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, 2008 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, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company ¨

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 18, 2008
Common stock, $0.01 par value		183,187,399

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, 2008 and June 30, 2007	1
	Consolidated Balance Sheets at June 30, 2008 and December 31, 2007	2
	Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2008	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and June 30, 2007	5
	Notes to Unaudited Consolidated Financial Statements	6

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60

ITEM 4.	CONTROLS AND PROCEDURES	62

	PART II
	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	63

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	63

ITEM 6.	EXHIBITS	64

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,
	2008			2007			2008			2007
Sales—Outside	$	1,111,410		$	879,300		$	1,997,735		$	1,712,427
Sales—Gas Royalty Interests		22,515			14,484			39,019			26,666
Sales—Purchased Gas		1,647			1,317			5,186			2,476
Freight—Outside		63,927			43,667			108,671			87,300
Other Income		11,397			121,230			86,016			146,314

Total Revenue and Other Income		1,210,896			1,059,998			2,236,627			1,975,183
Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)		740,735			591,157			1,377,463			1,110,406
Gas Royalty Interests’ Costs		21,880			12,500			37,954			23,138
Purchased Gas Costs		1,522			1,473			4,943			2,492
Freight Expense		63,927			43,667			108,671			87,300
Selling, General and Administrative Expense		30,644			26,539			61,114			52,548
Depreciation, Depletion and Amortization		95,775			75,689			188,503			152,478
Interest Expense		8,526			6,174			18,702			13,437
Taxes Other Than Income		73,299			62,474			144,905			130,752

Total Costs		1,036,308			819,673			1,942,255			1,572,551

Earnings Before Income Taxes and Minority Interest		174,588			240,325			294,372			402,632
Income Taxes		61,798			79,524			97,351			122,458

Earnings Before Minority Interest		112,790			160,801			197,021			280,174
Minority Interest		(11,778	)		(7,684	)		(20,927	)		(13,795	)

Net Income	$	101,012		$	153,117		$	176,094		$	266,379

Basic Earnings Per Share	$	0.55		$	0.84		$	0.96		$	1.46

Dilutive Earnings Per Share	$	0.54		$	0.83		$	0.95		$	1.44

Weighted Average Number of Common Shares Outstanding:
Basic		182,977,726			182,195,390			182,775,355			182,282,857

Dilutive		185,637,248			185,000,122			185,330,300			184,788,415

Dividends Paid Per Share	$	0.10		$	0.07		$	0.20		$	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, 2008		December 31, 2007
ASSETS
Current Assets:
Cash and Cash Equivalents	$	55,189	$	41,651
Accounts and Notes Receivable:
Trade		282,409		180,545
Other Receivables		52,736		69,771
Inventories		174,660		163,193
Deferred Income Taxes		204,713		130,820
Recoverable Income Taxes		37,186		19,090
Prepaid Expenses		46,865		78,085

Total Current Assets		853,758		683,155
Property, Plant and Equipment:
Property, Plant and Equipment		9,352,002		8,945,312
Less—Accumulated Depreciation, Depletion and Amortization		4,101,556		3,980,270

Total Property, Plant and Equipment—Net		5,250,446		4,965,042
Other Assets:
Deferred Income Taxes		343,823		374,811
Investment in Affiliates		68,199		94,866
Other		75,009		90,216

Total Other Assets		487,031		559,893

TOTAL ASSETS	$	6,591,235	$	6,208,090

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, 2008			December 31, 2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	267,966		$	238,312
Short-Term Notes Payable		207,000			247,500
Current Portion of Long-Term Debt		20,716			18,283
Other Accrued Liabilities		733,880			512,302

Total Current Liabilities		1,229,562			1,016,397
Long-Term Debt:
Long-Term Debt		411,887			398,077
Capital Lease Obligations		85,640			90,848

Total Long-Term Debt		497,527			488,925
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		2,388,980			2,336,809
Pneumoconiosis Benefits		180,535			171,896
Mine Closing		402,270			399,633
Workers’ Compensation		131,356			118,356
Deferred Revenue		—			3,162
Salary Retirement		61,330			67,392
Reclamation		33,821			34,317
Other		269,972			193,666

Total Deferred Credits and Other Liabilities		3,468,264			3,325,231
Minority Interest		158,181			163,118

Total Liabilities and Minority Interest		5,353,534			4,993,671
Stockholders’ Equity:
Common Stock, $.01 par value; 500,000,000 Shares Authorized, 185,126,526 Issued and 183,150,253 Outstanding at June 30, 2008; 185,126,526 Issued and 182,291,623 Outstanding at December 31, 2007		1,851			1,851
Preferred Stock, 15,000,000 Shares Authorized; None Issued and Outstanding		—			—
Capital in Excess of Par Value		997,308			966,544
Retained Earnings		852,123			766,536
Accumulated Other Comprehensive Loss		(542,789	)		(419,284	)
Common Stock in Treasury, at Cost—1,976,273 Shares at June 30, 2008 and 2,834,903 Shares at December 31, 2007		(70,792	)		(101,228	)

Total Stockholders’ Equity		1,237,701			1,214,419

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,591,235		$	6,208,090

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT 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, 2007	$	1,851	$	966,544	$	766,536		$	(419,284	)	$	(101,228	)	$	1,214,419

(Unaudited)
Net Income		—		—		176,094			—			—			176,094
Treasury Rate Lock (Net of ($31) tax)		—		—		—			(35	)		—			(35	)
Amortization of Prior Service Costs and Actuarial Loss (Net of ($106) tax)		—		—		—			(173	)		—			(173	)
Minority Interest in Other Comprehensive Income and Stock-based Compensation of Gas		—		—		—			27,667			—			27,667
Gas Cash Flow Hedge (Net of ($96,703) tax)		—		—		—			(150,877	)		—			(150,877	)

Comprehensive Income (Loss)		—		—		176,094			(123,418	)		—			52,676
Cumulative Effect of FAS 158 Measurement (Net of $22,973 tax)		—		—		(37,647	)		(87	)		—			(37,734	)
Issuance of Treasury Stock		—		—		(16,311	)					30,467			14,156
Purchases of Treasury Stock		—		—		—			—			(31	)		(31	)
Tax Benefit from Stock-Based Compensation		—		19,994		—			—			—			19,994
Amortization of Stock-Based Compensation Awards		—		10,770		—			—			—			10,770
Dividends ($0.20 per share)		—		—		(36,549	)		—			—			(36,549	)

Balance—June 30, 2008	$	1,851	$	997,308	$	852,123		$	(542,789	)	$	(70,792	)	$	1,237,701

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,
	2008			2007
Operating Activities:
Net Income	$	176,094		$	266,379
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization		188,503			152,478
Stock-based Compensation		12,425			16,717
Gain on the Sale of Assets		(8,050	)		(106,541	)
Change in Minority Interest		20,927			13,795
Amortization of Mineral Leases		3,240			3,465
Deferred Income Taxes		68,996			57,034
Equity in Earnings of Affiliates		(3,645	)		(2,733	)
Changes in Operating Assets:
Accounts Receivable Securitization		29,900			—
Accounts and Notes Receivable		(110,856	)		14,059
Inventories		(11,467	)		(14,998	)
Prepaid Expenses		19,289			11,542
Changes in Other Assets		13,822			16,518
Changes in Operating Liabilities:
Accounts Payable		21,058			(39,195	)
Other Operating Liabilities		11,276			36,107
Changes in Other Liabilities		37,739			29,078
Other		726			765

Net Cash Provided by Operating Activities		469,977			454,470

Investing Activities:
Capital Expenditures		(436,277	)		(344,599	)
Net Investment in Equity Affiliates		(819	)		(2,240	)
Proceeds from Sales of Assets		17,280			61,055

Net Cash Used in Investing Activities		(419,816	)		(285,784	)

Financing Activities:
Proceeds from Miscellaneous Borrowings		6,307			284
Payments on Revolver		(40,500	)		—
Payments on Long Term Notes		—			(45,000	)
Tax Benefit from Stock-Based Compensation		19,994			4,643
Dividends Paid		(36,549	)		(25,526	)
Issuance of Treasury Stock		14,156			5,153
Purchases of Treasury Stock		(31	)		(25,618	)

Net Cash Used in Financing Activities		(36,623	)		(86,064	)

Net Increase in Cash and Cash Equivalents		13,538			82,622
Cash and Cash Equivalents at Beginning of Period		41,651			223,883

Cash and Cash Equivalents at End of Period	$	55,189		$	306,505

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(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 and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2007 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, 2007 included in CONSOL Energy’s Form 10-K.

Certain reclassifications of 2007 data have been made to conform to the three and six months ended June 30, 2008 classifications.

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 383,161 shares of common stock were outstanding for both the three and six months ended June 30, 2008, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. Options to purchase 137,963 shares and 1,179,871 shares of common stock were outstanding for the three and six months ended June 30, 2007, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive.

There were 423,977 options and 304,247 options exercised during the three months ended June 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the three months ended June 30, 2008 and 2007 was $20.98 and $13.44, respectively. There were 816,614 options and 399,722 options exercised during the six months ended June 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the six months ended June 30, 2008 and 2007 was $17.90 and $12.89, respectively. Additionally, during the three and six months ended June 30, 2008, 391 and 48,929 fully vested restricted stock awards were released, respectively. During the three and six months ended June 30, 2007, no restricted stock awards were released.

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,
	2008		2007		2008		2007
Net Income	$	101,012	$	153,117	$	176,094	$	266,379

Average shares of common stock outstanding:
Basic		182,977,726		182,195,390		182,775,355		182,282,857
Effect of stock options		2,659,522		2,804,732		2,554,945		2,505,558

Dilutive		185,637,248		185,000,122		185,330,300		184,788,415

Earnings per share:
Basic	$	0.55	$	0.84	$	0.96	$	1.46

Dilutive	$	0.54	$	0.83	$	0.95	$	1.44

NOTE 2—ACQUISITIONS AND DISPOSITIONS:

In June 2008, CONSOL Energy, through a subsidiary, completed the acquisition of the outstanding 50% interest in Knox Energy, LLC not already owned by CNX Gas for a cash payment of $36,000 which was principally allocated to property, plant, and equipment. Prior to the acquisition of the outstanding interest, Knox Energy, LLC had been proportionately consolidated into CONSOL Energy’s financial statements. Knox Energy, LLC is a natural gas production company with operations in Tennessee. The pro forma results for this acquisition are not significant to CONSOL Energy’s financial results.

In February 2008, CONSOL Energy, through a subsidiary, completed a sale of the Mill Creek Mining Complex located in Kentucky. The sales agreement called for the transfer of all of the assets comprising the complex upon execution. Cash proceeds from the sale were $14,649, with our basis in the assets being $9,934. Accordingly, a gain of $4,715 was recorded on the transaction.

In December 2007, CONSOL Energy, through a subsidiary, completed a sale/lease-back of 35 river barges. Cash proceeds from the sale were $16,895, with our basis in the equipment being $16,951. Accordingly, a loss of $56 was recorded on the transaction. The lease has been accounted for as an operating lease. The lease term is fourteen years.

In October 2007, CONSOL Energy, through a subsidiary, acquired 100% of the outstanding shares in an oil and gas company for a cash payment of $12,385 which was principally allocated to property, plant and equipment. The acquired company is in the business of owning, operating and producing oil and gas wells and related pipelines. The acquired assets consisted of gas wells, equipment and connecting pipelines utilized in well operations. The acquisition was accounted for under the guidance of Statement of Financial Accounting Standards No. 141 (SFAS 141), “Business Combinations.”

On July 31, 2007, CONSOL Energy acquired 100% of the voting interest of AMVEST Corporation and certain subsidiaries and affiliates (AMVEST) for a cash payment, net of cash acquired, of $296,724 in a transaction accounted for under SFAS 141. The coal reserves acquired consist of approximately 160 million tons of high quality, low sulfur steam and high-volatile metallurgical coal. Also included in the acquisition were four coal preparation plants, several fleets of modern mining equipment and a common short-line railroad that connects the coal preparation plants to the CSX and Norfolk and Southern rail interchanges. The results of operations of the acquired entities are included in CONSOL Energy’s Consolidated Statement of Income as of August 1, 2007.

The AMVEST acquisition, when combined with CONSOL Energy’s adjacent coal reserves, creates a large contiguous block of coal reserves in the Central Appalachian region. Also included in the acquisition was a

highly-skilled workforce proficient in Central Appalachian surface mining. This workforce, combined with CONSOL Energy’s underground mining expertise, will allow us to build and transfer knowledge among operations to focus the best skill sets to development requirements of the various parts of this reserve block.

The unaudited pro forma results for the three and six months ended June 30, 2007, assuming the acquisition had occurred at January 1, 2007 are estimated to be:


	Three Months Ended June 30, 2007		Six Months Ended June 30, 2007
Revenue	$	1,120,463	$	2,094,424

Earnings Before Taxes	$	243,559	$	408,769

Net Income	$	155,482	$	270,870

Basic Earnings Per Share	$	0.85	$	1.49

Dilutive Earnings Per Share	$	0.84	$	1.47

The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of January 1, 2007, nor are they necessarily indicative of future consolidated results.

In July 2007, CONSOL Energy, through a subsidiary, completed the acquisition of Piping & Equipment, Inc. for a cash payment, net of cash acquired, of $16,914. Piping & Equipment, Inc. is a pipe, valve and fittings supplier with eight locations in Florida, Alabama, Louisiana and Texas. The fair value of merchandise for resale acquired in this acquisition was $8,481 and was included in inventory on the Consolidated Balance Sheets. The pro forma results for this acquisition are not significant to CONSOL Energy’s financial results.

During the year ended December 31, 2007, CONSOL Energy purchased $10,000 of CNX Gas stock on the open market at an average price of $26.87 per share. The purchase of these 372,000 shares changed CONSOL Energy’s ownership percentage in CNX Gas from 81.5% to 81.7%.

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, “Exchanges of Non-Monetary Assets,” and resulted 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 $361 of miscellaneous acquisition costs. Subsequent to June 30, 2007, $1,289 of additional acquisition costs were paid related to this acquisition.

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.

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,
	2008			2007			2008			2007			2008			2007			2008			2007
Service cost	$	2,438		$	2,754		$	4,876		$	5,507		$	2,639		$	2,747		$	5,277		$	5,494
Interest cost		8,257			7,139			16,515			14,277			39,959			34,791			79,919			69,582
Expected return on plan assets		(8,418	)		(7,624	)		(16,835	)		(15,248	)		—			—			—			—
Settlement loss		—			—			—			3,192			—			—			—			—
Amortization of prior service costs (credit)		(279	)		(279	)		(557	)		(557	)		(12,157	)		(12,750	)		(24,313	)		(25,500	)
Recognized net actuarial loss		4,182			3,122			8,363			6,244			15,376			15,307			30,752			30,615

Net periodic benefit cost	$	6,180		$	5,112		$	12,362		$	13,415		$	45,817		$	40,095		$	91,635		$	80,191

CONSOL Energy adopted the measurement provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158), on January 1, 2008. As a result of this adoption, the Company recognized an increase of $2,278 and $42,599 in the liabilities for pension and other postretirement benefits, respectively. These increases were accounted for as a reduction in the January 1, 2008 balance of retained earnings.

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 No. 88, “Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination Benefits (SFAS 88),” requires that when the lump-sum distributions made for a plan year, which prior to CONSOL Energy’s adoption of SFAS 158 was 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. 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 and six months ended June 30, 2008, $14,734 and $14,886 of contributions to pension trusts and pension benefits have been paid from operating cash flows. CONSOL Energy presently anticipates contributing a total of $39,000 to the pension trust in 2008.

We do not expect to contribute to the other post employment benefit plan in 2008. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2008, $34,315 and $70,273 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,
	2008			2007			2008			2007			2008			2007			2008			2007
Service cost	$	1,259		$	1,412		$	2,518		$	2,822		$	7,258		$	7,414		$	14,515		$	14,829
Interest cost		2,937			2,851			5,874			5,701			2,082			2,079			4,164			4,157
Amortization of actuarial gain		(6,027	)		(5,776	)		(12,056	)		(11,550	)		(1,235	)		(988	)		(2,468	)		(1,976	)
State administrative fees and insurance bond premiums		—			—			—			—			1,750			1,661			3,041			3,879
Legal and administrative costs		675			675			1,350			1,350			806			815			1,612			1,630

Net periodic (benefit) cost	$	(1,156	)	$	(838	)	$	(2,314	)	$	(1,677	)	$	10,661		$	10,981		$	20,864		$	22,519

CONSOL Energy adopted the measurement provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158), on January 1, 2008. As a result of this adoption, the Company recognized an increase of $4,871 and $10,146 in the liabilities for coal workers’ pneumoconiosis and workers’ compensation, respectively. These increases were accounted for as a reduction in the January 1, 2008 balance of retained earnings.

CONSOL Energy does not expect to contribute to the CWP plan in 2008. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2008, $3,110 and $5,825 of CWP benefit claims have been paid.

CONSOL Energy does not expect to contribute to the workers’ compensation plan in 2008. We intend to pay benefit claims as they become due. For the three and six months ended June 30, 2008, $9,038 and $18,761 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,
	2008					2007
	Amount			Percent		Amount			Percent
Statutory U.S. federal income tax rate	$	103,030		35.0	%	$	140,921		35.0	%
Excess tax depletion		(18,163	)	(6.2	)		(34,872	)	(8.7	)
Effect of domestic production activities deduction		(1,472	)	(0.5	)		(2,361	)	(0.6	)
Effect of Medicare Prescription Drug, Improvement and Modernization Act of 2003		589		0.2			878		0.2
Net effect of state tax		11,304		3.8			16,169		4.0
Other		2,063		0.7			1,723		0.5

Income Tax Expense / Effective Rate	$	97,351		33.0	%	$	122,458		30.4	%

CONSOL Energy 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, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. During the three months ended June 30, 2008 CONSOL Energy reduced its liability for unrecognized tax benefits by $7,899 as a result of resolving certain issues with the Internal Revenue Service (IRS) related to its examination of the Company’s 2004 and 2005 income tax returns. The reduction in the liability for unrecognized tax benefits had no impact on net income for the period since the issues involved the proper timing of certain tax deductions, and not the deductibility of the expenses. During the three months ended June 30, 2007 the Company recognized an increase of $970 in its liability for unrecognized tax benefits as a result of tax positions taken during the period. The increase in the liability was accounted for as additional state income tax expense.

The total amounts of unrecognized tax benefits as of June 30, 2008 and June 30, 2007 were approximately $55,622 and $51,164 respectively. If these unrecognized tax benefits were recognized approximately $12,600 and $10,600, respectively, would affect CONSOL Energy’s effective tax rate.

CONSOL Energy Inc. and its subsidiaries file income tax returns in the U.S. federal, various states, and Canadian tax 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 IRS is in the process of concluding its examination of CONSOL Energy’s U.S. 2004 and 2005 income tax returns. Within the next twelve months, CONSOL Energy expects to conclude this examination, and remit payment of the resulting tax deficiencies to federal and state taxing authorities. The amounts of the tax deficiencies for 2004 and 2005 have not been determined at this time by the IRS, however the Company believes that the recorded amount of the liabilities related to unrecognized tax benefits for these periods is adequate. Consequently, the resolution of the IRS’ examination of the Company’s 2004 and 2005 tax returns should have no impact on net income during the next twelve-month period. As of June 30, 2008, CONSOL Energy classified federal and state unrecognized tax benefits relating to the 2004 and 2005 tax returns of $16,264 and $3,251, respectively, as current liabilities in its financial statements. The Company also classified interest expense relating to the two-year audit period of $5,728 as a current liability.

The IRS Appeals Division concluded its review of the examination results of the Company’s 2002 and 2003 income tax returns during the three months ended June 30, 2008. The Company paid the disputed tax liability in a prior period, and anticipates that approximately $1,612 of interest will be paid as a result of the settlement of an issue relating to the proper year of deducting certain operating costs. The resolution of the issue and payment of interest has no impact on net income since the liability previously had been adequately provided.

Within the next twelve months the statute of limitations will expire for a tax period in one of the states in which the Company conducts business. At this time the taxing jurisdiction has not commenced an examination of the Company’s tax return filed for this period. Consequently, the amount of the tax payment to be made regarding this year cannot be projected at this time; however, the Company believes that the impact of the expiration of the statute of limitations in the state is insignificant to its financial statements.

CONSOL Energy recognizes interest expense related to unrecognized tax benefits as a component of interest expense. As of June 30, 2008 and June 30, 2007 the Company had accrued interest of approximately $9,944 and $7,102, respectively, for interest related to uncertain tax positions. The accrued interest liabilities for the six months ended June 30, 2008 and June 30, 2007 include $1,439 and $2,109, respectively, of interest expense recorded in the Company’s statements of operations related to unrecognized tax benefits.

CONSOL Energy recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. As of June 30, 2008 and June 30, 2007, CONSOL Energy had an accrued liability of approximately $1,200 for tax penalties.

NOTE 6—INVENTORIES:

Inventory components consist of the following:


	June 30, 2008		December 31, 2007
Coal	$	60,403	$	45,614
Merchandise for resale		22,515		25,418
Supplies		91,742		92,161

Total Inventories	$	174,660	$	163,193

NOTE 7—ACCOUNTS RECEIVABLE SECURITIZATION:

CONSOL Energy and certain of our U.S. subsidiaries are party to a trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. The facility allows CONSOL Energy to receive up to $165,000 on a revolving basis. The facility also allows for the issuance of letters of credit against the $165,000 capacity. At June 30, 2008, there were no letters of credit outstanding against the facility.

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. This retained interest, which is included in Accounts and Notes Receivable Trade in the Consolidated Balance Sheets, is recorded at fair value. Due to a short average collection cycle for such receivables, our collection experience history and the composition of the designated pool of trade accounts receivable that are part of this program, the fair value of our retained interest approximates the total amount of the designated pool of accounts receivable reduced by the amount of accounts receivables sold to the third-party financial institutions under the program. 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 $1,285 and $2,862 for the three and six months ended June 30, 2008. Costs associated with the receivables facility totaled $112 and $189 for the three and six months ended June 30, 2007. 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, 2008 and 2007, eligible accounts receivable totaled approximately $165,000 and $137,500, respectively. The subordinated retained interest approximated $9,700 and $137,500 at June 30, 2008 and 2007, respectively. Accounts receivables totaling $155,300 were removed from the Consolidated Balance Sheet at June 30, 2008. 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’s $29,900 increase in the accounts receivable securitization program for the six months ended June 30, 2008 is reflected in cash flows from operating activities in the Consolidated Statement of Cash Flows.

NOTE 8—PROPERTY, PLANT AND EQUIPMENT:

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


	June 30, 2008		December 31, 2007
Coal & other plant and equipment	$	4,349,443	$	4,249,698
Coal properties and surface lands		1,251,948		1,313,440
Gas properties and related development		1,106,995		889,057
Gas gathering equipment		660,239		596,171
Airshafts		600,644		582,028
Leased coal lands		502,130		458,216
Mine development		507,053		490,876
Coal advance mining royalties		371,291		363,072
Gas advance royalties		2,259		2,754

Total property, plant and equipment		9,352,002		8,945,312
Less accumulated depreciation, depletion and amortization		4,101,556		3,980,270

Total Net Property, Plant & Equipment	$	5,250,446	$	4,965,042

NOTE 9—SHORT-TERM NOTE PAYABLE:

CONSOL Energy has a five-year, $1,000,000 senior secured credit facility which extends through June 2012. 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 covenant of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 8.96 to 1.00 at June 30, 2008. The facility also includes a maximum leverage ratio of not more than 3.25 to 1.00, measured quarterly. The leverage ratio covenant was 1.89 to 1.00 at June 30, 2008. 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, 2008, the $1,000,000 facility had borrowings of $180,000 outstanding and $259,413 of letters of credit outstanding, leaving $560,587 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 3.00 to 1.00, measured quarterly. The leverage ratio was 0.24 to 1.00 at June 30, 2008. The facility also includes a minimum interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 72.65 to 1.00 at June 30, 2008. At June 30, 2008, the CNX Gas credit agreement had $27,000 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $158,067 of capacity available for borrowings and the issuance of letters of credit.

NOTE 10—COMMITMENTS AND CONTINGENCIES:

CONSOL Energy and its subsidiaries are 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.

On January 30, 2008, the Pennsylvania Department of Conservation and Natural Resources filed a six-count Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, asserting claims in both tort and contract against the Company for alleged damage to park property owned by the Commonwealth allegedly due to the Company’s underground mining activities. The matter was the subject of a mediation process with an independent, neutral mediator prior to the filing of the Complaint. That process terminated with no resolution and the Commonwealth then filed its Complaint. The Commonwealth claims that the Company’s underground longwall mining activities in the Summer of 2005 in Greene County, Pennsylvania, caused cracks and seepage damage to the nearby Ryerson Park Dam. The Commonwealth demolished the Ryerson Dam’s spillway allegedly under its role of Parens Patrie to protect persons and property, thereby eliminating the Ryerson Park lake. The Commonwealth claims that the Company is liable for dam reconstruction costs, lake restoration costs and natural resources damages totaling $58,000. The theories of liability include general allegations of negligence, breach of contract, strict liability, nuisance, an administrative remedy claim under the Bituminous Mine Subsidence Act and a claim of fraud; the last claim seeking punitive damages. The Company has not yet filed its answer to the Complaint, but has filed preliminary motions regarding the propriety of the claims filed by the Commonwealth. The Company believes it was not responsible for the damage to the dam, that there exist numerous grounds upon which to attack the propriety of the claims, and it will vigorously defend the case. However, it is reasonably possible that the ultimate liability in the future with respect to these 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, 2008 and the year ended December 31, 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.

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 $40,000. There was $3,200 of expense recognized in the three and six months ended June 30, 2008. CONSOL Energy funded $1,440 and $2,880 in the three and six months ended June 30, 2008, respectively, to an independent trust established for this remediation. CONSOL Energy has funded $6,639 since inception of the independent trust established for this remediation. The remaining liability of $6,162 is included in Other Accrued Liabilities at June 30, 2008. 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. 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. CONSOL Energy expects the majority of payments related to this liability to be made over the next eighteen months. In addition, the EPA has advised the PRPs that it has completed its investigation of additional areas of potential contamination allegedly related to the Ward Transformer site and published the proposed remedial action plan for public comment. Special notice letters to PRPs have not yet been completed. We are currently working with the EPA in an effort to have special notice letters sent to a large group of PRPs, of which it is probable we will be named. No expense was recognized in the six months ended June 30, 2008 related to the additional areas of Ward Transformer. The $1,000 previously recognized liability related to these areas is included in Other Accrued Liabilities at June 30, 2008. Until the remediation determination is completed, a specific range of potential exposure is not possible to estimate. There may be some delay in negotiating settlements with other PRPs who may want settlement of all Ward-related claims. We cannot predict the ultimate outcome of this Superfund site; 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.

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 removal of naturally accumulating and pumped water 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 is 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 up to $3,252,000, and punitive damages in the amount of $350,000, plus interest, costs, and attorneys’ fees, 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. The plaintiffs in the Yukon Action have moved to amend their Complaint again, and the amendment likely will be permitted by the Court. The amendment seeks primarily to correct defects in the current version of their Complaint and to add a count seeking a declaratory judgment that certain agreements between ICCC and CCC are void.

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 Circuit Court for a temporary restraining order prohibiting the further depositing of water into the void spaces which, after a two-day hearing, the Circuit Court denied. Subsequently, the Circuit Court entered an order holding that CCC has the right to store water in the VP3 mine void based upon provisions in this lease and dismissed the action. The Virginia Supreme Court, on appeal, disagreed with the Circuit Court’s interpretation of the lease, held that CCC has no right to store wastewater in VP3 and reversed the dismissal and remanded to the Circuit Court to determine whether under equitable principles a permanent injunction should be issued. We have petitioned the Virginia Supreme Court for reconsideration of its decision. On June 13, 2008 Levisa Coal Company filed a second action against CCC in the Circuit Court of Buchanan County, Virginia relating to the deposit of water by CCC into the void spaces of the VP3 mine which seeks damages of approximately $300,000, plus interest, costs and attorneys’ fees.

Meredith Ellis Jennings and several other individuals and entities filed an action on July 8, 2008 against CCC in the Circuit Court of Buchanan County, Virginia (the “Pobst/Combs Action”). The plaintiffs allege that they hold real property interests and royalty interests in gas including coal bed methane gas in and around the VP3 mine. The action is for injunctive relief and seeks a court order prohibiting CCC from depositing water from its Buchanan Mine into the void spaces of the VP3 mine and requiring CCC to remove water from the void spaces of the VP3 mine.

CCC has obtained revision 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 the discharge of 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 Board of Supervisors, and others have requested the DMME to reconsider the permit revisions 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 the DMME. The hearing to be conducted by the Director of the DMME through a Hearing Officer appointed by the Supreme Court of Virginia has not yet been scheduled. 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. DMME filed demurrers, but no hearing has been conducted since the DMME issued the permit in September 2006. On December 4, 2006, both the plaintiffs in the Yukon Action and Levisa nonsuited their respective “Citizen Suits.”

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 authorizing it to deposit naturally accumulating water from the Buchanan Mine into VP3 as well as discharging water into the Levisa River under the controlled conditions established by the permits. CCC and the other named CONSOL Energy defendants in the Yukon Action, the Levisa Action and the Pobst/Combs Action deny all liability and intend to vigorously defend the actions filed against them in connection with the removal and deposit of water from the Buchanan Mine. 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, an 81.7% subsidiary, 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 coal seam 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. The remaining portions of the May 23, 2007 order have been certified for interlocutory appeal to the Virginia Supreme Court, and the appeal is pending in the Virginia Supreme Court. Pocahontas Mining has amended its complaint to seek rescission or reformation of the lease. We cannot predict the ultimate outcome of this litigation; 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.

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 (Case No. CL07000065-00). The lawsuit alleged that CNX Gas conspired with Island Creek and has violated the Virginia Antitrust Act and tortiously interfered with GeoMet’s contractual relations, prospective contracts and business expectancies. CNX Gas and Island Creek filed motions to dismiss all counts of the complaint. On December 19, 2007, the court granted CNX Gas’ and Island Creek’s motions to dismiss all counts, with leave for GeoMet to file an amended complaint. On March 31, 2008, GeoMet filed an amended complaint. The amended complaint is again against CNX Gas and Island Creek, but it added CONSOL Energy and Cardinal States Gathering Company as additional defendants. The amended complaint restates allegations that CNX Gas, Island Creek and now CONSOL Energy and Cardinal States Gathering Company violated the Virginia Antitrust Act and tortiously interfered with GeoMet’s contractual relations, prospective contracts and business expectancies. The amended complaint seeks injunctive relief, compensatory damages of $385,600 and treble damages. CNX Gas continues to believe this lawsuit to be without merit and intends to vigorously defend it. We cannot predict the ultimate outcome of this litigation; 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.

In April 2005, Buchanan County Virginia (through its Board of Supervisors and Commissioner of Revenue) filed a “Motion for Judgment Pursuant to the Declaratory Judgment Act Virginia Code § 8.01-184” against CNX Gas Company LLC in the Circuit Court of the County of Buchanan (Case No. CL05000149-00) for the year 2002; the county has since filed and served two substantially similar cases for years 2003, 2004 and 2005. The complaint alleges that our calculation of the license tax on the basis of the wellhead value (sales price less post production costs) rather than the sales price is improper. For the period from 1999 through mid 2002, we paid the tax on the basis of the sales price, but we have filed a claim for a refund for these years. Since 2002, we have continued to pay Buchanan County taxes based on our method of calculating the taxes. However, we have been accruing an additional liability reflected in Other Liabilities on our balance sheet in an amount based on the difference between our calculation of the tax and Buchanan County’s calculation. We believe that we have calculated the tax correctly and in accordance with the applicable rules and regulations of Buchanan County and intend to vigorously defend our position. We cannot predict the ultimate outcome of this litigation; however, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the cash flows of CONSOL Energy.

In November 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) against CDX Gas, LLC, seeking a judicial determination that we do not infringe any claim of any valid and enforceable CDX patent relating to certain vertical to horizontal CBM drilling methods. CDX filed an answer and counterclaim denying our allegations of invalidity and alleging that we infringe certain claims of their patents. On June 2, 2008, CNX Gas and CDX announced that they had settled this litigation. As part of the settlement, CNX Gas affirmed the validity and enforceability of the patents at issue in the litigation and CNX Gas licensed the CDX technology from CDX. The settlement did not require CNX Gas to pay CDX any cash consideration for CNX Gas’ prior drilling activities. The pending litigation was dismissed with prejudice. The parties have agreed to enter into joint venture arrangements with respect to several properties. The other terms of the settlement agreement are confidential.

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 Fund for beneficiaries assigned to CONSOL Energy and its subsidiaries. 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 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 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. CONSOL Energy received reimbursement of approximately $33,400, which includes the reduction of $2,255 related to the unassigned beneficiary premium liability previously accrued. The reimbursement was reflected as a reduction to cost of goods sold and other charges in the six months ended June 30, 2007.

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. The mine atmosphere was continually monitored to determine the impact of the roof falls on the mine’s ventilation system and the overall mine atmosphere. On March 17, 2008, Buchanan Mine resumed production. This incident is covered under our property and business interruption insurance policy, subject to certain deductibles. Business interruption recoveries of $50,000 were recognized as Other Income in the six months ended June 30, 2008, $42,000 in the coal segment and $8,000 in the gas segment. The total recoveries for this incident under our insurance policy were $75,000. As of June 30, 2008, all recognized recoveries have been collected. No other insurance recoveries for this incident will be received.

At June 30, 2008, CONSOL Energy and certain subsidiaries have provided the following financial guarantees and unconditional purchase obligations. 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	$	175,618	$	113,104	$	62,514	$	—	$	—
Environmental		74,193		71,478		2,715		—		—
Gas		14,933		152		14,781		—		—
Other		9,602		9,502		100		—		—

Total Letters of Credit	$	274,346	$	194,236	$	80,110	$	—	$	—

Surety Bonds:
Employee-Related	$	201,751	$	190,251	$	11,500	$	—	$	—
Environmental		309,629		284,959		24,670		—		—
Gas		3,325		3,289		36		—		—
Other		9,390		9,370		20		—		—

Total Surety Bonds	$	524,095	$	487,869	$	36,226	$	—	$	—

Guarantees:
Coal	$	588,403	$	291,738	$	263,024	$	30,544	$	3,097
Gas		42,004		38,904		—		—		3,100
Other		223,537		39,155		37,704		26,339		120,339

Total Guarantees	$	853,944	$	369,797	$	300,728	$	56,883	$	126,536

Total Commitments	$	1,652,385	$	1,051,902	$	417,064	$	56,883	$	126,536

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, pipeline 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—OTHER COMPREHENSIVE INCOME:

Total comprehensive income, net of tax, was as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net Income	$	101,012		$	153,117		$	176,094		$	266,379
Treasury Rate Lock		(14	)		(21	)		(35	)		(41	)
Amortization of prior service costs and actuarial gains (loss)		(86	)		(909	)		(173	)		(1,818	)
Pension Settlement Accounting					—			—			2,132
Minority Interest in Other Comprehensive Income and Stock- Based Compensation		18,650			(1,905	)		27,667			263
Gas Cash Flow Hedge		(101,702	)		10,358			(150,877	)		(1,326	)
FAS 158 Long-Term Liability Deferred Tax Adjustments					(361	)					(361	)

Total Comprehensive Income	$	17,860		$	160,279		$	52,676		$	265,228

NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS:

Effective January 1, 2008, CONSOL Energy adopted Statement of Financial Accounting Standards 157, “Fair Value Measurements” (SFAS 157) and Statement of Financial Accounting Standards 159 “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (SFAS 159). As a result of the adoption, CONSOL Energy elected not to measure any additional financial assets or liabilities at fair value, other than those which were recorded at fair value prior to the adoption.

The financial liabilities measured at fair value on a recurring basis are summarized below:


	Fair Value Measurements at June 30, 2008
Description	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Gas Cash Flow Hedges	$	—	$	238,738	$	—
Coal Sales Options	$	—	$	21,652	$	—

Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments” (SFAS 107) requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the SFAS 159 fair value option was not elected. The following methods and assumptions were used to estimate the fair value of those 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.

Short-term notes payable: The carrying amount reported in the balance sheets for short-term notes payable approximates its fair value due to the short-term 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.

The carrying amounts and fair values of financial instruments for which SFAS 159 was not elected are as follows:


	June 30, 2008						December 31, 2007
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	55,189		$	55,189		$	41,651		$	41,651
Short-term notes payable	$	(207,000	)	$	(207,000	)	$	(247,500	)	$	(247,500	)
Long-term debt	$	(422,128	)	$	(428,934	)	$	(406,451	)	$	(420,203	)

NOTE 13—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, 2008, the Northern Appalachian aggregated segment includes the following mines: Blacksville 2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork and Mine 84. For the three and six months ended June 30, 2008, the Central Appalachian aggregated segment includes the following mines: Jones Fork, Miller Creek and Wiley-Mill Creek. The three and six months ended June 30, 2008 also includes the Fola Complex and the Terry Eagle Complex which were acquired in the July 2007 AMVEST acquisition. For the three and six months ended June 30, 2008, 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. Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses. Certain reclassifications of 2007 segment information have been made to conform to the 2008 presentation.

Industry segment results for the three months ended June 30, 2008:


	Northern Appalachian		Central Appalachian			Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	525,213	$	93,656		$	130,952	$	97,407		$	847,228	$	179,475	$	84,707	$	—		$	1,111,410
Sales—gas royalty interest		—		—			—		—			—		22,515		—		—			22,515
Sales—purchased gas		—		—			—		—			—		1,647		—		—			1,647
Freight—outside		—		—			—		63,927			63,927		—		—		—			63,927
Intersegment transfers		—		—			—		—			—		1,444		36,391		(37,835	)		—

Total Sales and Freight	$	525,213	$	93,656		$	130,952	$	161,334		$	911,155	$	205,081	$	121,098	$	(37,835	)	$	1,199,499

Earnings (Loss) Before Income Taxes	$	74,621	$	(8,836	)	$	53,097	$	(33,913	)	$	84,969	$	103,105	$	7,677	$	(21,163	)	$	174,588	(A)

Segment assets											$	4,110,732	$	1,679,674	$	246,675	$	554,154		$	6,591,235	(B)

Depreciation, depletion and amortization											$	74,295	$	16,592	$	4,888	$	—		$	95,775

Capital Expenditures (Including acquisitions)											$	104,963	$	149,254	$	5,718	$	—		$	259,935

(A)	Includes equity in earnings of unconsolidated affiliates of $218, $6 and $2,066 for Coal, Gas and All Other, respectively.

(B)	Includes investments in unconsolidated equity affiliates of $6,925, $24,769 and $36,505 for Coal, Gas and All Other, respectively.

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 interest		—		—		—		—		—		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	(C)

Segment assets									$	3,566,640	$	1,258,997	$	226,696	$	860,412		$	5,912,745	(D)

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

Capital Expenditures									$	100,671	$	90,130	$	3,579	$	—		$	194,380

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

(D)	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, 2008:


	Northern Appalachian		Central Appalachian			Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	1.048,376	$	182,582		$	141,677	$	162,683		$	1,535,318	$	306,874	$	155,543	$	—		$	1,997,735
Sales—gas royalty interest		—		—			—		—			—		39,019		—		—			39,019
Sales—purchased gas		—		—			—		—			—		5,186		—		—			5,186
Freight—outside		—		—			—		108,671			108,671		—		—		—			108,671
Intersegment transfers		—		—			—		—			—		4,586		69,327		(73,913	)		—

Total Sales and Freight	$	1,048,376	$	182,582		$	141,677	$	271,354		$	1,643,989	$	355,665	$	224,870	$	(73,913	)	$	2,150,611

Earnings (Loss) Before Income Taxes	$	188,210	$	(13,367	)	$	45,244	$	(71,922	)	$	148,165	$	181,031	$	10,190	$	(45,014	)	$	294,372	(E)

Segment assets											$	4,110,732	$	1,679,674	$	246,675	$	554,154		$	6,591,235	(F)

Depreciation, depletion and amortization											$	146,131	$	32,537	$	9,835	$	—		$	188,503

Capital Expenditures (Including acquisitions)											$	190,165	$	235,806	$	10,306	$	—		$	436,277

(E)	Includes equity in earnings of unconsolidated affiliates of $674, $116 and $2,855 for Coal, Gas and All Other, respectively.

(F)	Includes investments in unconsolidated equity affiliates of $6,925, $24,769 and $36,505 for Coal, Gas and All Other, respectively.

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 interest		—		—		—		—		—		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	(G)

Segment assets									$	3,566,640	$	1,258,997	$	226,696	$	860,412		$	5,912,745	(H)

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

Capital Expenditures									$	190,550	$	147,665	$	6,384	$	—		$	344,599

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

(H)	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.

Reconciliation of Segment Information to Consolidated Amounts

Earnings Before Income Taxes:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2008			2007			2008			2007
Segment earnings before income taxes for total reportable business segments	$	188,074		$	262,575		$	329,196		$	446,694
Segment earnings before income taxes for all other businesses		7,677			4,968			10,190			8,230
Incentive compensation (A)		(5,234	)		(16,204	)		(12,013	)		(25,973	)
Compensation from restricted stock unit grants, stock option expense and performance share unit expense (A)		(5,842	)		(4,357	)		(10,770	)		(15,132	)
Interest income (expense), net and other non-operating activity(A)		(10,087	)		(6,657	)		(22,231	)		(11,187	)

Earnings Before Income Taxes	$	174,588		$	240,325		$	294,372		$	402,632

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

Total Assets:


	June 30,
	2008		2007
Segment assets for total reportable business segments	$	5,790,406	$	4,825,637
Segment assets for all other businesses		246,675		226,696
Items excluded from segment assets:
Cash and other investments (A)		32,503		248,232
Deferred tax assets (A)		483,260		610,631
Recoverable Income Taxes		37,186		—
Bond issuance costs		1,205		1,549

Total Consolidated Assets	$	6,591,235	$	5,912,745

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

NOTE 14—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:

The payment obligations under the $250,000, 7.875% per annum notes due March 1, 2012 issued by CONSOL Energy 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 (“SEC”), the following financial information sets forth separate financial information with respect to the parent, CNX Gas, an 81.7% owned guarantor subsidiary, the remaining 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 include investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all other 100% owned subsidiaries. These include, for example, 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, 2008:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors			Elimination			Consolidated
Sales—Outside	$	—		$	180,919	$	863,301		$	68,737		$	(1,547	)	$	1,111,410
Sales—Purchased Gas		—			1,647		—			—			—			1,647
Sales—Gas Royalty Interests		—			22,515		—			—			—			22,515
Freight—Outside		—			—		63,927			—			—			63,927
Other Income (including equity earnings)		120,179			728		482			10,050			(120,042	)		11,397

Total Revenue and Other Income		120,179			205,809		927,710			78,787			(121,589	)		1,210,896
Cost of Goods Sold and Other Operating Charges		19,082			38,283		638,313			29,917			15,140			740,735
Purchased Gas Costs		—			1,522		—			—			—			1,522
Gas Royalty Interests’ Costs		—			21,913		—			—			(33	)		21,880
Related Party Activity		2,353			—		(22,389	)		38,047			(18,011	)		—
Freight Expense		—			—		63,927			—			—			63,927
Selling, General and Administrative Expense		—			21,430		9,498			(284	)		—			30,644
Depreciation, Depletion and Amortization		2,158			16,592		74,236			2,791			(2	)		95,775
Interest Expense		4,098			1,683		2,694			135			(84	)		8,526
Taxes Other Than Income		1,783			—		69,125			2,391			—			73,299

Total Costs		29,474			101,423		835,404			72,997			(2,990	)		1,036,308

Earnings (Loss) Before Income Taxes		90,705			104,386		92,306			5,790			(118,599	)		174,588
Income Tax Expense (Benefit)		(10,307	)		40,131		29,783			2,191			—			61,798

Earnings (Loss) before Minority Interest		101,012			64,255		62,523			3,599			(118,599	)		112,790
Minority Interest		—			—		—			—			(11,778	)		(11,778	)

Net Income (Loss)	$	101,012		$	64,255	$	62,523		$	3,599		$	(130,377	)	$	101,012

Balance Sheet for June 30, 2008:


	Parent Issuer			CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	30,115		$	23,101		$	—		$	1,973	$	—		$	55,189
Accounts and Notes Receivable:
Trade		—			80,921			—			201,488		—			282,409
Other		1,408			6,132			7,078			38,118		—			52,736
Inventories		80			—			152,052			22,528		—			174,660
Recoverable Income Taxes		37,186			—			—			—		—			37,186
Deferred Income Taxes		139,437			65,276			—			—		—			204,713
Prepaid Expenses		19,585			1,423			23,940			1,917		—			46,865

Total Current Assets		227,811			176,853			183,070			266,024		—			853,758
Property, Plant and Equipment:
Property, Plant and Equipment		118,690			1,759,209			7,385,997			88,106		—			9,352,002
Less-Accumulated Depreciation, Depletion and Amortization		66,429			282,853			3,709,386			42,888		—			4,101,556

Property, Plant and Equipment—Net		52,261			1,476,356			3,676,611			45,218		—			5,250,446
Other Assets:
Deferred Income Taxes		556,739			(212,916	)		—			—		—			343,823
Investment in Affiliates		443,857			24,769			1,607,392			—		(2,007,819	)		68,199
Other		15,871			4,539			36,644			17,955		—			75,009

Total Other Assets		1,016,467			(183,608	)		1,644,036			17,955		(2,007,819	)		487,031

Total Assets	$	1,296,539		$	1,469,601		$	5,503,717		$	329,197	$	(2,007,819	)	$	6,591,235

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	85,651		$	41,768		$	113,081		$	27,466	$	—		$	267,966
Accounts Payable (Recoverable)—Related Parties		1,753,187						(1,922,207	)		169,020		—			—
Short-Term Notes Payable		180,000			27,000			—			—		—			207,000
Current Portion of Long–Term Debt		—			7,450			11,266			2,000		—			20,716
Other Accrued Liabilities		140,182			207,114			376,808			9,776		—			733,880

Total Current Liabilities		2,159,020			283,332			(1,421,052	)		208,262		—			1,229,562
Long-Term Debt:		258,951			76,641			153,950			7,985		—			497,527
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—			2,856			2,386,124			—		—			2,388,980
Pneumoconiosis		—			—			180,535			—		—			180,535
Mine Closing		—			—			394,879			7,391		—			402,270
Workers’ Compensation		—			—			131,356			—		—			131,356
Salary Retirement		61,330			—			—			—		—			61,330
Reclamation		—			—			13,683			20,138		—			33,821
Other		54,943			118,268			78,961			17,800		—			269,972

Total Deferred Credits and Other Liabilities		116,273			121,124			3,185,538			45,329		—			3,468,264
Minority Interest		—			—			—			—		158,181			158,181
Stockholders’ Equity		(1,237,705	)		988,504			3,585,281			67,621		(2,166,000	)		1,237,701

Total Liabilities and Stockholders’ Equity	$	1,296,539		$	1,469,601		$	5,503,717		$	329,197	$	(2,007,819	)	$	6,591,235

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			3,161		106,334			10,398		(173,577	)		121,230

Total Revenue and Other Income		174,914			133,668		873,552			52,778		(174,914	)		1,059,998
Cost of Goods Sold and Other Operating Charges		26,326			26,955		479,833			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		3,320			—		13,266			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		887			1,246		3,901			140		—			6,174
Taxes Other Than Income		1,237			—		59,631			1,606		—			62,474

Total Costs		33,665			66,736		672,050			47,377		(155	)		819,673

Earnings (Loss) Before Income Taxes		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 for December 31, 2007:


	Parent Issuer		CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	6,519	$	32,048		$	—		$	3,084	$	—		$	41,651
Accounts and Notes Receivable:
Trade		—		38,680			—			141,865		—			180,545
Other		840		2,428			34,619			31,884		—			69,771
Inventories		—		—			135,132			28,061		—			163,193
Recoverable Income Taxes		18,118		972			—			—		—			19,090
Deferred Income Taxes		132,089		(1,269	)		—			—		—			130,820
Prepaid Expenses		18,130		13,859			40,985			5,111		—			78,085

Total Current Assets		175,696		86,718			210,736			210,005		—			683,155
Property, Plant and Equipment:
Property, Plant and Equipment		103,223		1,480,446			7,274,197			87,446		—			8,945,312
Less-Accumulated Depreciation, Depletion and Amortization		52,103		251,367			3,638,286			38,514		—			3,980,270

Property, Plant and Equipment—Net		51,120		1,229,079			3,635,911			48,932		—			4,965,042
Other Assets:
Deferred Income Taxes		563,226		(188,415	)		—			—		—			374,811
Investment in Affiliates		2,817,974		56,865			1,305,043			—		(4,085,016	)		94,866
Other		30,242		6,772			35,600			17,602		—			90,216

Total Other Assets		3,411,442		(124,778	)		1,340,643			17,602		(4,085,016	)		559,893

Total Assets	$	3,638,258	$	1,191,019		$	5,187,290		$	276,539	$	(4,085,016	)	$	6,208,090

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	71,558	$	30,263		$	110,370		$	26,121	$	—		$	238,312
Accounts Payable (Recoverable)–Related Parties		1,592,539		—			(1,714,595	)		122,056		—			—
Short-Term Notes Payable		247,500		—			—			—		—			247,500
Current Portion of Long–Term Debt		—		5,819			10,464			2,000		—			18,283
Accrued Income Taxes		—		—			—			—		—			—
Other Accrued Liabilities		99,169		25,333			378,788			9,012		—			512,302

Total Current Liabilities		2,010,766		61,415			(1,214,973	)		159,189		—			1,016,397
Long-Term Debt:		258,848		66,949			154,143			8,985		—			488,925
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		2,700			2,334,109			—		—			2,336,809
Pneumoconiosis		—		—			171,896			—		—			171,896
Mine Closing		—		—			388,710			10,923		—			399,633
Workers’ Compensation		—		—			118,356			—		—			118,356
Deferred Revenue		—		—			3,162			—		—			3,162
Salary Retirement		67,065		327			—			—		—			67,392
Reclamation		—		—			14,497			19,820		—			34,317
Other		87,160		36,391			52,958			17,157		—			193,666

Total Deferred Credits and Other Liabilities		154,225		39,418			3,083,688			47,900		—			3,325,231
Minority Interest		—		—			—			—		163,118			163,118
Stockholders’ Equity		1,214,419		1,023,237			3,164,432			60,465		(4,248,134	)		1,214,419

Total Liabilities and Stockholders’ Equity	$	3,638,258	$	1,191,019		$	5,187,290		$	276,539	$	(4,085,016	)	$	6,208,090

Income Statement for the six months ended June 30, 2008:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	311,460	$	1,557,619		$	134,104	$	(5,448	)	$	1,997,735
Sales—Purchased Gas		—			5,186		—			—		—			5,186
Sales—Gas Royalty Interests		—			39,019		—			—		—			39,019
Freight—Outside		—			—		108,671			—		—			108,671
Other Income (including equity earnings)		209,319			10,757		56,683			19,293		(210,036	)		86,016

Total Revenue and Other Income		209,319			366,422		1,722,973			153,397		(215,484	)		2,236,627
Cost of Goods Sold and Other Operating Charges		32,683			65,308		1,153,681			56,237		69,554			1,377,463
Purchased Gas Costs		—			4,943		—			—		—			4,943
Gas Royalty Interests’ Costs		—			38,002		—			—		(48	)		37,954
Related Party Activity		1,397			—		(7,865	)		76,691		(70,223	)		—
Freight Expense		—			—		108,671			—		—			108,671
Selling, General and Administrative Expense		—			37,174		21,792			2,148		—			61,114
Depreciation, Depletion and Amortization		4,269			32,537		148,158			5,426		(1,887	)		188,503
Interest Expense		9,741			3,155		5,701			270		(165	)		18,702
Taxes Other Than Income		3,413			—		136,728			4,764		—			144,905

Total Costs		51,503			181,119		1,566,866			145,536		(2,769	)		1,942,255

Earnings (Loss) Before Income Taxes		157,816			185,303		156,107			7,861		(212,715	)		294,372
Income Tax Expense (Benefit)		(18,278	)		71,127		41,528			2,974		—			97,351

Earnings (Loss) before Minority Interest		176,094			114,176		114,579			4,887		(212,715	)		197,021
Minority Interest		—			—		—			—		(20,927	)		(20,927	)

Net Income (Loss)	$	176,094		$	114,176	$	114,579		$	4,887	$	(233,642	)	$	176,094

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			4,871		116,681			19,797		(302,606	)		146,314

Total Revenue and Other Income		307,571			249,007		1,616,874			106,753		(305,022	)		1,975,183
Cost of Goods Sold and Other Operating Charges		49,018			50,334		893,047			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		4,728			—		23,561			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		2,058			2,465		8,634			280		—			13,437
Taxes Other Than Income		2,688			—		124,797			3,267		—			130,752

Total Costs		62,229			128,837		1,282,548			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

Cash Flow for the six months ended June 30, 2008:


	Parent			CNX Gas			Guarantor			Non- Guarantor			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	93,526		$	186,779		$	189,017		$	655		$	—	$	469,977

Cash Flows from Investing Activities:
Capital Expenditures	$	—		$	(235,806	)	$	(199,705	)	$	(766	)	$	—	$	(436,277	)
Investment in Equity Affiliates		—			1,081			(1,900	)		—			—		(819	)
Other Investing Activities		—			450			16,830			—			—		17,280

Net Cash Used in Investing Activities	$	—		$	(234,275	)	$	(184,775	)	$	(766	)	$	—	$	(419,816	)

Cash Flows from Financial Activities:
Dividends Paid	$	(36,549	)	$	—		$	—		$	—		$	—	$	(36,549	)
(Payments on) Proceeds from Short-Term Borrowings		(67,500	)		27,000			—			—			—		(40,500	)
Other Financing Activities		34,119			11,549			(4,242	)		(1,000	)		—		40,426

Net Cash Used in Financing Activities	$	(69,930	)	$	38,549		$	(4,242	)	$	(1,000	)	$	—	$	(36,623	)

Cash Flow for the six months ended June 30, 2007:


	Parent			CNX Gas			Guarantor			Non- Guarantor			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	)	$	(188,386	)	$	(542	)	$	44,238		$	(344,599	)
Investment in Equity Affiliates		—			(786	)		(1,454	)		—			—			(2,240	)
Other Investing Activities		—			40			105,253			—			(44,238	)		61,055

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

Cash Flows from Financial Activities:
Dividends Paid	$	(25,526	)	$	—		$	—		$	—		$	—		$	(25,526	)
Purchase of Treasury Stock		(25,618	)		—			—			—			—			(25,618	)
Other Financing Activities		9,831			4,900			(48,651	)		(1,000	)		—			(34,920	)

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

NOTE 15—RECENT ACCOUNTING PRONOUNCEMENTS:

In May 2008, The Financial Accounting Standards Board (FASB) issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Statement 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles

for financial statements that are presented in conformity with GAAP. Statement 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect this guidance to have a significant impact on CONSOL Energy.

In March 2008, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement 133” (SFAS 161). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and how derivative instruments and related hedged items are accounted for under Statement 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. CONSOL Energy’s management is currently assessing the new disclosure requirements required by SFAS 161.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141R), and Statement of Financial Accounting Standards No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141R and SFAS 160 will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141R retains the fundamental requirements in Statement 141 “Business Combinations” while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests, and classified as a component of equity. These Statements become simultaneously effective January 1, 2009. Early adoption is not permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

ITEM 2.

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

General

CONSOL Energy had net income of $101 million for the three months ended June 30, 2008 compared to $153 million in the three months ended June 30, 2007. Net income for the 2008 period declined in comparison to the 2007 period due to:

•

an asset exchange and an asset sale in the 2007 period that resulted in pretax income of approximately $100 million and net income of approximately $59 million;

•

increased unit cost of goods sold and other charges for both coal and gas;

•

mark-to-market adjustments related to free standing coal sales options; and

•

the effective tax rate increased as a result of a higher proportion of pre-tax earnings from gas operations in the 2008 period compared to the 2007 period which lowered the impact of the percentage depletion benefit generated by coal operations.

These decreases in net income were offset, in part, by:

•

higher average prices received for both coal and gas; and

•

higher volumes of gas produced.

Total coal sales for the three months ended June 30, 2008 were 17.5 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 17.1 million tons for the three months ended June 30, 2007, of which 17.0 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 16.6 million tons, including our portion of equity affiliates and consolidated variable interest entities, for the three months ended June 30, 2008 compared to 16.4 million tons for the three months ended June 30, 2007. Production was higher in the 2008 period as a result of the July 31, 2007 AMVEST acquisition, offset, in part by lower production at our other operations. Lower production at these operations is the result of various factors including, increased frequency of inspections related to health & safety regulations which cause a reduction in mining equipment availability, several Northern Appalachian mines were affected by delays in resumption of longwall production following equipment moves because preparation of a new area to be mined was not complete, as well as various other operating issues at these locations which have lowered efficiency.

Produced coalbed methane gas sales volumes, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 26.5% to 18.6 billion cubic feet in the 2008 period compared with 14.7 billion cubic feet in the 2007 period. Sales volumes in the 2008 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 24.1% to $9.63 per thousand cubic feet in the 2008 period compared with $7.76 per thousand cubic feet in the 2007 period. The increase in average sales price was a result of CNX Gas, an 81.7% owned subsidiary, realizing general market price increases.

CNX Gas has entered into precedent agreements with several interstate gas pipeline companies for the acquisition of approximately 114,000 dekatherms per day of firm transportation capacity at negotiated rates, to transport current and future forecasted production within the Appalachian Basin to market once agreed upon expansions are completed by the gas pipeline companies. We expect to enter into firm transportation contracts upon completion of the related expansion projects, which is expected to occur between December 1, 2008 and November 1, 2009.

CNX Gas has completed the independent verification process for several CCX approved projects relating to the capture of coal mine methane. Approximately 8.4 million metric tons of emission offsets were verified and

registered for trading on the Chicago Climate Exchange (CCX) in the three months ended June 30, 2008. CCX is a rules-based Greenhouse Gas (GhG) allowance trading system. CCX emitting members make a voluntary but legally binding commitment to meet annual GhG emission reduction targets. Those emitting members who exceed their targets have surplus allowances to sell or bank; those who fall short of their targets comply by purchasing offsets which are called CCX Carbon Financial Instruments (CFI) contracts. As a CCX offset provider, CNX Gas is not bound to any emission reduction targets. An offset provider is an owner of an offset project that registers and sells offsets on its own behalf. Sales of these emission offsets will be reflected in income as they occur. To date, no offsets have been sold.

CONSOL Energy also verified approximately 8.3 million metric tons of additional emission offsets. CONSOL Energy has engaged a broker through which we will evaluate emission credit opportunities on the over the counter market. Sales of these emission offsets will be reflected in income as they occur. To date, no offsets have been sold.

Mine accidents involving multiple fatalities occurred during the calendar years 2006 and 2007 at mines operated by other coal companies. These accidents attracted 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 have and could continue to have an affect on our performance.

We estimate that the implementation of compliance with these new requirements will cost $45 million to $55 million during the period from 2006 until the end of 2009. The actual costs will depend primarily on: final guidelines regarding the design requirements as well as the extent of deployment of refuge chambers, final guidelines regarding sealed areas, final guidelines relating to new conveyor belt regulations, final interpretation of other regulatory requirements, and final approval of mine-by-mine implementation plans. We also believe that changes in inspection protocols by the federal mine safety and Health Administration have reduced availability of mining equipment.

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 been billing the cost of implementation to customers in most of our existing sales agreements. Responses from customers have varied.

In July 2008, CONSOL Energy Inc. announced plans to develop its first U. S. coal gasification plant in West Virginia, through a joint venture with Synthesis Energy Systems Inc. (“SES”), a global industrial gasification company. CONSOL and SES formed Northern Appalachia Fuels, LLC, as the company through which the development will occur. The Board of Directors of both companies authorized funds for development activities, including the front-end engineering design (“FEED”) package. Each company will contribute equally to this phase of the project. Aker Solutions US Inc., a subsidiary of Aker Solutions ASA (OSL: AKSO), will perform the FEED. The FEED will include a carbon management strategy which may focus on carbon sequestration in a deep saline aquifer. It is expected that the plant will be a ‘mine mouth’ facility with feedstock supplied directly from CONSOL’s nearby Shoemaker complex. Coal will be converted to syngas utilizing SES’s proprietary U-Gas technology. Syngas is expected to be used to produce approximately 720,000 metric tons per year of methanol which can be converted into approximately 100 million gallons per year of gasoline.

Environmental groups in West Virginia and Kentucky have challenged state and U.S. Army Corps of Engineers permits for mountaintop mining on various grounds. The most recent challenges have focused on the adequacy of the Corps of Engineers analysis of impacts to streams and the adequacy of mitigation plans to compensate for stream impacts. In 2007, the U.S. District Court of the Southern District of West Virginia found other operators permits for mining in these areas to be deficient. The ruling is currently in appeals. The legal issues around these previously issued permits have delayed or prevented the issuance of new permits by the Corp of Engineers. Currently, CONSOL Energy’s surface operations in these areas have not been impacted, but the delay or denial of additional permits could impact some or all of the surface operations within the next twelve to twenty-four months.

Results of Operations

Three Months Ended June 30, 2008 Compared with Three Months Ended June 30, 2007

Net Income

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


	2008 Period		2007 Period		Dollar Variance			Percentage Change
Coal Sales—Produced and Purchased	$	847	$	714	$	133		18.6	%
Produced Gas Sales		179		113		66		58.4	%
Gas Royalty Interest		23		14		9		64.3	%
Gain on Sales of Assets		1		103		(102	)	(99.0	)%
Other Sales and Other Income		161		116		45		38.8	%

Total Revenue and Other Income		1,211		1,060		151		14.2	%
Coal Cost of Goods Sold—Produced and Purchased		583		452		131		29.0	%
Produced Gas Cost of Goods Sold		45		33		12		36.4	%
Gas Royalty Interest costs of Goods Sold		22		13		9		69.2	%
Other Cost of Goods Sold		114		107		7		6.5	%

Total Cost of Goods Sold		764		605		159		26.3	%
Other		272		214		58		27.1	%

Total Costs		1,036		819		217		26.5	%

Earnings Before Income Taxes and Minority Interest		175		241		(66	)	(27.4	)%
Income Tax Expense		62		80		(18	)	(22.5	)%

Earnings Before Minority Interest		113		161		(48	)	(29.8	)%
Minority Interest		12		8		4		50.0	%

Net Income	$	101	$	153	$	(52	)	(34.0	)%

•

an asset exchange and an asset sale in the 2007 period that resulted in pretax income of approximately $100 million and net income of approximately $59 million;

•

increased unit cost of goods sold and other charges for both coal and gas;

•

mark-to-market adjustments related to free standing coal sales options; and

•

These decreases in net income were offset, in part, by:

•

higher average prices received for both coal and gas; and

•

higher volumes of gas produced.

Revenue

Revenue and other income increased due to the following items:


	2008 Period		2007 Period		Dollar Variance		Percentage Change
Sales:
Produced Coal	$	815	$	705	$	110	15.6	%
Purchased Coal		32		9		23	255.6	%
Produced Gas		179		113		66	58.4	%
Industrial Supplies		50		31		19	61.3	%
Other		35		21		14	66.7	%

Total Sales—Outside		1,111		879		232	26.4	%
Gas Royalty Interest		23		14

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