,106
Salary Retirement		113,755		189			—			—		—			113,944
Reclamation		—		—			8,728			17,733		—			26,461
Other		32,996		30,571			44,786			19,017		—			127,370

Total Deferred Credits and Other Liabilities		146,751		33,073			3,001,336			47,493		—			3,228,653
Minority Interest		—		—			—			—		135,659			135,659
Stockholders’ Equity		1,066,151		880,215			2,508,658			20,537		(3,409,410	)		1,066,151

Total Liabilities and Stockholders’ Equity	$	3,097,194	$	1,029,711		$	4,441,831		$	371,092	$	(3,276,496	)	$	5,663,332

Income Statement for the Six Months Ended June 30, 2007:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	214,994	$	1,412,893		$	86,956	$	(2,416	)	$	1,712,427
Sales—Purchased Gas		—			2,476		—			—		—			2,476
Sales—Gas Royalty Interests		—			26,666		—			—		—			26,666
Freight—Outside		—			—		87,300			—		—			87,300
Other Income (including equity earnings)		307,571			4,467		117,085			19,797		(302,606	)		146,314

Total Revenue and Other Income		307,571			248,603		1,617,278			106,753		(305,022	)		1,975,183
Cost of Goods Sold and Other Operating Charges		49,018			49,930		893,451			8,849		109,158			1,110,406
Purchased Gas Costs		—			2,492		—			—		—			2,492
Gas Royalty Interests’ Costs		—			23,193		(55	)		—		—			23,138
Related Party Activity		(3,278	)		—		31,567			73,647		(101,936	)		—
Freight Expense		—			—		87,300			—		—			87,300
Selling, General and Administrative Expense		—			26,276		23,577			2,695		—			52,548
Depreciation, Depletion and Amortization		3,737			24,077		121,687			4,977		(2,000	)		152,478
Interest Expense		10,064			2,465		628			280		—			13,437
Taxes Other Than Income		2,688			—		124,797			3,267		—			130,752

Total Costs		62,229			128,433		1,282,952			93,715		5,222			1,572,551

Earnings (Loss) Before Income Taxes		245,342			120,170		334,326			13,038		(310,244	)		402,632
Income Tax Expense (Benefit)		(21,037	)		45,686		93,246			4,563		—			122,458

Earnings (Loss) before Minority Interest		266,379			74,484		241,080			8,475		(310,244	)		280,174
Minority Interest		—			—		—			—		(13,795	)		(13,795	)

Net Income (Loss)	$	266,379		$	74,484	$	241,080		$	8,475	$	(324,039	)	$	266,379

Income Statement for the Six Months Ended June 30, 2006:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	197,021	$	1,401,470		$	103,880	$	(9,120	)	$	1,693,251
Sales—Purchased Gas		—			32,130		—			—		—			32,130
Sales—Gas Royalty Interests		—			28,493		—			—		—			28,493
Freight—Outside		—			—		74,768			—		—			74,768
Other Income (including equity earnings)		268,922			13,431		51,583			17,335		(261,762	)		89,509

Total Revenue and Other Income		268,922			271,075		1,527,821			121,215		(270,882	)		1,918,151
Cost of Goods Sold and Other Operating Charges		20,734			44,477		898,660			26,944		81,510			1,072,325
Purchased Gas Costs		—			32,751		—			—		—			32,751
Gas Royalty Interests’ Costs		—			23,683		(64	)		—		—			23,619
Related Party Activity		(3,355	)		—		9,694			71,626		(77,965	)		—
Freight Expense		—			—		74,768			—		—			74,768
Selling, General and Administrative Expense		—			15,007		24,917			2,067		—			41,991
Depreciation, Depletion and Amortization		3,306			17,891		122,769			4,456		(2,158	)		146,264
Interest Expense		10,084			9		1,723			290		—			12,106
Taxes Other Than Income		3,090			—		130,582			4,484		—			138,156

Total Costs		33,859			133,818		1,263,049			109,867		1,387			1,541,980

Earnings (Loss) Before Income
Taxes and Minority Interest		235,063			137,257		264,772			11,348		(272,269	)		376,171
Income Tax Expense (Benefit)		(10,187	)		53,228		68,346			3,972		—			115,359

Earnings (Loss) before Minority Interest		245,250			84,029		196,426			7,376		(272,269	)		260,812
Minority Interest		—			—		—			—		(15,562	)		(15,562	)

Net Income (Loss)	$	245,250		$	84,029	$	196,426		$	7,376	$	(287,831	)	$	245,250

Cash Flow for the Six Months Ended June 30, 2007:


	Parent Issuer			CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors			Elimination			Consolidated
Net Cash Provided by Operating Activities	$	179,464		$	140,604		$	133,134		$	1,268		$	—		$	454,470

Cash Flows from Investing Activities:
Capital Expenditures	$	(8,006	)	$	(191,903	)	$	(179,535	)	$	(542	)	$	44,238		$	(335,748	)
Investment in Equity Affiliates		—			(786	)		(1,454	)		—			—			(2,240	)
Other Investing Activities		—			40			96,402			—			(44,238	)		52,204

Net Cash Used in Investing Activities	$	(8,006	)	$	(192,649	)	$	(84,587	)	$	(542	)	$	—		$	(285,784	)

Cash Flows from Financing Activities:
Purchase of Treasury Stock	$	(25,618	)	$	—		$	—		$	—		$	—		$	(25,618	)
Tax Benefit from Stock-Based Compensation		4,617			26			—			—			—			4,643
Dividends Paid		(25,526	)		—			—			—			—			(25,526	)
Other Financing Activities		5,214			4,874			(48,651	)		(1,000	)		—			(39,563	)

Net Cash (Used in) Provided by Financing Activities	$	(41,313	)	$	4,900		$	(48,651	)	$	(1,000	)	$	—		$	(86,064	)

Cash Flow for the Six Months Ended June 30, 2006:


	Parent Issuer			CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	28,464		$	126,833		$	192,102		$	1,685		$	—	$	349,084

Cash Flows from Investing Activities:
Capital Expenditures	$	—		$	(83,009	)	$	(232,885	)	$	(3,240	)	$	—	$	(319,134	)
Investment in Equity Affiliates		—			104			(1	)		—			—		103
Other Investing Activities		(4,667	)		—			40,351			(500	)		—		35,184

Net Cash Used in Investing Activities	$	(4,667	)	$	(82,905	)	$	(192,535	)	$	(3,740	)	$	—	$	(283,847	)

Cash Flows from Financing Activities:
Purchase of Treasury Stock	$	(83,631	)	$	—		$	—		$	—		$	—	$	(83,631	)
Tax Benefit from Stock-Based Compensation		35,796			—			—			—			—		35,796
Dividends Paid		(25,784	)		—			—			—			—		(25,784	)
Other Financing Activities		13,071			306			(253	)		(115	)		—		13,009

Net Cash (Used in) Provided by Financing Activities	$	(60,548	)	$	306		$	(253	)	$	(115	)	$	—	$	(60,610	)

NOTE 14—RECENT ACCOUNTING PRONOUNCEMENTS:

In April 2007, the FASB issued FASB Staff Position (“FSP”) FIN 39-1, “Amendment of FASB Interpretation No. 39.” This FSP amends paragraph 10 of Interpretation 39 to permit entities to offset fair value amounts recognized for either a receivable representing the right to reclaim cash collateral or a payable representing an obligation to return cash collateral, if such receivable or payable arises from derivative instruments executed with the same counterparty under the same master netting arrangement. FSP FIN 39-1 also requires entities to make an accounting policy decision to offset fair value amounts in accordance with FIN 39-1 and apply the policy consistently. An entity may not offset fair value amounts recognized for derivative instruments without offsetting fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. FSP FIN 39-1 is effective for financial statements issued for fiscal years beginning after November 15, 2007, however earlier application is permitted. We do not expect this guidance to have a significant impact on CONSOL Energy.

In November 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 states that companies should recognize the income tax benefit realized from dividends that are paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and charged to retained earnings under Statement 123(R) as additional paid-in capital. EITF 06-11 is effective for financial statements issued for fiscal years beginning after September 15, 2007, however earlier application is permitted. We do not expect this guidance to have a significant impact on CONSOL Energy.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and requires additional disclosures about fair value measurements. SFAS 157 aims to improve the consistency and comparability of fair value measurements by creating a single definition of fair value. The Statement emphasizes that fair value is not entity-specific, but instead is a market-based measurement of an asset or liability. SFAS 157 upholds the requirements of previously issued

pronouncements concerning fair value measurements and expands the required disclosures. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits all entities to choose to measure certain eligible assets and liabilities at fair value and would enable entities to mitigate volatility in earnings caused by measuring related assets and liabilities differently. The Statement attempts to improve financial reporting as it establishes presentation and disclosure requirements specific to the fair value method. The required disclosures are aimed at enhancing the comparability of financial information between entities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is permitted provided the entity also elects to apply the provisions of SFAS 157. We do not expect this guidance to have a significant impact on CONSOL Energy.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158), which requires the recognition of the funded status of defined benefit postretirement plans and related disclosures. CONSOL Energy adopted SFAS 158 for its December 31, 2006 year-end. Additionally, SFAS 158 requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. This provision becomes effective for CONSOL Energy in its December 31, 2008 year-end. The funded status of CONSOL Energy’s pension and other postretirement benefit plans are currently measured as of September 30.

NOTE 15—SUBSEQUENT EVENT:

In June 2007, CONSOL Energy agreed to acquire AMVEST Corporation and certain of its subsidiaries and affiliates, including AMVEST West Virginia Coal (AMVEST Coal) and Vaughan Railroad Company, for approximately $335,000, subject to adjustments. AMVEST's coal reserves consist of high quality, low sulfur steam and high-vol metallurgical coal. The Vaughan Railroad Company is a common carrier short line railroad that connects the Fola and Little Eagle coal operations and other potential shippers to the CSX and Norfolk Southern rail interchanges. The 18 miles of track that comprise the Vaughan Railroad is capable of accommodating 130 car trains. This transaction closed on July 31, 2007.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

CONSOL Energy had net income of $153 million for the three months ended June 30, 2007 compared to $110 million in the 2006 period. Net income for the 2007 period increased in comparison to the 2006 period primarily due to two separate transactions; an asset exchange and an asset sale that resulted in pretax income of approximately $100 million and net income of approximately $59 million. Additionally, increased average coal and gas prices and higher gas volumes sold also contributed to the improvement in net income in the 2007 period. These increases were partially offset by $25 million of insurance proceeds received related to the 2005 Buchanan Mine fire being included in earnings before income tax in the 2006 period. Improvements in net income were also offset, in part, by increased coal and gas unit costs and increased incentive compensation expense.

Total coal sales for the three months ended June 30, 2007 were 17.1 million tons, of which 17.0 million tons were produced by CONSOL Energy operations, our equity affiliates, consolidated variable interest entities, or sold from inventory of company-produced coal. This compares with total coal sales of 17.5 million tons for the three months ended June 30, 2006, of which 17.2 million tons were produced by CONSOL Energy operations, consolidated variable interest entities, or sold from inventory of company-produced coal. Company-produced coal production was 16.4 million tons in the 2007 period compared to 18.0 million tons in the 2006 period. The 2007 period production was lower primarily due to the idling of certain Central Appalachian mines, the idling of Shoemaker for the entire 2007 period compared to a portion of the 2006 period and the planned lower production at several Northern Appalachian mines.

Produced coalbed methane gas sales volumes, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 8.1% to 14.7 billion cubic feet in the 2007 period compared with 13.6 billion cubic feet in the 2006 period. Sales volumes in the 2007 period increased as a result of additional wells coming online from our on-going drilling program. Our average sales price for coalbed methane gas, including sales of equity affiliates increased 13.6% to $7.76 per thousand cubic feet in the 2007 period compared with $6.83 per thousand cubic feet in the 2006 period. The increase in average sales price was a result of CNX Gas, an 81.5% owned subsidiary, exposing the majority of gas sales to market prices which were higher in the 2007 period compared to the 2006 period.

In July 2007, production at the Buchanan Mine was suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine by employees. No one was injured during the evacuation. Air monitoring continues to show an overall improvement in the underground mine atmosphere. Overall levels of carbon monoxide continue to decline, indicating that there is no active combustion in the mine. In addition, cameras inserted in several bore holes showed no smoke or signs of combustion in the mine and temperature readings from boreholes indicate the mine temperatures are at ambient levels. Other gas levels being measured are in acceptable ranges. The mine continues to be ventilated and engineers believe that carbon monoxide in the mine is progressively being swept from the mine by the active ventilation flow. Once all monitoring stations show acceptable levels of the gases being monitored, and agency approval is secured, we can re-enter the mine to repair areas where the ventilation controls have been disrupted. The source of the carbon monoxide has not been determined. Engineers theorize that it may be from an ignition of a small amount of methane caused by one of the roof falls that occurred, but a final determination cannot be made until we re-enter the mine. The mine continues to ship coal from above ground inventories, although total shipments per week are lower than normal. Customers who purchase coal from the mine have been notified that a force majeure condition exists at the mine that may result in a reduction in deliveries under their sales agreement with the mine.

In June 2007, CONSOL Energy completed a $1 billion Senior Secured Loan Agreement, effective June 27, 2007, to replace an existing facility of $750 million. The new agreement, which includes more-favorable pricing and flexibility, is a five-year revolving credit facility.

In June 2007, CONSOL Energy agreed to acquire AMVEST Corporation and certain of its subsidiaries and affiliates, including AMVEST West Virginia Coal (AMVEST Coal) and Vaughan Railroad Company, for approximately $335 million, subject to adjustments. AMVEST's coal reserves consist of high quality, low sulfur steam and high-vol metallurgical coal. The Vaughan Railroad Company is a common carrier short line railroad that connects the Fola and Little Eagle coal operations and other potential shippers to the CSX and Norfolk Southern rail interchanges. The 18 miles of track that comprise the Vaughan Railroad is capable of accommodating 130 car trains. This transaction closed on July 31, 2007.

In June 2007, CONSOL Energy, through a subsidiary, sold the rights to certain western Kentucky coal in the Illinois Basin to Alliance Resource Partners, L.P. for $53 million. This transaction resulted in a pretax gain of approximately $50 million.

In April 2007, the company amended its trade accounts receivable facility to allow CONSOL Energy to receive up to $150 million, an increase in capacity of $25 million from the previous facility. The amended facility also provides the ability to issue letters of credit and has reduced the associated fees.

Mine accidents involving multiple fatalities occurred during the calendar year of 2006 in West Virginia at mines operated by other coal companies. These accidents continue to attract widespread public attention and have resulted in both federal government and some state government changes to statutory and regulatory control of mine safety, particularly for underground mines. Because nearly all of our mines are underground, these legislative and regulatory changes could affect our performance.

The actions taken thus far by federal and state governments include requiring: the caching of additional supplies of self-contained self rescuer (SCSR) devices underground; providing breathable air for all underground miners for 96 hours; the purchase and installation during the next several years of electronic communication and personal tracking devices underground; the placement, in various mine areas, of rescue chambers, structures designed to provide refuge for groups of miners for long periods of time during a mine emergency when evacuation from the mine is not possible; the possible reconstruction of existing seals in worked-out areas of mines; and additional training and testing requirements that created the need to hire additional employees.

In reviewing actions taken to date, we estimate that implementation of these new requirements could cost $30 million to $45 million during the period from 2006 until the end of 2009. The actual costs will depend primarily on: the number of additional SCSR oxygen units purchased; the design requirements as well as the extent of deployment of rescue chambers; final guidelines regarding sealed areas; final interpretation of other regulatory requirements; and final approval of mine-by-mine implementation plans.

We did incur costs related to these regulatory requirements during the reporting period. We have reviewed our coal sales agreements to determine the degree to which costs related to these regulatory requirements may be passed through to customers. While the amount will vary by contract, we have begun billing the cost of implementation to customers in most of our existing sales agreements. Responses from customers have varied.

In December 2006, the Surface Mining Act was amended. The Surface Mining Act amendments have several impacts on CONSOL Energy, including: the reduction over time in the production tax paid to fund the reclamation of abandoned mining sites; and the assumption of responsibility by the federal government by 2011 for so-called “orphan miners” who receive retirement benefits from several multi-employer funds into which CONSOL Energy contributes.

Results of Operations

Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006

Net Income

Net income changed primarily due to the following items (table in millions):


	2007 Period			2006 Period			Dollar Variance			Percentage Change
Coal Sales-Produced and Purchased	$	714		$	679		$	35		5.2	%
Produced Gas Sales		113			93			20		21.5	%
Gas Royalty Interest		14			13			1		7.7	%
Purchased Gas Sales		1			10			(9	)	(90.0	)%
Other Sales and Other Income		218			137			81		59.1	%

Total Revenue and Other Income		1,060			932			128		13.7	%
Coal Cost of Goods Sold—Produced and Purchased		452			414			38		9.2	%
Produced Gas Cost of Goods Sold		33			26			7		26.9	%
Gas Royalty Interest Costs of Goods Sold		13			10			3		30.0	%
Purchased Gas Cost of Goods Sold		1			10			(9	)	(90.0	)%
Other Cost of Goods Sold		106			98			8		8.2	%

Total Cost of Goods Sold		605			558			47		8.4	%
Other		214			206			8		3.9	%

Total Costs		819			764			55		7.2	%

Earnings Before Income Taxes and Minority Interest		241			168			73		43.5	%
Income Tax Expense		80			51			29		56.9	%

Earnings Before Minority Interest		161			117			44		37.6	%
Minority Interest		(8	)		(7	)		(1	)	14.3	%

Net Income	$	153		$	110		$	43		39.1	%

Revenue

Revenue and other income increased due to the following items:


	2007 Period		2006 Period		Dollar Variance			Percentage Change
Sales
Produced Coal	$	705	$	661	$	44		6.7	%
Purchased Coal		9		18		(9	)	(50.0	)%
Produced Gas		113		93		20		21.5	%
Industrial Supplies		31		33		(2	)	(6.1	)%
Other		21		19		2		10.5	%

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