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 September 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.)

1000 CONSOL Energy Drive Canonsburg, Pennsylvania		15317
(Address of Principal Executive Offices)		(Zip Code)

(724)485-4000

(Registrant’s Telephone Number, Including Area Code)

Consol Plaza, 1800 Washington Road, Pittsburgh, PA 15241

(Registrant’s Former Address)

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 October 17, 2008
Common stock, $0.01 par value		181,193,758

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION


		Page
ITEM 1.	CONDENSED FINANCIAL STATEMENTS
	Consolidated Statements of Income for the three months and nine months ended September 30, 2008 and September 30, 2007	1
	Consolidated Balance Sheets at September 30, 2008 and December 31, 2007	2
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2008	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and September 30, 2007	5
	Notes to Unaudited Consolidated Financial Statements	6

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	64

ITEM 4.	CONTROLS AND PROCEDURES	66

	PART II
	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	67

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67

ITEM 6.	EXHIBITS	68

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)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
Sales—Outside	$	1,052,384		$	791,981		$	3,050,119		$	2,504,408
Sales—Gas Royalty Interests		22,902			10,175			61,921			36,841
Sales—Purchased Gas		1,674			821			6,860			3,297
Freight—Outside		60,458			44,707			169,129			132,007
Other Income		35,688			20,692			121,704			167,006

Total Revenue and Other Income		1,173,106			868,376			3,409,733			2,843,559
Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)		740,063			634,852			2,117,526			1,745,258
Gas Royalty Interests’ Costs		21,040			8,525			58,994			31,663
Purchased Gas Costs		1,664			496			6,607			2,988
Freight Expense		60,458			44,707			169,129			132,007
Selling, General and Administrative Expense		31,406			26,623			92,520			79,171
Depreciation, Depletion and Amortization		96,288			82,402			284,791			234,880
Interest Expense		9,069			5,820			27,771			19,257
Taxes Other Than Income		69,688			60,064			214,593			190,816

Total Costs		1,029,676			863,489			2,971,931			2,436,040

Earnings Before Income Taxes and Minority Interest		143,430			4,887			437,802			407,519
Income Taxes		41,014			4,506			138,365			126,964

Earnings Before Minority Interest		102,416			381			299,437			280,555
Minority Interest		(12,362	)		(5,765	)		(33,289	)		(19,560	)

Net Income (Loss)	$	90,054		$	(5,384	)	$	266,148		$	260,995

Basic Earnings (Loss) Per Share	$	0.49		$	(0.03	)	$	1.46		$	1.43

Dilutive Earnings (Loss) Per Share	$	0.49		$	(0.03	)	$	1.44		$	1.41

Weighted Average Number of Common Shares Outstanding:
Basic		183,202,086			181,866,727			182,918,637			182,123,133

Dilutive		185,591,759			181,866,727			185,349,250			184,517,283

Dividends Paid Per Share	$	0.10		$	0.07		$	0.30		$	0.21

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) September 30, 2008		December 31, 2007
ASSETS
Current Assets:
Cash and Cash Equivalents	$	10,302	$	41,651
Accounts and Notes Receivable:
Trade		234,580		180,545
Other Receivables		55,539		69,771
Inventories		175,981		163,193
Deferred Income Taxes		113,102		130,820
Recoverable Income Taxes		10,583		19,090
Prepaid Expenses		152,056		78,085

Total Current Assets		752,143		683,155
Property, Plant and Equipment:
Property, Plant and Equipment		9,650,694		8,945,312
Less—Accumulated Depreciation, Depletion and Amortization		4,188,371		3,980,270

Total Property, Plant and Equipment—Net		5,462,323		4,965,042
Other Assets:
Deferred Income Taxes		317,705		374,811
Investment in Affiliates		69,657		94,866
Other		103,903		90,216

Total Other Assets		491,265		559,893

TOTAL ASSETS	$	6,705,731	$	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) September 30, 2008			December 31, 2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	324,590		$	238,312
Short-Term Notes Payable		270,500			247,500
Current Portion of Long-Term Debt		20,829			18,283
Other Accrued Liabilities		564,581			512,302

Total Current Liabilities		1,180,500			1,016,397
Long-Term Debt:
Long-Term Debt		410,910			398,077
Capital Lease Obligations		71,553			90,848

Total Long-Term Debt		482,463			488,925
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		2,392,171			2,336,809
Pneumoconiosis Benefits		181,827			171,896
Mine Closing		406,827			399,633
Workers’ Compensation		133,406			118,356
Deferred Revenue		—			3,162
Salary Retirement		57,380			67,392
Reclamation		33,971			34,317
Other		184,370			193,666

Total Deferred Credits and Other Liabilities		3,389,952			3,325,231
Minority Interest		210,041			163,118

Total Liabilities and Minority Interest		5,262,956			4,993,671
Stockholders’ Equity:
Common Stock, $.01 par value; 500,000,000 Shares Authorized, 183,938,026 Issued and 182,085,298 Outstanding at September 30, 2008; 185,126,526 Issued and 182,291,623 Outstanding at December 31, 2007		1,839			1,851
Capital in Excess of Par Value		996,530			966,544
Retained Earnings		882,228			766,536
Other Comprehensive Loss		(370,825	)		(419,284	)
Common Stock in Treasury, at Cost—1,852,728 Shares at September 30, 2008 and 2,834,903 Shares at December 31, 2007		(66,997	)		(101,228	)

Total Stockholders’ Equity		1,442,775			1,214,419

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,705,731		$	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		—			—			266,148			—			—			266,148
Treasury Rate Lock (Net of ($42) tax)		—			—			—			(56	)		—			(56	)
Amortization of Prior Service Costs and Actuarial Gains (Loss) (Net of ($154) tax)		—			—			—			(260	)		—			(260	)
Minority Interest in Other Comprehensive Income and Stock-based Compensation of Gas		—			—			—			(10,947	)		—			(10,947	)
Gas Cash Flow Hedge (Net of $36,960 tax)		—			—			—			59,809			—			59,809

Comprehensive Income (loss)		—			—			266,148			48,546			—			314,694
Cumulative Effect of FAS 158 Measurement (Net of $22,973 tax)		—			—			(37,647	)		(87	)		—			(37,734	)
Issuance of Treasury Stock		—			—			(20,977	)		—			34,316			13,339
Purchases of Treasury Stock		—			—			—			—			(85	)		(85	)
Retirement of Common Stock		(12	)		(9,496	)		(36,954	)		—			—			(46,462	)
Tax Benefit from Stock-Based Compensation		—			23,108			—			—			—			23,108
Amortization of Stock-Based Compensation Awards		—			16,374			—			—			—			16,374
Dividends ($0.30 per share)		—			—			(54,878	)		—			—			(54,878	)

Balance—September 30, 2008	$	1,839		$	996,530		$	882,228		$	(370,825	)	$	(66,997	)	$	1,442,775

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)


	Nine Months Ended September 30,
	2008			2007
Operating Activities:
Net Income	$	266,148		$	260,995
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization		284,791			234,880
Stock-based Compensation		18,911			20,496
Gain on the Sale of Assets		(16,586	)		(109,898	)
Change in Minority Interest		33,289			19,560
Amortization of Mineral Leases		3,467			3,546
Deferred Income Taxes		56,251			63,643
Equity in Earnings of Affiliates		(5,314	)		(5,209	)
Changes in Operating Assets:
Accounts Receivable Securitization		39,600			113,300
Accounts and Notes Receivable		(75,530	)		34,941
Inventories		(12,788	)		10,480
Prepaid Expenses		(8,146	)		(9,180	)
Changes in Other Assets		14,166			19,977
Changes in Operating Liabilities:
Accounts Payable		14,391			11,822
Other Operating Liabilities		29,554			(21,063	)
Changes in Other Liabilities		39,741			(52,182	)
Other		1,297			(73	)

Net Cash Provided by Operating Activities		683,242			596,035

Investing Activities:
Capital Expenditures		(731,849	)		(514,911	)
Additions to Mineral Leases		(8,157	)		(10,733	)
Acquisition of AMVEST, net of cash received					(296,659	)
Net Investment in Equity Affiliates		(608	)		(3,034	)
Purchase of CNX Gas Stock					(10,000	)
Proceeds from Sales of Assets		18,799			64,287

Net Cash Used in Investing Activities		(721,815	)		(771,050	)

Financing Activities:
Proceeds from (Payments on) Miscellaneous Borrowings		1,005			(1,316	)
Proceeds from Revolver		23,000			181,000
Payments on Long Term Notes		—			(45,000	)
Tax Benefit from Stock-Based Compensation		23,108			6,358
Dividends Paid		(54,878	)		(38,282	)
Issuance of Treasury Stock		15,074			7,200
Purchases of Common Stock		(85	)		(80,132	)

Net Cash Provided by Financing Activities		7,224			29,828

Net Decrease in Cash and Cash Equivalents		(31,349	)		(145,187	)
Cash and Cash Equivalents at Beginning of Period		41,651			223,883

Cash and Cash Equivalents at End of Period	$	10,302		$	78,696

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine months ended September 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 nine months ended September 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 382,487 shares of common stock were outstanding for both the three and nine months ended September 30, 2008, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive. As a result of the net loss for the three months ended September 30, 2007, no options or units were included in the computation of dilutive earnings per share because the effect would be antidilutive. Options to purchase 1,174,561 shares of common stock were outstanding for the nine months ended September 30, 2007, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive.

There were 17,678 options and 136,930 options exercised during the three months ended September 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the three months ended September 30, 2008 and 2007 was $26.23 and $14.95, respectively. There were 834,292 options and 536,652 options exercised during the nine months ended September 30, 2008 and 2007, respectively. The weighted average exercise price per share of the options exercised during the nine months ended September 30, 2008 and 2007 was $18.08 and $13.42, respectively. Additionally, during the three and nine months ended September 30, 2008, 125,395 and 174,324 fully vested restricted stock awards were released, respectively. During both the three and nine months ended September 30, 2007, 172,702 fully vested restricted stock awards were released.

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008		2007
Net Income (Loss)	$	90,054	$	(5,384	)	$	266,148	$	260,995

Average shares of common stock outstanding:
Basic		183,202,086		181,866,727			182,918,637		182,123,133
Effect of stock-based compensation		2,389,673		—			2,430,613		2,394,150

Dilutive		185,591,759		181,866,727			185,349,250		184,517,283

Earnings per share:
Basic	$	0.49	$	(0.03	)	$	1.46	$	1.43

Dilutive	$	0.49	$	(0.03	)	$	1.44	$	1.41

NOTE 2—ACQUISITIONS AND DISPOSITIONS:

In July 2008, our 81.7% subsidiary, CNX Gas, completed the acquisition of several leases and gas wells from KIS Oil & Gas Inc. for a cash payment of $19,324. The purchase price was principally allocated to property, plant, and equipment. The sales agreement called for the transfer of 30 oil and gas wells and approximately 5,600 leased acres. This acquisition enhanced our acreage position in Northern Appalachia. The pro forma results for this acquisition were not significant to CONSOL Energy’s financial results.

In June 2008, CNX Gas 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 were not significant to CONSOL Energy’s financial results. The acquisition was not material to the CONSOL Energy’s consolidated financial statements.

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. 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.” The acquisition was not material to the CONSOL Energy’s consolidated financial statements.

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 $296,659 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 nine months ended September 30, 2007, assuming the acquisition had occurred at January 1, 2007 are estimated to be:


	Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007
Revenue	$	1,020,904		$	3,115,328

Earnings Before Taxes	$	1,545		$	410,314

Net Income	$	(7,815	)	$	263,054

Basic Earnings (Loss) Per Share	$	(0.04	)	$	1.44

Dilutive Earnings (Loss) Per Share	$	(0.04	)	$	1.43

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 were 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 $1,269 of miscellaneous acquisition costs. Subsequent to September 30, 2007, $381 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 nine months ended September 30 are as follows:


	Pension Benefits												Other Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007			2008			2007			2008			2007
Service cost	$	2,438		$	2,754		$	7,314		$	8,261		$	2,639		$	2,747		$	7,916		$	8,241
Interest cost		8,257			7,201			24,771			21,478			39,958			34,814			119,878			104,396
Expected return on plan assets		(8,418	)		(7,688	)		(25,253	)		(22,936	)		—			—			—			—
Settlement loss		—			—			—			3,192			—			—			—			—
Amortization of prior service costs (credit)		(278	)		(279	)		(835	)		(836	)		(12,156	)		(12,750	)		(36,469	)		(38,251	)
Recognized net actuarial loss		4,182			3,122			12,546			9,366			15,376			15,307			46,128			45,923

Net periodic benefit cost	$	6,181		$	5,110		$	18,543		$	18,525		$	45,817		$	40,118		$	137,453		$	120,309

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 nine months ended September 30, 2007. The settlement loss was included in cost of goods sold and other operating charges and selling, general and administrative expenses.

For the three and nine months ended September 30, 2008, $6,409 and $21,295 of contributions to pension trusts and pension benefits have been paid from operating cash flows. CONSOL Energy presently anticipates contributing a total of approximately $42,000 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 nine months ended September 30, 2008, $37,000 and $107,273 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 nine months ended September 30 are as follows:


	CWP												Workers’ Compensation
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007			2008			2007			2008			2007
Service cost	$	1,259		$	1,412		$	3,777		$	4,234		$	7,257		$	7,415		$	21,773		$	22,244
Interest cost		2,938			2,935			8,811			8,636			2,081			2,095			6,246			6,253
Amortization of actuarial gain		(6,028	)		(5,775	)		(18,083	)		(17,325	)		(1,235	)		(988	)		(3,704	)		(2,965	)
State administrative fees and insurance bond premiums		—			—			—			—			1,538			2,024			4,578			5,903
Legal and administrative costs		675			675			2,025			2,025			806			815			2,418			2,445

Net periodic (benefit) cost	$	(1,156	)	$	(753	)	$	(3,470	)	$	(2,430	)	$	10,447		$	11,361		$	31,311		$	33,880

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 nine months ended September 30, 2008, $3,505 and $9,330 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 nine months ended September 30, 2008, $8,603 and $27,364 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 Nine Months Ended September 30,
	2008					2007
	Amount			Percent		Amount			Percent
Statutory U.S. federal income tax rate	$	153,231		35.0	%	$	142,632		35.0	%
Excess tax depletion		(31,040	)	(7.1	)		(38,356	)	(9.4	)
Effect of Domestic Production Activities Deduction		(6,348	)	(1.5	)		(1,504	)	(0.4	)
Effect of Medicare Prescription Drug, Improvement and Modernization Act of 2003		963		0.2			1,169		0.3
Effect of Federal Tax Accrual to Tax Return Reconciling Adjustment		473		0.1			4,172		1.0
Net Effect of state tax		17,381		4.0			16,177		4.0
Other		3,705		0.9			2,674		0.6

Income Tax Expense / Effective Rate	$	138,365		31.6	%	$	126,964		31.1	%

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 September 30, 2008, CONSOL Energy did not change its liability for unrecognized tax benefits. During the three months ended September 30, 2007, the Company recognized an increase of $9,917 in its liability for unrecognized tax benefits as a result of tax positions taken during the period and uncertain tax positions identified upon the acquisition of AMVEST Corporation and related subsidiaries (AMVEST). Of the total increase in the liability for unrecognized positions, $7,397 results from an increase in uncertain tax positions related to temporary differences similar to those positions that are generated by current operations and are currently under examination by the Internal Revenue Service (IRS) in its audit of CONSOL Energy’s tax returns. The remainder of the increase in the liability for uncertain tax positions, $2,520, was attributable to the acquisition of AMVEST.

The total amounts of unrecognized tax benefits as of September 30, 2008 and September 30, 2007 were approximately $55,622 and $61,082, respectively. If these unrecognized tax benefits were recognized, approximately $12,376 and $13,200, 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 September 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 audit period of $7,878 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. 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 September 30, 2008 and September 30, 2007, the Company had accrued interest of approximately $11,032 and $7,176, respectively, for interest related to uncertain tax positions. The accrued interest liabilities for the nine months ended September 30, 2008 and September 30, 2007 include $2,527 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 September 30, 2008 and September 30, 2007, CONSOL Energy had an accrued liability of approximately $1,200 for tax penalties.

NOTE 6—INVENTORIES:

Inventory components consist of the following:


	September 30, 2008		December 31, 2007
Coal	$	60,570	$	45,614
Merchandise for resale		24,714		25,418
Supplies		90,697		92,161

Total Inventories	$	175,981	$	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 September 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 $1,389 and $4,251 for the three and nine months ended September 30, 2008. Costs associated with the receivables facility totaled $1,231 and $1,420 for the three and nine months ended September 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 September 30, 2008 and 2007, eligible accounts receivable totaled approximately $165,000 and $131,400, respectively. There was no subordinated retained interest at September 30, 2008. The subordinated retained interest approximated $18,100 at September 30, 2007. Accounts receivables totaling $165,000 and $113,300 were removed from the Consolidated Balance Sheet at September 30, 2008 and 2007. CONSOL Energy’s $39,600 and $113,300 increase in the accounts receivable securitization program for the nine months ended September 30, 2008 and 2007, respectively, 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:


	September 30, 2008		December 31, 2007
Coal & other plant and equipment	$	4,445,172	$	4,249,698
Coal properties and surface lands		1,257,223		1,313,440
Gas properties and related development		1,245,119		889,057
Gas gathering equipment		705,990		596,171
Airshafts		605,115		582,028
Leased coal lands		502,473		458,216
Mine development		514,604		490,876
Coal advance mining royalties		372,589		363,072
Gas advance royalties		2,409		2,754

Total property, plant and equipment		9,650,694		8,945,312
Less accumulated depreciation, depletion and amortization		4,188,371		3,980,270

Total Net Property, Plant & Equipment	$	5,462,323	$	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 at the request of CONSOL Energy 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 10.74 to 1.00 at September 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 1.63 to 1.00 at September 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 September 30, 2008, the $1,000,000 facility had borrowings of $212,300 outstanding and $257,658 of letters of credit outstanding, leaving $530,042 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 0.32 to 1.00 at September 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 76.43 to 1.00 at September 30, 2008. At September 30, 2008, the CNX Gas credit agreement had $58,200 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $126,867 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 Court, in ruling on the Company’s Preliminary Objections to the Complaint, stayed the current proceedings in the state court, holding that the Commonwealth should pursue administrative agency review of the claim because full compensatory relief, if warranted, could be provided by the particular administrative agency and then the Environmental Hearing Board, if further relief was sought. Furthermore, the Court found that the Commonwealth could not recover natural resources damages under applicable law. The remainder of the Company’s objections were preserved pending the outcome of the administrative proceedings. As to the underlying claim, the Company believes it is 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 nine months ended September 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 has also been sued in a limited number of asbestos cases in Pennsylvania and Illinois. All involve claims that the plaintiffs developed asbestos-related diseases as a result of working with or around

asbestos containing products used at mines operated by subsidiaries Consolidation Coal Company or CONSOL of Kentucky. CONSOL Energy has raised a number of defenses including lack of jurisdiction and that it is not properly named as a party since CONSOL Energy did not own or operate the mines at which the alleged exposures occurred. Discovery is still in the early stages in each matter. The Company believes it is not responsible for these claims, and it will vigorously defend the cases. 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.

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 $50,000. There was $2,880 and $6,080 of expense recognized in the three and nine months ended September 30, 2008. CONSOL Energy funded $1,840 and $4,720 in the three and nine months ended September 30, 2008, respectively, to an independent trust established for this remediation. CONSOL Energy has funded $8,479 since inception of the independent trust established for this remediation. The remaining liability of $7,202 is included in Other Accrued Liabilities at September 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 advised the PRPs that it had completed its investigation of additional areas of potential contamination allegedly related to the Ward Transformer site. On September 29, 2008, the EPA issued a Record of Decision (ROD), which is the remedy selection, for the area of the Ward Site designated as Operable Unit 1 (OU1). The ROD estimates the cost of the selected remedy for OU1 at approximately $6,300. However, the selected remedy requires an extensive pre-remedial design sampling program that could determine that the contamination is more widespread than currently estimated by the EPA. That could result in an upward adjustment in the OU1 remedial action cost. On or about September 30, 2008, the EPA sent Special Notice Letters to 61 PRPs, including CONSOL Energy, requesting those PRPs to sign a consent decree committing to do the remedial work at OU1, to conduct a remedial investigation and feasibility study at Operable Unit 2 (OU2), which is generally the area encompassed by the current removal action work, to reimburse the EPA for approximately $2,900 in past costs, and to agree to reimburse the EPA for its future oversight costs. Those PRPs have until December 8, 2008 to submit a response to the Special Notice Letter. CONSOL Energy expects that a new, larger group of PRPs will form in order to respond to the Special Notice Letter. Until that occurs, it is premature to estimate a specific range of potential exposure. No expense was recognized in the nine months ended September 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 September 30, 2008. 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 twice amended the original complaint to assert additional claims for compensatory damages to the coal and gas estates of up to $3,252,000, punitive damages in the amount of $350,000, as well as interest, costs, and attorneys’ fees, against CCC. Plaintiffs have also added CONSOL Energy, CNX Gas Company, LLC and ICCC as additional defendants asserting additional damage claims of $150,000 against those defendants. The Yukon group has recently filed a demand for arbitration against ICCC which makes similar claims relating to breach of the lease for water deposits and lost coal claims. In addition, an appeal of the 2005 Arbitration Award in favor of ICCC is pending before the Buchanan Circuit Court.

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 injunction 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 water in VP3 and reversed the dismissal and remanded to the Circuit Court to determine whether under equitable principles a permanent injunction should be issued. 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 coalbed 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 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 or permanent 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 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) filed in 2006. 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. GeoMet filed an appeal to the Virginia Supreme Court which, on September 12, 2008, reversed the Circuit Court’s decision, holding that CNX Gas’ right to construct and operate pipelines on the property is not an exclusive right, but that Pocahontas Mining and GeoMet may not use the property in a manner that affects CNX Gas’ exercise of its stated lease rights or causes CNX Gas to suffer any inconvenience or other difficulty in its exercise of those rights. The Supreme Court remanded the case to the Circuit Court for further proceedings consistent with its decision. We do not believe that CNX Gas has any exposure for damages in this matter.

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 tortuously 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 tortuously 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. CNX Gas’ action seeking to

dismiss GeoMet’s complaint is pending. 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 financial position, results of operations or the cash flows of CONSOL Energy.

In 1999, CNX Gas was named in a suit brought by a group of royalty owners that leases gas development rights to CNX Gas in southwest Virginia. The suit alleged the underpayment of royalties to the group of royalty owners. The claim of underpayment of royalties related to the interpretation of permissible deductions from production revenues upon which royalties are calculated. The deductions at issue relate to post-production expenses of gathering, compression and transportation. CNX Gas was ordered to pay, and subsequently paid, damages to the group of royalty owners that brought the suit. A final payment was subsequently made to the plaintiffs to adjust all royalties owed to the plaintiffs for subsequent periods, which effectively settled this case. CNX Gas recognized an estimated liability for other similarly situated plaintiffs who could bring similar claims. This amount is included in Other Liabilities on the balance sheet and is evaluated quarterly. CONSOL Energy believes that the final resolution of this matter will not have a material effect on our financial position, results of operations or cash flows.

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 nine months ended September 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 nine months ended September 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 September 30, 2008, all recognized recoveries have been collected. No other insurance recoveries for this incident will be received.

On October 3, 2008 the Emergency Economic Stabilization Act of 2008 (the Act) was signed into law. The Act contains a section that authorizes certain coal producers who have filed a Black Lung Excise Tax (BLET) return on or after October 1, 1990, to request a refund of the BLET paid on export sales during these years. The Act requires that the U.S. Treasury pay a coal producer an amount equal to the BLET erroneously paid on export sales in prior years along with interest computed at the statutory rates.

CONSOL Energy estimates that it could receive refunds of BLET of approximately $25,000. The estimated interest to be received on BLET refunds is approximately $30,000. The claims for refund of BLET plus interest were filed with the Internal Revenue Service (IRS) on October 30, 2008. At this time, CONSOL Energy cannot be certain that it will receive the refund of BLET and related interest since technical guidance has not been issued by the IRS regarding the type of documentation required before it will approve the refund of BLET and the related payment of interest. As of September 30, 2008, no amounts have been recognized related to the potential BLET refunds.

At September 30, 2007, CONSOL Energy has provided financial guarantees and letters of credit to certain third parties as described by major category in the following table. These amounts represent the maximum potential total of future payments that we could be required to make under these instruments. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credit are recorded as liabilities in the financial statements. CONSOL Energy management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition.


	Total Amounts Committed		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Letters of Credit:
Employee-Related	$	175,018	$	71,808	$	103,210	$	—	$	—
Environmental		73,790		71,410		2,380		—		—
Gas		14,933		14,913		20		—		—
Other		8,850		250		8,600		—		—

Total Letters of Credit	$	272,591	$	158,381	$	114,210	$	—	$	—

Surety Bonds:
Employee-Related	$	188,251	$	188,251	$	—	$	—	$	—
Environmental		315,783		313,529		2,254		—		—
Gas		3,947		3,897		50		—		—
Other		10,233		10,214		19		—		—

Total Surety Bonds	$	518,214	$	515,891	$	2,323	$	—	$	—

Guarantees:
Coal	$	534,908	$	292,825	$	221,356	$	17,018	$	3,709
Gas		37,272		34,172		—		—		3,100
Other		205,006		21,062		38,599		27,280		118,065

Total Guarantees	$	777,186	$	348,059	$	259,955	$	44,298	$	124,874

Total Commitments	$	1,567,991	$	1,022,331	$	376,488	$	44,298	$	124,874

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 to 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 September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net Income (Loss)	$	90,054		$	(5,384	)	$	266,148		$	260,995
Treasury Rate Lock		(21	)		(21	)		(56	)		(62	)
Amortization of prior service costs and actuarial loss		(87	)		(909	)		(260	)		(2,727	)
Pension Settlement Accounting		—			—			—			2,132
Minority Interest in Other Comprehensive Income		(38,614	)		(1,446	)		(10,947	)		(1,183	)
Gas Cash Flow Hedge		210,686			7,875			59,809			6,549
FAS 158 Long-Term Liability Deferred Tax Adjustments		—			—			—			(361	)

Total Comprehensive Income	$	262,018		$	115		$	314,694		$	265,343

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 assets and (liabilities) measured at fair value on a recurring basis are summarized below:


	Fair Value Measurements at September 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	$	—	$	106,994		$	—
Coal Sales Options	$	—	$	(15,294	)	$	—

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:


	September 30, 2008						December 31, 2007
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	10,302		$	10,302		$	41,651		$	41,651
Short-term notes payable	$	(270,500	)	$	(270,500	)	$	(247,500	)	$	(247,500	)
Long-term debt	$	(421,206	)	$	(417,214	)	$	(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 nine months ended September 30, 2008, the Northern Appalachian aggregated segment includes the following mines: Blacksville 2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork, Shoemaker, and Mine 84. For the three and nine months ended September 30, 2008, the Central Appalachian aggregated segment includes the following mines: Jones Fork, the Fola Complex and the Terry Eagle Complex. For the three and nine months ended September 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 September 30, 2008:


	Northern Appalachian		Central Appalachian			Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	491,507	$	78,658		$	109,189	$	101,093		$	780,447	$	189,689	$	82,248	$	—		$	1,052,384
Sales—gas royalty interest		—		—			—		—			—		22,902		—		—			22,902
Sales—purchased gas		—		—			—		—			—		1,674		—		—			1,674
Freight—outside		—		—			—		60,458			60,458		—		—		—			60,458
Intersegment transfers		—		—			—		—			—		1,510		34,893		(36,403	)		—

Total Sales and Freight	$	491,507	$	78,658		$	109,189	$	161,551		$	840,905	$	215,775	$	117,141	$	(36,403	)	$	1,137,418

Earnings (Loss) Before Income Taxes	$	29,099	$	(12,472	)	$	49,248	$	(18,861	)	$	47,014	$	114,214	$	5,304	$	(23,102	)	$	143,430	(A)

Segment assets											$	4,133,854	$	1,854,067	$	267,691	$	450,119		$	6,750,731	(B)

Depreciation, depletion and amortization											$	73,517	$	17,803	$	4,968	$	—		$	96,288

Capital Expenditures (Including acquisitions)											$	122,372	$	170,374	$	10,983	$	—		$	303,729

(A)	Includes equity in earnings of unconsolidated affiliates of $589, $236 and $844 for Coal, Gas and All Other, respectively.

(B)	Includes investments in unconsolidated equity affiliates of $7,304, $25,005 and $37,348 for Coal, Gas and All Other, respectively.

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


	Northern Appalachian		Central Appalachian		Metallurgical			Other Coal			Total Coal			Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	456,869	$	70,367	$	44,373		$	58,510		$	630,119		$	98,389	$	63,473	$	—		$	791,981
Sales—gas royalty interest		—		—		—			—			—			10,175		—		—			10,175
Sales—purchased gas		—		—		—			—			—			821		—		—			821
Freight—outside		—		—		—			44,707			44,707			—		—		—			44,707
Intersegment transfers		—		—		—			—			—			212		28,796		(29,008	)		—

Total Sales and Freight	$	456,869	$	70,367	$	44,373		$	103,217		$	674,826		$	109,597	$	92,269	$	(29,008	)	$	847,684

Earnings (Loss) Before Income Taxes	$	50,675	$	4,010	$	(6,662	)	$	(96,425	)	$	(48,402	)	$	51,852	$	5,025	$	(3,588	)	$	4,887	(C)

Segment assets											$	3,975,973		$	1,320,124	$	255,149	$	525,176		$	6,076,422	(D)

Depreciation, depletion and amortization											$	65,550		$	12,248	$	4,604	$	—		$	82,402

Capital Expenditures (Including Acquisitions)											$	380,704		$	72,571	$	24,429	$	—		$	477,704

(C)	Includes equity in earnings of unconsolidated affiliates of $303, $927 and $1,246 for Coal, Gas and All Other, respectively.

(D)	Includes investments in unconsolidated equity affiliates of $2,116, $55,872 and $34,474 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 nine months ended September 30, 2008:


	Northern Appalachian		Central Appalachian			Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	1.549,663	$	261,240		$	250,866	$	253,996		$	2,315,765	$	496,563	$	237,791	$	—		$	3,050,119
Sales—gas royalty interest		—		—			—		—			—		61,921		—		—			61,921
Sales—purchased gas		—		—			—		—			—		6,860		—		—			6,860
Freight—outside		—		—			—		169,129			169,129		—		—		—			169,129
Intersegment transfers		—		—			—		—			—		6,096		104,220		(110,316	)		—

Total Sales and Freight	$	1,549,663	$	261,240		$	250,866	$	423,125		$	2,484,894	$	571,440	$	342,011	$	(110,316	)	$	3,288,029

Earnings (Loss) Before Income Taxes	$	205,863	$	(25,839	)	$	94,492	$	(81,775	)	$	192,741	$	295,245	$	17,932	$	(68,116	)	$	437,802	(E)

Segment assets											$	4,133,854	$	1,854,067	$	267,691	$	450,119		$	6,705,731	(F)

Depreciation, depletion and amortization											$	219,648	$	50,340	$	14,803	$	—		$	284,791

Capital Expenditures (Including acquisitions)											$	312,537	$	406,180	$	21,289	$	—		$	740,006

(E)	Includes equity in earnings of unconsolidated affiliates of $1,263, $352 and $3,699 for Coal, Gas and All Other, respectively.

(F)	Includes investments in unconsolidated equity affiliates of $7,304, $25,005 and $37,348 for Coal, Gas and All Other, respectively.

Industry segment results for the nine months ended September 30, 2007:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—outside	$	1,487,815	$	174,386	$	230,155	$	132,780		$	2,025,136	$	310,967	$	168,305	$	—		$	2,504,408
Sales—gas royalty interest		—		—		—		—			—		36,841		—		—			36,841
Sales—purchased gas		—		—		—		—			—		3,297		—		—			3,297
Freight—outside		—		—		—		132,007			132,007		—		—		—			132,007
Intersegment transfers		—		—		—		—			—		2,628		98,434		(101,062	)		—

Total Sales and Freight	$	1,487,815	$	174,386	$	230,155	$	264,787		$	2,157,143	$	353,733	$	266,739	$	(101,062	)	$	2,676,553

Earnings (Loss) Before Income Taxes	$	272,457	$	15,283	$	69,722	$	(77,079	)	$	280,383	$	169,761	$	13,255	$	(55,880	)	$	407,519	(G)

Segment assets										$	3,975,973	$	1,320,124	$	255,149	$	525,176		$	6,076,422	(H)

Depreciation, depletion and amortization										$	184,957	$	36,325	$	13,598	$	—		$	234,880

Capital Expenditures (Including Acquisitions)										$	571,254	$	220,236	$	30,813	$	—		$	822,303

(G)	Includes equity in earnings of unconsolidated affiliates of $741, $1,330 and $3,138 for Coal, Gas and All Other, respectively.

(H)	Includes investments in unconsolidated equity affiliates of $2,116, $55,872 and $34,474 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 September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
Segment earnings before income taxes for total reportable business segments	$	161,228		$	3,450		$	487,986		$	450,144
Segment earnings (loss) before income taxes for all other businesses		5,304			5,025			17,932			13,255
Incentive compensation (A)		(6,874	)		5,736			(18,887	)		(20,237	)
Compensation from restricted stock unit grants, stock option expense and performance share unit expense (A)		(5,605	)		(2,949	)		(16,375	)		(18,081	)
Interest income (expense), net and other non-operating activity(A)		(10,623	)		(6,375	)		(32,854	)		(17,562	)

Earnings Before Income Taxes	$	143,430		$	4,887		$	437,802		$	407,519

Total Assets:


	September 30,
	2008		2007
Segment assets for total reportable business segments	$	5,987,921	$	5,296,097
Segment assets for all other businesses		267,691		255,149
Items excluded from segment assets:
Cash and other investments (A)		7,610		20,628
Deferred tax assets		430,807		502,999
Recoverable income taxes		10,583		—
Bond issuance costs		1,119		1,549

Total Consolidated Assets	$	6,705,731	$	6,076,422

(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 September 30, 2008:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors		Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	191,199	$	795,356	$	68,416	$	(2,587	)	$	1,052,384
Sales—Purchased Gas		—			1,674		—		—		—			1,674
Sales—Gas Royalty Interests		—			22,902		—		—		—			22,902
Freight—Outside		—			—		60,458		—		—			60,458
Other Income (including equity earnings)		110,447			1,172		25,543		10,131		(111,605	)		35,688

Total Revenue and Other Income		110,447			216,947		881,357		78,547		(114,192	)		1,173,106
Cost of Goods Sold and Other Operating Charges		22,266			37,639		545,840		31,299		103,019			740,063
Purchased Gas Costs		—			1,664		—		—		—			1,664
Gas Royalty Interests’ Costs		—			21,055		—		—		(15	)		21,040
Related Party Activity		2,773			—		67,873		36,509		(107,155	)		—
Freight Expense		—			—		60,458		—		—			60,458
Selling, General and Administrative Expense		—			13,527		16,737		1,142		—			31,406
Depreciation, Depletion and Amortization		2,211			17,803		73,680		2,596		(2	)		96,288
Interest Expense		3,314			2,412		3,292		135		(84	)		9,069
Taxes Other Than Income		1,308			7,272		58,766		2,342		—			69,688

Total Costs		31,872			101,372		826,646		74,023		(4,237	)		1,029,676

Earnings (Loss) Before Income Taxes		78,575			115,575		54,711		4,524		(109,955	)		143,430
Income Tax Expense (Benefit)		(11,479	)		48,160		2,622		1,711		—			41,014

Earnings (Loss) before Minority Interest		90,054			67,415		52,089		2,813		(109,955	)		102,416
Minority Interest		—			—		—		—		(12,362	)		(12,362	)

Net Income (Loss)	$	90,054		$	67,415	$	52,089	$	2,813	$	(122,317	)	$	90,054

Balance Sheet for September 30, 2008:


	Parent Issuer		CNX Gas Guarantor			Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	2,810	$	3,116		$	—		$	4,376	$	—		$	10,302
Accounts and Notes Receivable:
Trade		—		64,356			—			170,224		—			234,580
Other		1,670		7,454			8,018			38,397		—			55,539
Inventories		80		—			150,563			25,338		—			175,981
Recoverable Income Taxes		10,583		—			—			—		—			10,583
Deferred Income Taxes		141,305		(28,203	)		—			—		—			113,102
Prepaid Expenses		23,317		79,632			47,679			1,428		—			152,056

Total Current Assets		179,765		126,355			206,260			239,763		—			752,143
Property, Plant and Equipment:
Property, Plant and Equipment		114,959		1,943,084			7,504,244			88,407		—			9,650,694
Less-Accumulated Depreciation, Depletion and Amortization		68,640		301,790			3,773,113			44,828		—			4,188,371

Property, Plant and Equipment—Net		46,319		1,641,294			3,731,131			43,579		—			5,462,323
Other Assets:
Deferred Income Taxes		577,531		(259,826	)		—			—		—			317,705
Investment in Affiliates		3,212,133		25,005			1,413,582			—		(4,581,063	)		69,657
Other		35,927		34,040			16,193			17,743		—			103,903

Total Other Assets		3,825,591		(200,781	)		1,429,775			17,743		(4,581,063	)		491,265

Total Assets	$	4,051,675	$	1,566,868		$	5,367,166		$	301,085	$	(4,581,063	)	$	6,705,731

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	124,831	$	69,101		$	107,438		$	23,220	$	—		$	324,590
Accounts Payable (Recoverable)—Related Parties		1,760,582		—			(1,900,521	)		139,939		—			—
Short-Term Notes Payable		212,300		58,200			—			—		—			270,500
Current Portion of Long-Term Debt		—		7,563			11,266			2,000		—			20,829
Other Accrued Liabilities		148,743		46,517			357,536			11,785		—			564,581

Total Current Liabilities		2,246,456		181,381			(1,424,281	)		176,944		—			1,180,500
Long-Term Debt		249,294		75,365			150,319			7,485		—			482,463
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		2,896			2,389,275			—		—			2,392,171
Pneumoconiosis		—		—			181,827			—		—			181,827
Mine Closing		—		—			398,725			8,102		—			406,827
Workers’ Compensation		—		—			133,406			—		—			133,406
Salary Retirement		57,380		—			—			—		—			57,380
Reclamation		—		—			13,644			20,327		—			33,971
Other		55,770		39,543			71,528			17,529		—			184,370

Total Deferred Credits and Other Liabilities		113,150		42,439			3,188,405			45,958		—			3,389,952
Minority Interest		—		—			—			—		210,041			210,041
Stockholders’ Equity		1,442,775		1,267,683			3,452,723			70,698		(4,791,104	)		1,442,775

Total Liabilities and Stockholders’ Equity	$	4,051,675	$	1,566,868		$	5,367,166		$	301,085	$	(4,581,063	)	$	6,705,731

Income Statement for the three months ended September 30, 2007:


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors			Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	98,601	$	641,475		$	56,469	$	(4,564	)	$	791,981
Sales—Purchased Gas		—			821		—			—		—			821
Sales—Gas Royalty Interests		—			10,175		—			—		—			10,175
Freight—Outside		—			—		44,707			—		—			44,707
Other Income (including equity earnings)		1,833			208		9,967			9,585		(901	)		20,692

Total Revenue and Other Income		1,833			109,805		696,149			66,054		(5,465	)		868,376
Cost of Goods Sold and Other Operating Charges		1,172			18,731		541,560			25,771		47,618			634,852
Purchased Gas Costs		—			496		—			—		—			496
Gas Royalty Interests’ Costs		—			8,543		55			—		(73	)		8,525
Related Party Activity		3,326			—		11,152			29,540		(44,018	)		—
Freight Expense		—			—		44,707			—		—			44,707
Selling, General and Administrative Expense		—			12,793		12,990			840		—			26,623
Depreciation, Depletion and Amortization		1,929			12,248		65,485			2,813		(73	)		82,402
Interest Expense		2,154			1,221		2,303			142		—			5,820
Taxes Other Than Income		1,433			3,776		53,085			1,770		—			60,064

Total Costs		10,014			57,808		731,337			60,876		3,454			863,489

Earnings (Loss) Before Income Taxes		(8,181	)		51,997		(35,188	)		5,178		(8,919	)		4,887
Income Tax Expense (Benefit)		(2,797	)		20,701		(15,566	)		2,168		—			4,506

Earnings (Loss) before Minority Interest		(5,384	)		31,296		(19,622	)		3,010		(8,919	)		381
Minority Interest		—			—		—			—		(5,765	)		(5,765	)

Net Income (Loss)	$	(5,384	)	$	31,296	$	(19,622	)	$	3,010	$	(14,684	)	$	(5,384	)

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		2,818,267		56,865			1,305,043			—		(4,085,309	)		94,866
Other		30,242		6,772			35,600			17,602		—			90,216

Total Other Assets		3,411,735		(124,778	)		1,340,643			17,602		(4,085,309	)		559,893

Total Assets	$	3,638,551	$	1,191,019		$	5,187,290		$	276,539	$	(4,085,309	)	$	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		1,586,775		—			(1,708,831	)		122,056		—			—
Short-Term Notes Payable		247,500		—			—			—		—			247,500
Current Portion of Long-Term Debt		—		5,819			10,464			2,000		—			18,283
Other Accrued Liabilities		105,226		25,333			372,731			9,012		—			512,302

Total Current Liabilities		2,011,059		61,415			(1,215,266	)		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			3,164,725			60,465		(4,248,427	)		1,214,419

Total Liabilities and Stockholders’ Equity	$	3,638,551	$	1,191,019		$	5,187,290		$	276,539	$	(4,085,309	)	$	6,208,090

Income Statement for the Nine Months Ended September 30, 2008


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors		Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	502,659	$	2,352,975	$	202,520	$	(8,035	)	$	3,050,119
Sales—Purchased Gas		—			6,860		—		—		—			6,860
Sales—Gas Royalty Interests		—			61,921		—		—		—			61,921
Freight—Outside		—			—		169,129		—		—			169,129
Other Income (including equity earnings)		319,766			11,929		82,226		29,424		(321,641	)		121,704

Total Revenue and Other Income		319,766			583,369		2,604,330		231,944		(329,676	)		3,409,733
Cost of Goods Sold and Other Operating Charges		54,949			90,147		1,712,321		87,536		172,573			2,117,526
Purchased Gas Costs		—			6,607		—		—		—			6,607
Gas Royalty Interests’ Costs		—			59,057		—		—		(63	)		58,994
Related Party Activity		4,170			—		60,007		113,200		(177,377	)		—
Freight Expense		—			—		169,129		—		—			169,129
Selling, General and Administrative Expense		—			50,701		38,529		3,290		—			92,520
Depreciation, Depletion and Amortization		6,480			50,340		221,838		8,022		(1,889	)		284,791
Interest Expense		13,055			5,567		8,994		405		(250	)		27,771
Taxes Other Than Income		4,721			20,072		182,694		7,106		—			214,593

Total Costs		83,375			282,491		2,393,512		219,559		(7,006	)		2,971,931

Earnings (Loss) Before Income Taxes		236,391			300,878		210,818		12,385		(322,670	)		437,802
Income Tax Expense (Benefit)		(29,757	)		119,287		44,150		4,685		—			138,365

Earnings (Loss) before Minority Interest		266,148			181,591		166,668		7,700		(322,670	)		299,437
Minority Interest		—			—		—		—		(33,289	)		(33,289	)

Net Income (Loss)	$	266,148		$	181,591	$	166,668	$	7,700	$	(355,959	)	$	266,148

Income Statement for the Nine Months Ended September 30, 2007


	Parent Issuer			CNX Gas Guarantor		Other Subsidiary Guarantors		Non- Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	313,595	$	2,054,368	$	143,425	$	(6,980	)	$	2,504,408
Sales—Purchased Gas		—			3,297		—		—		—			3,297
Sales—Gas Royalty Interests		—			36,841		—		—		—			36,841
Freight—Outside		—			—		132,007		—		—			132,007
Other Income (including equity earnings)		309,404			4,675		127,052		29,382		(303,507	)		167,006

Total Revenue and Other Income		309,404			358,408		2,313,427		172,807		(310,487	)		2,843,559
Cost of Goods Sold and Other Operating Charges		50,190			59,918		1,443,754		34,620		156,776			1,745,258
Purchased Gas Costs		—			2,988		—		—		—			2,988
Gas Royalty Interests’ Costs		—			31,736		—		—		(73	)		31,663
Related Party Activity		8,055			—		34,712		103,187		(145,954	)		—
Freight Expense		—			—		132,007		—		—			132,007
Selling, General and Administrative Expense		—			39,069		37,582		2,520		—			79,171
Depreciation, Depletion and Amortization		5,666			36,325		187,172		7,790		(2,073	)		234,880
Interest Expense		4,211			3,686		10,938		422		—			19,257
Taxes Other Than Income		4,121			12,519		169,139		5,037		—			190,816

Total Costs		72,243			186,241		2,015,304		153,576		8,676			2,436,040

Earnings (Loss) Before Income Taxes		237,161			172,167		298,123		19,231		(319,163	)		407,519
Income Tax Expense (Benefit)		(23,834	)		66,387		77,680		6,731		—			126,964

Earnings (Loss) before Minority Interest		260,995			105,780		220,443		12,500		(319,163	)		280,555
Minority Interest		—			—		—		—		(19,560	)		(19,560	)

Net Income (Loss)	$	260,995		$	105,780	$	220,443	$	12,500	$	(338,723	)	$	260,995

Cash Flow for the nine months ended September 30, 2008:


	Parent			CNX Gas			Guarantor			Non- Guarantor			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	55,236		$	306,919		$	316,874		$	4,213		$	—	$	683,242

Cash Flows from Investing Activities:
Capital Expenditures	$	(6,964	)	$	(406,180	)	$	(325,441	)	$	(1,421	)	$	—	$	(740,006	)
Investment in Equity Affiliates		—			1,081			(1,689	)		—			—		(608	)
Other Investing Activities		—			450			18,349			—			—		18,799

Net Cash Used in Investing Activities	$	(6,964	)	$	(404,649	)	$	(308,781	)	$	(1,421	)	$	—	$	(721,815	)

Cash Flows from Financial Activities:
Dividends Paid	$	(54,878	)	$	—		$	—		$	—		$	—	$	(54,878	)
Purchase of Common Stock		(85	)		—			—			—			—		(85	)
(Payments on) Proceeds from Short Term Borrowings		(35,200	)		58,200			—			—			—		23,000
Other Financing Activities		38,182			10,598			(8,093	)		(1,500	)		—		39,187

Net Cash (Used in) Provided by Financing Activities	$	(51,981	)	$	68,798		$	(8,093	)	$	(1,500	)	$	—	$	7,224

Cash Flow for the nine months ended September 30, 2007:


	Parent			CNX Gas			Guarantor			Non- Guarantor			Elimination			Consolidated
Net Cash Provided by Operating Activities	$	(161,115	)	$	211,075		$	522,045		$	24,030		$	—		$	596,035

Cash Flows from Investing Activities:
Capital Expenditures	$	(11,932	)	$	(265,116	)	$	(261,050	)	$	(21,693	)	$	44,880		$	(514,911	)
Acquistion of AMVEST		—			—			(296,659	)		—			—			(296,659	)
Investment in Equity Affiliates		—			(2,259	)		(775	)		—			—			(3,034	)
Other Investing Activities		—			187			88,247			—			(44,880	)		43,554

Net Cash Used in Investing Activities	$	(11,932	)	$	(267,188	)	$	(470,237	)	$	(21,693	)	$	—		$	(771,050	)

Cash Flows from Financial Activities:
Dividends Paid	$	(38,282	)	$	—		$	—		$	—		$	—		$	(38,282	)
Proceeds from Revolver		181,000															181,000
Purchase of Common Stock		(80,132	)		—			—			—			—			(80,132	)
Tax Benefit from Stock-Based Compensation		6,323			35			—			—			—			6,358
Payments on Long Term Notes		—			—			(45,000	)		—			—			(45,000	)
Other Financing Activities		7,005			7,308			(6,929	)		(1,500	)		—			5,884

Net Cash (Used in) Provided by Financing Activities	$	75,914		$	7,343		$	(51,929	)	$	(1,500	)	$	—		$	29,828

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

Current forecasts by the U.S. Department of Energy estimate that worldwide energy demand will grow more than 55 percent by 2030 and that the two fastest growing supply segments are expected to be coal and natural gas, which are forecasted to grow approximately 74 percent and 63 percent, respectively. The company believes that the long-term fundamentals of population growth, a desire for improved living standards, and the need to build or repair critical infrastructure in many countries will keep demand for energy strong over the next several decades, despite indications that global economic growth is slowing in the face of a more challenging financial environment.

The impact of current economic conditions on global demand for coal and natural gas in the short-term is far from clear. For instance, the impact on price from a decline in demand for coal is likely to be offset by the continuing challenges of coal production globally. The Company believes that the long-term global demand for coal is very strong and developing countries will continue to grow at rates that will stretch global supplies of coal.

In the short-term, base loading of eastern power generation in the U.S. will continue to create demand for CONSOL’s high-Btu coal. On the supply side, coal production challenges related to permitting, new safety regulations, and complex geology in Appalachia are expected to keep supplies tight.

The company believes it is in a strong position in the near term for a number of reasons:

•

The company has a significant amount of anticipated 2009 coal and gas production already committed for sale;

•

The company’s low-volatile metallurgical coal and its high Btu (British thermal units) steam coal are premium products that should command premium prices even in a weaker demand environment;

•

The company expects to generate strong cash flows during the next 15 months, reflecting both higher priced tons entering the sales mix and the relatively low-cost position of both its coal and gas segments;

•

The company’s relatively low debt and strong liquidity position allows the company to maintain its reputation as a disciplined producer and to make adjustments to production should market conditions require it; and

•

The company has the flexibility to defer or slow certain capital project outlays without undercutting the company’s fundamental growth strategy.

During the second and third quarters, a number of factors impacted production, but no single factor dominated. Factors included: events such as roof falls on main line belt haulage; regulatory issues, particularly related to safety that impacted productivity and costs; technological issues, particularly the challenge of completing development of new longwall coal panels as rapidly as required; and geologic issues such as roof conditions and intrusion of rock into coal seams. We have made a number of important changes that, over the next six months, are expected to positively impact productivity and production. We have focused a lot of attention on the development issue because it is the key to getting the maximum efficiency from our longwall equipped mines.

The company has added crews and changed work schedules to increase longwall panel development; has worked with equipment manufacturers to develop better haulage systems for continuous mining machines to increase rates of advance in development sections of the mine; and is modifying mine plans in a number of longwall-equipped mines to increase the ratio of coal produced by the longwall equipment compared to that produced by the continuous miners.

Some of the changes we have made, such as adding additional crews, should give us benefits very quickly, while things like mine plan modifications take several quarters to fully execute. However, over the next year, we expect the aggregate result of these actions will positively impact productivity.

Regulatory impacts on production are more difficult to manage. Most producers in the eastern U.S. are being impacted by government regulations and enforcement to a much greater extent than we saw only a few years ago. The pace with which government issues permits needed for on-going operations to continue mining has negatively impacted expected production, especially in Central Appalachia. 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 Corp 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. In addition, the length of time needed to bring a new mine into production has increased by several years because of the increased time required to obtain necessary permits. New safety laws and regulations have impacted productivity at underground mines, although the company has not yet been able to ascertain the exact amount of the impact.

CONSOL Energy estimates that it could receive refunds of BLET of approximately $25 million. The estimated interest to be received on BLET refunds is approximately $30 million. The claims for refund of BLET plus interest must be filed with the Internal Revenue Service (IRS) within 30 days of enactment of the Act. At this time, CONSOL Energy cannot be certain that it will receive the refund of BLET and related interest since technical guidance has not been issued by the IRS regarding the type of documentation required before it will approve the refund of BLET and the related payment of interest. As of September 30, 2008, no amounts have been recognized related to the potential BLET refunds.

Results of Operations

Three Months Ended September 30, 2008 Compared with Three Months Ended September 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	$	780	$	630		$	150		23.8	%
Produced Gas Sales		190		98			92		93.9	%
Gas Royalty Interest		23		10			13		130.0	%
Other Sales and Other Income		180		130			50		38.5	%

Total Revenue and Other Income		1,173		868			305		35.1	%
Coal Cost of Goods Sold—Produced and Purchased		577		455			122		26.8	%
Produced Gas Cost of Goods Sold		51		30			21		70.0	%
Gas Royalty Interest costs of Goods Sold		21		9			12		133.3	%
Other Cost of Goods Sold		114		150			(36	)	(24.0	)%

Total Cost of Goods Sold		763		644			119		18.5	%
Depreciation, Depletion and Amortizaton		96		82			14		17.1	%
Other		171		137			34		24.8	%

Total Costs		1,030		863			167		19.4	%

Earnings Before Income Taxes and Minority Interest		143		5			138		2760.0	%
Income Tax Expense		41		5			36		720.0	%

Earnings Before Minority Interest		102		—			102		100.0	%
Minority Interest		12		5			7		140.0	%

Net Income (Loss)	$	90	$	(5	)	$	95		(1900.0	)%

CONSOL Energy had net income of $90 million for the three months ended September 30, 2008 compared to a net loss of $5 million in the three months ended September 30, 2007. Net income for the 2008 period was improved in comparison to the 2007 period due to:

•

the 2007 period including a total of approximately $72 million of pre-tax expense

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