CNX Gas 424B3
Filed pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended
Registration Number 333-127483
PROSPECTUS SUPPLEMENT NO. 6
(To the Prospectus dated March 30, 2006)
27,936,667 Shares of
Common Stock
This Prospectus Supplement supplements the prospectus dated March 30, 2006 (the
Prospectus) relating to the sale by the holders of Common Stock of CNX Gas Corporation.
This Prospectus Supplement is incorporated by reference into, and should be read in
conjunction with, the Prospectus (including the supplements thereto).
INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE RISK FACTORS BEGINNING ON PAGE 9 OF
THE PROSPECTUS.
Shares of our common stock are listed on the New York Stock Exchange under the symbol CXG.
On February 20, 2007, CNX Gas filed with the Securities and Exchange Commission its annual report
on Form 10-K, a copy of which is attached hereto and deemed to be a part hereof.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is February 20, 2007.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2006;
OR
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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: 001-32723
CNX GAS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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20-3170639 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
4000 Brownsville Road
South Park, PA 15129-9545
(412) 854-6719
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title Of Each Class
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Name of Each Exchange On Which Registered |
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Common Stock ($.01 par value)
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New York Stock Exchange |
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of
the Act). Yes o No þ
The aggregate market value of voting stock held by nonaffiliates of the registrant as of June
30, 2006, based on the closing price of the common stock on the New York Stock Exchange on such
date ($30.00 per share), was $834,112,650. For purposes of determining this amount, affiliates
include directors and executive officers, who, as of June 30, 2006, in the aggregate held 132,912
shares, and CONSOL Energy Inc., which held 122,896,667 shares.
The number of shares outstanding of the registrants common stock as of January 31, 2007 is
150,864,825 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of CNX Gas Corporations Proxy Statement for the Annual Meeting of Stockholders to be
held on April 23, 2007, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III
FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Annual Report on Form 10-K to make
applicable and take advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf, of us. With the
exception of historical matters, the matters discussed in this Annual Report on Form 10-K are
forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and
uncertainties that could cause actual results to differ materially from projected results.
Accordingly, investors should not place undue reliance on forward-looking statements as a
prediction of actual results. The forward-looking statements may include projections and estimates
concerning the timing and success of specific projects and our future production, revenues, income
and capital spending. When we use the words believe, intend, expect, may, should,
anticipate, could, estimate, plan, predict, project, or their negatives, or other
similar expressions, the statements which include those words are usually forward-looking
statements. When we describe strategy that involves risks or uncertainties, we are making
forward-looking statements. The forward-looking statements in this Annual Report on Form 10-K speak
only as of the date of this Annual Report on Form 10-K; we disclaim any obligation to update these
statements unless required by securities law, and we caution you not to rely on them unduly. We
have based these forward-looking statements on our current expectations and assumptions about
future events. While our management considers these expectations and assumptions to be reasonable,
they are inherently subject to significant business, economic, competitive, regulatory and other
risks, contingencies and uncertainties, most of which are difficult to predict and many of which
are beyond our control. These risks, contingencies and uncertainties relate to, among other
matters, the following:
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our business strategy; |
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our financial position, cash flow and liquidity; |
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declines in the prices we receive for our gas affecting our operating results and cash flow; |
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uncertainties in estimating our gas reserves and replacing our gas reserves; |
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uncertainties in exploring for and producing gas; |
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our inability to obtain additional financing necessary in order to
fund our operations, capital expenditures and to meet our other
obligations; |
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disruptions to, capacity constraints in or other limitations on the pipeline systems which deliver our gas; |
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the availability of personnel and equipment, including our inability to retain and attract key personnel; |
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increased costs; |
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the effects of government regulation and permitting and other legal requirements; |
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legal uncertainties regarding the ownership of the coalbed methane
estate, and costs associated with perfecting title for gas rights
in some of our properties; |
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litigation concerning real property rights, intellectual property rights, royalty calculations and other matters; |
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our relationships and arrangements with CONSOL Energy; and |
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other factors discussed under Risk Factors. |
3
PART I
ITEM 1. BUSINESS
Except as otherwise noted or unless the context otherwise requires, (i) the information in
this Annual Report on Form 10-K gives effect to the contribution to CNX Gas of the CONSOL Energy
gas business effective as of August 8, 2005, (ii) CNX Gas refers, with respect to any date prior to
the effective date of that contribution, to the CONSOL Energy gas business and, with respect to any
date on or subsequent to the effective date of the contribution, to CNX Gas and our subsidiaries,
(iii) CONSOL Energy refers to CONSOL Energy Inc. and its subsidiaries other than CNX Gas and the
companies which conducted CONSOL Energys gas business, and (iv) reserve and operating data are as
of December 31, 2006 unless otherwise indicated. The estimates of our proved reserves as of
December 31, 2006 and 2005 included in this Annual Report are based on reserve reports prepared by
Schlumberger Data and Consulting Services. The estimates of our proved reserves as of December 31,
2004 included in this Annual Report are based on reserve reports prepared by Ralph E. Davis
Associates, Inc. and Schlumberger Data and Consulting Services. Similarly, the estimates of our
proved reserves as of December 31, 2004 and 2003 (set forth in Item 6, Selected Financial Data
Other Financial Data) are based on reserve reports prepared by Ralph E. Davis Associates, Inc. and
Schlumberger Data and Consulting Services. Unless otherwise noted, we discuss production, per unit
revenue and per unit costs net of any royalty owners interest. With respect to production and
reserves, we use the word net to indicate when a number does not include the royalty owners
interest. With respect to acres, we use the word net to describe our aggregate fractional
interest in property that we control by deed or lease. With the exception of earnings per share
data, we discuss dollars in thousands throughout this Form 10-K. Financial information concerning
industry segments, as defined by accounting principles generally accepted in the United States of
America, for the twelve months ended December 31, 2006, 2005 and 2004 is included in Note 16 to the
Consolidated Financial Statements included as Item 8 in
Part II of this Annual Report on Form 10-K.
General
We are engaged in the exploration, development, production and gathering of natural gas
primarily in the Appalachian Basin, and we are expanding our operations into the Illinois Basin. In
particular, we are a leading developer of coalbed methane (CBM). CONSOL Energy Inc. (CONSOL Energy)
owns 81.5% of our outstanding common stock. In August 2005, we acquired all of CONSOL Energys
rights associated with CBM from 4.5 billion tons of proved coal reserves owned or controlled by
CONSOL Energy in Northern Appalachia, Central Appalachia, the Illinois Basin and other western
basins. As of December 31, 2006, we had 1.265 Tcfe of net proved reserves, including our portion of
equity affiliates, with a PV-10 value of $1,499,664 and a standardized measure of discounted after
tax future net cash flows attributable to our proved reserves of $934,891. Our proved
reserves are approximately 99% CBM and 48% proved developed. We are one of the largest gas
producers in the Appalachian Basin with net sales of 56.1 Bcf for the twelve months ended December
31, 2006. Our proved reserves are long-lived with a reserve life index of 22.5 years.
We began extracting CBM in the early 1980s in order to reduce the gas content in the coal
being mined by CONSOL Energy. We developed techniques to extract CBM from coal seams prior to
mining in order to enhance the safety and efficiency of CONSOL Energys mining operations. As a
result of our more than 20 years of experience with CBM extraction, we believe our management has
developed industry-leading expertise in this type of gas production.
History of CNX Gas
We began extracting CBM from coal seams in Virginia in the early 1980s as part of CONSOL
Energys operations. CBM was extracted from the Pocahontas #3 seam in order to reduce the amount of
gas in the coal seam prior to mining to enhance safety. Typically, the gas was vented to the
atmosphere.
In 1990, CONSOL Energy created a joint venture with Conoco Inc. (Conoco) to produce CBM that
qualified for certain preferential tax treatment. Under an operating arrangement, CONSOL Energy
operated gas wells and gathering facilities in which Conoco had an ownership interest. In 1993,
CONSOL Energy acquired the assets of Island Creek Coal Company in Virginia, including an interest
in CBM and gathering assets, from Occidental Petroleum (Occidental). The related gas assets
acquired from Occidental were sold to MCN Energy Group Inc. (MCN) in 1995, although CONSOL Energy
continued to operate gas wells in the area for MCN under an operating agreement.
Between 2000 and 2001, CONSOL Energy reacquired the assets of MCN and acquired the interests
of our joint venture partner, Conoco, to consolidate our interest in Central Appalachia. This
created the core of our business.
4
CNX Gas Corporation (CNX Gas) was established on June 30, 2005. CONSOL Energy contributed its
gas assets to CNX Gas effective August 8, 2005.
Our common stock commenced trading on the New York Stock Exchange (NYSE) under the symbol
CXG on January 19, 2006.
Our Relationship with CONSOL Energy
Prior to August 2005, we conducted business through various companies that were subsidiaries
or joint ventures of CONSOL Energy, a public company traded on the NYSE under the symbol CNX. Those
companies include: CNX Gas Company, LLC; Cardinal States Gathering Company (CSGC); a 50.0%
interest in Coalfield Pipeline Company; a 50.0% interest in Knox Energy LLC; a joint venture with
Kelly Oil and certain other entities; and a 50.0% interest in Buchanan Generation, LLC. These are
the companies primarily responsible for the exploration, production, gathering and sale of our gas,
with the exception of Buchanan Generation, LLC. Buchanan Generation, LLC uses our gas to generate
electricity from a generating facility located near our Virginia gas field. CONSOL Energy owns
81.5% of the outstanding common stock of CNX Gas.
The success of our operations substantially depends upon rights we received from CONSOL
Energy. As a part of our separation from CONSOL Energy, CONSOL Energy transferred to CNX Gas
various subsidiaries and joint venture interests as well as all of CONSOL Energys ownership or
rights to CBM, natural gas, oil, and certain related surface rights. In addition, CONSOL Energy has
given us significant rights to conduct gas production operations associated with its coal mining
activity. These rights are not dependent upon any continuing ownership in us by CONSOL Energy. We
also have established other agreements under which CONSOL Energy will provide us certain corporate
staff services and coordinate our tax filings.
We have made every effort to preserve the synergies that exist between CONSOL Energys mining
activities and our gas production activities. Additionally, the master cooperation and safety
agreement between us and CONSOL Energy will ensure that we continue to have access to gob gas and
gas produced from horizontal wells drilled from inside CONSOL Energys mines. These additional
sources of gas enhance our overall recovery rates for CBM.
Coordination with Mining Activities
Approximately 13.5% of our current gas production is produced in connection with coal
extraction by CONSOL Energy (not including another approximately 16.0% of our production that is
associated with previously mined areas). It is essential that gas liberated by the mining process
be removed from the mine in order to maintain a safe working environment in the mine. As a result,
a portion of our gas extraction activity is determined based upon the needs of the related mining
activity.
Through close cooperation and coordination between CNX Gas and CONSOL Energy, we prepare an
annual drilling program that meets the needs of both companies. The master cooperation and safety
agreement provides that each year, in consultation with CONSOL Energy, CNX Gas will outline its
drilling plans to show: (i) the general area of drilling and the number of wells proposed to be
drilled in the following calendar year, and (ii) the approximate location of all production,
treatment and gathering related systems proposed to be installed by CNX Gas.
Gas Operations
We primarily produce CBM, which is gas that resides in coal seams. In the eastern United
States, conventional natural gas fields typically are located in various types of sedimentary
formations at depths ranging from 2,000 to 15,000 feet. Exploration companies often put their
capital at risk by searching for gas in commercially exploitable quantities at these depths. By
contrast, gas in the coal seams that we drill or anticipate drilling is typically in formations
less than 2,500 feet deep which are usually better defined than deeper formations. We believe that
this contributes to lower exploration costs than those incurred by producers that operate in
deeper, less defined formations.
5
Areas of Operation
In the Appalachian Basin we operate principally in Central Appalachia and Northern Appalachia,
which represent our two reportable segments. We also operate in the Illinois Basin. The four
areas we see playing prominent roles in our portfolio in the near future are as follows:
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first, in Central Appalachia, Virginia Operations CBM, our
traditional area of operation, where we have typically produced
CBM from vertical wells which we drill ahead of mining and gob gas
from wells paid for by CONSOL Energy to de-gas their coal mines; |
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second, in Northern Appalachia, the Mountaineer CBM play in
northwestern West Virginia and southwestern Pennsylvania where our
first major drilling program using vertical to horizontal well
methodology has shown good results; |
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third, in Northern Appalachia, the Nittany CBM play in central
Pennsylvania, where we have substantial holdings and have
completed initial testing activities; and |
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last, in the Illinois Basin, Cardinal, the New Albany Shale play
in western Kentucky and southern Illinois, which has compelling
economic potential similar to Nittany and Mountaineer. |
Central Appalachia
Virginia Operations CBM
We have the right to extract CBM in this region from approximately 290,000 net CBM acres,
which cover a portion of the over 424 million tons of recoverable coal reserves owned or controlled
by CONSOL Energy in Central Appalachia. We have acquired all of CONSOL Energys rights associated
with CBM in this region. We produce gas primarily from the Pocahontas #3 seam which is the main
coal seam mined by CONSOL Energy in this region. This seam is generally found at depths of 2,000
feet and generally ranges from 3 to 6 feet thick. The gas content of this seam is typically between
400 and 600 cubic feet of gas per ton of coal in place. In addition, there are as many as 50
thinner seams present in the several hundred feet above the main Pocahontas #3 seam. Collectively,
this series of coal seams represents a total thickness ranging from 15 to 40 feet. We have access
to over 1,300 core samples that allow us to determine the amount of coal present, the geologic
structure of the coal seam and the gas content of the coal.
We coordinate some of our CBM extraction with the subsurface coal mining of CONSOL Energy. The
initial phase of CBM extraction involves drilling a traditional vertical wellbore into the coal
seam in advance of future mining activities. In general, we drill these wells into the coal seam
ahead of the planned mining recovery in an area. To stimulate the flow of CBM to the wellbore, we
fracture the coal seam by pumping water or inert gases into the coal seam. Once established, these
fractures are maintained by further forcing sand into the fractures to keep them from closing,
allowing CBM to desorb from the coal and migrate along the series of fractures into the wellbore.
We refer to this type of well as a frac well. Presently, frac wells account for
approximately 72.0% of our daily production.
Because some of our gas is produced in association with subsurface mining, we have a unique
opportunity to evaluate the effectiveness of our fracture techniques. We can enter the coal mine
and inspect the fracture pattern created in the seam as the mining process exposes more of the
coal. As a result, we have had the opportunity to gain insight into the efficacy of our fracturing
techniques that is not available in a conventional production scenario. We have used this knowledge
to modify and improve the effectiveness of our fracturing techniques.
Eventually, subsurface mining activities will mine through the frac wells that are drilled in
advance of the mine development plan. As the main coal seam is removed from an area (called a
panel), a rubble zone (called gob) is created in the cavity created by the extraction of the
coal. When the coal is removed, the rock above, which includes as many as 50 thinner coal seams
that cannot be mined, collapses into the void. These seams become extensively fractured and release
substantial volumes of gas as they collapse. We drill vertical wells (called gob wells) into the
gob to extract the additional gas that is released. Approximately 26.0% of our gas production comes
in the form of gob gas (11.5% active gob and 14.5% sealed gob). CONSOL Energy pays for the drilling
of our gob wells in most instances.
6
Recently, we began drilling long horizontal wellbores into the coal seam from within active
mines. We strategically locate these horizontal wells within the pattern of existing frac wells to
further accelerate the desorption of CBM from the coal seam. As of December 31, 2006, we have
drilled 15 of these in-mine horizontal wells, some of which have been extended to lengths of
5,000 feet. The results from these wells are encouraging and suggest that a more efficient recovery
of gas in place is possible ahead of mining operations. The production rates from frac wells have
not been adversely impacted by the introduction of nearby horizontal wellbores in the coal seam.
In fact, we believe production at offsetting frac wells has actually increased due to the further
reductions in pressure within the coal seam caused by the horizontal wells. We intend to increase
our use of the horizontal wells drilled within an active mine in our future development plans.
In-mine horizontal wells account for approximately 2.0% of current daily production.
Tennessee
We are exploring for natural gas in various formations at depths up to 7,000 feet with a joint
venture partner and through a farm-out arrangement on approximately 206,000 gross leasehold acres
in this region. In 2006, we extended the farm-out arrangement through the end of 2007, with a
small portion of the acreage covered through 2011. At December 31, 2006, we had 2.2 Bcfe of proved
reserves in this area. As of December 31, 2006, we have 37.5 net wells that we are operating, while
we also participate in another 5.9 net wells operated by a third party. In total, we have an
inventory of approximately 2,900 drilling locations on this acreage, none of which are proved
undeveloped locations. We also have the right to test and produce from the Chattanooga Shale
formation in this area.
We also
control other property in East Kentucky and Tennessee that represents approximately
94,600 CBM acres, and 62,500 oil and gas acres.
Northern Appalachia
Mountaineer CBM
We have the right to extract CBM in this region from approximately 523,000 net CBM acres,
which contain most of the over 2.7 billion tons of recoverable coal reserves owned or controlled by
CONSOL Energy in Northern Appalachia. We have acquired all of CONSOL Energys rights associated
with CBM in this region. We produce gas primarily from the Pittsburgh #8 coal seam. This seam is
generally found at depths of less than 1,000 feet and generally ranges from 4 to 7 feet thick. The
gas content of this seam is typically between 100 and 250 cubic feet of gas per ton of coal in
place. There are additional coal seams above and below the Pittsburgh seam. Collectively, this
series of coal seams represents a total thickness ranging from 10 to 30 feet. We have access to
over 7,000 core samples that allow us to determine the amount of coal present, the geologic
structure of the coal seam and the gas content of the coal.
Due to the significant geological differences between the Pittsburgh #8 seam in Mountaineer
and the Pocahontas #3 seam in Virginia, we have found that alternative extraction techniques are
more effective than vertical frac wells in this area. Instead of using frac wells, we utilize well
designs that rely on the application of vertical-to-horizontal drilling techniques. This well
design includes a vertical wellbore that is intersected by a second well that has up to three
horizontal lateral sections in the coal. Together, this well system facilitates extraction of CBM
and water from the coal seam. The horizontal wellbores, extending up to 5,000 feet from the point
of intersection with the vertical wellbore, expose large amounts of coal surface area allowing for
the migration of water and CBM from the coal seam. This design creates up to 15,000 feet of total
productive wellbore. The wells are spaced in up to one square mile sections. The vertical well,
equipped with a mechanical pump, provides a sump for water produced by the coal seam to collect and
enables the collected water to be lifted to the surface for disposal. In addition to our
vertical-to-horizontal drilling, we also develop gob wells in this region associated with CONSOL
Energys mines.
In 2006, we drilled, completed and connected to the sales line 10 vertical-to-horizontal CBM
wells in Mountaineer. We expect to achieve peak production rates of nearly 4 Mcf per 100 feet of
lateral exposure in the Blacksville area of this play. As of December 31, 2006, wells that have
been de-watered are meeting this expectation.
Nittany CBM
We have the right to extract CBM in this region of Pennsylvania from approximately 248,000 net
CBM acres. We have acquired all of CONSOL Energys rights associated with CBM in this region. We
expect to produce CBM in Nittany using both vertical-to-horizontal wells and traditional vertical
frac wells. In 2006 we drilled two vertical test wells. As of December 31, 2006, both had been
fractured. During the first quarter of 2007, we plan to begin controlled production, seam by seam,
in these wells in order to better estimate the gas content and productive capability of each
individual seam.
7
Illinois
Cardinal
As of December 31, 2006, we controlled approximately 70,000 acres of oil and gas rights, which
include the rights to gas in the New Albany Shale in western Kentucky and southern Illinois. The
New Albany Shale is a formation containing gaseous hydrocarbons and our acreage position has an
average thickness of 300 feet at an average depth of 3,880 feet. As of December 31, 2006, we have
identified test well locations and we have spudded the first well. We are using a standard
drilling rig to drill approximately 4,000 vertical feet. When drilling is complete, we will
re-enter the hole with a device that takes sidewall core samples into the shale formation within
the expected 300-foot pay zone. These samples may take several months to analyze.
Other
In addition to the Cardinal play in the Illinois Basin, we control 33,000 additional oil & gas
acres. We also control 92,000 net CBM acres which contain most of the over 700 million tons of
recoverable coal reserves owned or controlled by CONSOL Energy in Illinois.
Other Conventional Oil & Gas and CBM
We have acquired all of CONSOL Energys rights associated with CBM from over 270 million tons
of recoverable coal reserves owned or controlled by CONSOL Energy throughout other regions of the
United States. We do not currently have any producing operations in these regions. We have not
fully evaluated our ability to produce CBM in these regions and we may need to acquire additional
rights from holders of real estate interests in order to obtain the rights needed to extract and
produce CBM.
8
The table below sets forth the states and counties in each of our principal areas where our
properties reside.
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Kentucky
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Bell
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Breathitt
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Clay |
Crittenden
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Estill
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Floyd |
Harlan
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Henderson
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Hopkins |
Jackson
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Johnson
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Knott |
Knox
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Lee
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Leslie |
Letcher
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Magoffin
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McLean |
Muhlenberg
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Owsley
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Perry |
Pike
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Pulaski |
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Rockcastle
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Union
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Webster |
Whitley
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Wolfe |
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Virginia
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Bland
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Buchanan
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Carroll |
Culpeper
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Dickenson
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Russell |
Tazewell
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Washington
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Wythe |
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West Virginia
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Braxton
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Clay
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Lewis |
Logan
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McDowell
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Mercer |
Mingo
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Nicholas
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Pocahontas |
Raleigh
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Randolph
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Upshur |
Webster
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Wyoming |
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Ohio
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Athens
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Belmont
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Carroll |
Columbiana
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Gallia
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Guernsey |
Harrison
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Highland
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Jefferson |
Meigs
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Monroe
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Morgan |
Muskingum
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Noble
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Perry |
Vinton
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Washington |
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Pennsylvania
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Allegheny
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Armstrong
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Beaver |
Butler
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Clearfield
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Fayette |
Greene
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Indiana
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Jefferson |
Somerset
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Washington
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Westmoreland |
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West Virginia
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Barbour
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Brooke
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Doddridge |
Grant
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Harrison
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Marion |
Marshall
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Monongalia
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Ohio |
Taylor
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Tucker
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Wetzel |
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Tennessee
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Claiborne
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Morgan
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Campbell |
Scott
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Roane
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Anderson |
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New York
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Allegany
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Steuben |
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Illinois
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Gallatin
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Hamilton
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Hardin |
Jefferson
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Pope
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Williamson |
9
Other Assets
In addition to our production assets, CNX Gas typically constructs, owns and operates its
gathering and processing mid-stream infrastructure.
Each gathering system begins at the individual wellhead, delivering gas into a major trunkline
that connects to the interstate pipeline system. Among our most significant gathering systems is
our Cardinal States Gathering System in our Virginia Operations. There, gas from our wells is
gathered from 1,030 miles of various diameter pipe and collected into our two main
trunklinesCardinal States No. 1 and Cardinal States No. 2. Cardinal States No. 1 is a 50-mile,
16-inch gathering system capable of transporting 100,000 Mcf of gas per day. Cardinal States No. 2
is a 30-mile, 20-inch gathering line currently capable of transporting 150,000 Mcf of gas per day.
Our Cardinal States Gathering System connects to a Columbia Gas Transmission interstate pipeline
and to the Jewell Ridge Lateral, which delivers into an East Tennessee Natural Gas (ETNG)
interstate pipeline. We have entered into a 15- year firm transportation agreement with ETNG for
197,500 Mcf of capacity per day at pre-determined fixed rates. The aggregate capacity that we
control is more than the current daily production from our Virginia operations, allowing us to
expand our production in this area while realizing economies of scale. We also own and operate
gathering systems in our other production regions.
We also own or lease various processing plants that remove impurities from certain types of
CBM gas in order to meet interstate pipeline standards. These plants allow us to sell gas that
might otherwise be unsaleable.
Through a joint venture with Allegheny Energy, we own a 50% interest in an 88-megawatt,
gas-fired electric generating facility in Virginia near our gas production facilities. This
facility, which is used to meet peak load demands for electricity, uses the CBM that we produce.
Because it is a peaking power facility, it does not operate at all times of the year, but the
facility does provide a potential sales outlet for our gas of up to 22 Mmcf per day.
Summary of Properties as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
Northern |
|
Illinois |
|
|
|
|
|
|
Appalachia |
|
Appalachia |
|
Basin |
|
Other |
|
Total |
Estimated Net Proved Reserves (Bcfe) |
|
|
1,220.8 |
|
|
|
32.6 |
|
|
|
|
|
|
|
12.1 |
|
|
|
1,265.5 |
|
Percent Developed (1) |
|
|
47.3 |
% |
|
|
66.9 |
% |
|
|
|
|
|
|
100 |
% |
|
|
48.2 |
% |
Net Producing Wells |
|
|
2,315.4 |
|
|
|
156.0 |
|
|
|
|
|
|
|
164.25 |
|
|
|
2,635.65 |
|
No. of Potential Drill Sites Available |
|
|
6,898 |
|
|
|
1,876 |
|
|
|
765 |
|
|
|
|
|
|
|
9,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proved Developed CBM Acres |
|
|
134,320 |
|
|
|
45,763 |
|
|
|
|
|
|
|
|
|
|
|
180,083 |
|
Net Proved Undeveloped CBM Acres |
|
|
31,300 |
|
|
|
10,880 |
|
|
|
|
|
|
|
|
|
|
|
42,180 |
|
Net Unproved CBM Acres |
|
|
341,880 |
|
|
|
806,357 |
|
|
|
92,000 |
|
|
|
|
|
|
|
1,240,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net CBM Acres |
|
|
507,500 |
|
|
|
863,000 |
|
|
|
92,000 |
|
|
|
|
|
|
|
1,462,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proved Developed Oil & Gas
Acres |
|
|
8,660 |
|
|
|
|
|
|
|
|
|
|
|
31,640 |
(3) |
|
|
40,300 |
|
Gross Proved Undeveloped Oil & Gas
Acres |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unproved Oil & Gas Acres |
|
|
414,340 |
|
|
|
178,000 |
|
|
|
103,000 |
|
|
|
198,360 |
|
|
|
893,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Oil & Gas Acres |
|
|
423,000 |
|
|
|
178,000 |
|
|
|
103,000 |
|
|
|
230,000 |
|
|
|
934,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We estimate the cost to fully develop our proved undeveloped reserves
excluding abandonment is $490,600 (non-discounted and in 2006
dollars). |
|
(2) |
|
Includes areas leased to others or participation interests in third party wells as well as small acreage in other areas. |
|
(3) |
|
Assumes 40 acres per gross well on leased out or participating interest wells. |
10
Our inventory of drilling sites associated with the oil and gas estate was determined by
dividing our acreage in evaluated areas by the well spacing generally used in that area. In
Tennessee, wells are commonly drilled on 40-acre units and in Central Appalachia, wells are drilled
on an average of 110-acre spacing. The inventory of CBM locations was determined in a detailed
evaluation of our Northern Appalachia and Central Appalachia reserves by Schlumberger Data &
Consulting Services. The total CBM drilling site inventory reflects the sum of 80-acre and 60-acre
vertical development well locations, 40-acre infill well locations and 640-acre
vertical-to-horizontal well locations identified in the study. The inventory of drilling sites
excludes a number of potential locations in areas not yet evaluated and the majority of potential
30-acre infill sites in Virginia CBM operations.
We control all of the properties reflected in the table above by deed or by lease, except to
the extent burdened by the production joint ventures described in the table below. The aggregate
production from these joint ventures represents less than 1% of total company production for 2006.
Summary of Principal Production Partners and Joint Venture Interests as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Partners |
|
|
|
|
|
|
|
|
|
|
and Joint Venture |
|
|
|
Working |
|
|
Area |
|
Type |
|
Interests |
|
Acreage |
|
Interest |
|
How Acquired |
Central Appalachia
|
|
Oil & Gas
|
|
Columbia Natural Resources, LLC
|
|
132,000 Gross Oil &
Gas Acres
|
|
|
50 |
% |
|
Received from CONSOL Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Appalachia
|
|
Oil & Gas
|
|
New River Energy, LLC (1)
|
|
206,000 Gross Oil &
Gas Acres
|
|
|
50 |
% |
|
Acquired through lease
jointly with New River
Energy, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern Appalachia
|
|
Oil & Gas
|
|
Kelly Oil and
Gas, Inc., Excelsior Exploration
Corporation, KWR Ventures LLC and
Ceja Corporation
|
|
36,000 Gross Oil &
Gas Acres
|
|
|
25 |
% |
|
Acquired through a
working interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Appalachia
|
|
CBM
|
|
Appalachian Energy, Inc.
|
|
4,200 Gross CBM
Acres
|
|
|
50 |
% |
|
Contribution of
acres by each party |
|
|
|
(1) |
|
New River Energy, LLC owns 50% of Knox Energy, LLC. We own the
remaining 50%. A similar arrangement is in place with respect to
Coalfield Pipeline Company, which owns and operates the pipeline
that gathers the Knox Energy, LLC gas for transportation to the
sales pipeline. |
Drilling
During the twelve months ended December 31, 2006, 2005 and 2004, we drilled 314, 225 and 228
net development wells, respectively, all of which were productive. These well counts include gob
wells and wells drilled by CNX Gas. Wells drilled by other operators that we participate in are
excluded. As of December 31, 2006, we have not had any dry development wells, and 41 wells are
still in process. The following table illustrates the wells referenced above by geographic region:
Development Wells (Net)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Central Appalachia |
|
|
290 |
|
|
|
206 |
|
|
|
222 |
|
Northern Appalachia |
|
|
24 |
|
|
|
19 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
314 |
|
|
|
225 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
During the twelve months ended December 31, 2006, 2005 and 2004, we drilled in the aggregate
4, 15 and 12 net exploratory wells, respectively. The following table illustrates the exploratory
wells by geographic region:
Exploratory Wells (Net)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
Producing |
|
Dry |
|
Still Eval. |
|
Producing |
|
Dry |
|
Still Eval. |
|
Producing |
|
Dry |
|
Still Eval. |
Central Appalachia |
|
|
2 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5 |
|
|
|
0 |
|
|
|
0 |
|
Northern Appalachia |
|
|
0 |
|
|
|
0 |
|
|
|
2 |
|
|
|
13 |
|
|
|
0 |
|
|
|
0 |
|
|
|
7 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2 |
|
|
|
0 |
|
|
|
2 |
|
|
|
15 |
|
|
|
0 |
|
|
|
0 |
|
|
|
12 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Other Operating Data
Production
The following table sets forth net sales volume produced for the periods indicated, including
our portion of equity affiliates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Total Produced (Mmcf) |
|
|
56,135 |
|
|
|
48,390 |
|
|
|
48,556 |
|
Average Sales Prices and Lifting Costs
The following table sets forth the average sales price, net of hedging transactions, and the
average lifting cost, including our portion of equity interests, for all of our gas production for
the periods indicated. Lifting cost is the cost of raising gas to the gathering system and does not
include depreciation, depletion or amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Average Gas Sales Price Including Effects of Financial
Settlements (per Mcf) |
|
$ |
7.04 |
|
|
$ |
5.90 |
|
|
$ |
4.90 |
|
Average Lifting Cost (per Mcf) |
|
$ |
0.56 |
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
12
Productive Wells and Acreage
The following table sets forth, at December 31, 2006, the number of CNX Gas producing wells,
developed acreage and undeveloped acreage:
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Net (1) |
Producing Wells |
|
|
3,232 |
|
|
|
2,636 |
|
Proved Developed Acreage |
|
|
220,383 |
|
|
|
190,134 |
|
Proved Undeveloped Acreage |
|
|
42,900 |
|
|
|
42,180 |
|
Unproven Acreage |
|
|
2,197,397 |
|
|
|
1,776,786 |
|
|
|
|
|
|
|
|
Total Acreage |
|
|
2,460,680 |
|
|
|
2,009,100 |
|
|
|
|
|
|
|
|
Most of our development wells and acreage are located in Central Appalachia. Some leases are
beyond their primary term, but these leases are extended in accordance with their terms as long as
certain drilling commitments are satisfied.
(1) |
|
Net acres do not include acreage attributable to the working interests
of our principal joint venture partners and the portions of certain
proved developed acreage attributable to property we have leased to
third-party producers. Additional adjustments (either increases or
decreases) may be required as we further develop title to and further
confirm our rights with respect to our various properties in
anticipation of development. We believe that our assumptions and
methodology in this regard are reasonable. |
Sales
CNX Gas enters into physical gas sales transactions with various counterparties for terms
varying in length. Reserves and production estimates are believed to be sufficient to satisfy these
obligations. In the past, other than interstate pipeline outages related to maintenance, we have
not failed to deliver quantities required under contract. CNX Gas has also entered into various gas
swap transactions that qualify as financial cash flow hedges. These gas swap transactions exist
parallel to the underlying physical transactions. These financial, as well as physical hedges,
represented approximately 27% of our produced gas sales volumes for the twelve months ended
December 31, 2006 at an average price of $7.42 per Mcf. As of December 31, 2006, we expect these
transactions will cover approximately 20% of our estimated 2007 production.
CNX Gas has purchased firm transportation capacity on the Columbia pipeline to ensure gas
production flows to market. As mentioned above in the section entitled Other Assets, as of October
2006, pursuant to our agreement with ETNG, we have a contract for firm transportation of 197,500
Mcf per day on the Jewell Ridge Lateral for the next 15 years, and 40,000 Mcf per day on ETNGs
Patriot mainline. As of December 31, 2006, CNX Gas has secured firm transportation capacity to
cover more than its 2007 hedged production. CNX Gas also participates in the short-term firm
transportation markets to manage flows as market conditions dictate. We expect to be able to flow
all of our production in 2007 without curtailment, other than curtailments resulting from
maintenance or other major events relating to our gathering system, laterals or the interstate gas
pipelines.
The hedging strategy and information regarding derivative instruments used are outlined in
Managements Discussion and Analysis of Results of Operations and Financial ConditionQualitative
and Quantitative Disclosures About Market Risk, and in Note 14 of the notes to the consolidated
annual financial statements included in Item 8 of Part II of this Annual Report.
13
Reserves
The following table shows our estimated proved developed and proved undeveloped reserves.
Reserve information is net of royalty interest. Proved developed and proved undeveloped reserves
are reserves that could be commercially recovered under current economic conditions, operating
methods and government regulations. Proved developed and proved undeveloped reserves are defined by
the SEC Rule 4.10(a) of Regulation S-X.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserves (Mmcfe) |
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
Consolidated |
|
Equity |
|
Consolidated |
|
Equity |
|
Consolidated |
|
Equity |
|
|
Operations |
|
Affiliates |
|
Operations |
|
Affiliates |
|
Operations |
|
Affiliates |
Estimated
proved developed
reserves |
|
|
609,700 |
|
|
|
2,200 |
|
|
|
549,574 |
|
|
|
2,672 |
|
|
|
395,152 |
|
|
|
1,489 |
|
Estimated proved
undeveloped
reserves |
|
|
653,593 |
|
|
|
|
|
|
|
578,150 |
|
|
|
|
|
|
|
647,251 |
|
|
|
896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated
proved developed
and undeveloped
reserves |
|
|
1,263,293 |
|
|
|
2,200 |
|
|
|
1,127,724 |
|
|
|
2,672 |
|
|
|
1,042,403 |
|
|
|
2,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted Future Net Cash Flows
The following table shows our estimated future net cash flows and total standardized measure
of discounted future net cash flows at 10%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted Future Net Cash Flows |
|
|
($ in thousands) |
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Future net cash flows |
|
$ |
2,483,887 |
|
|
$ |
5,149,938 |
|
|
$ |
2,872,571 |
|
Total PV-10 measure of pre tax discounted future net cash flows (1) |
|
$ |
1,499,664 |
|
|
$ |
3,051,866 |
|
|
$ |
1,655,232 |
|
Total standardized measure of after tax discounted future net cash flows |
|
$ |
934,891 |
|
|
$ |
1,870,794 |
|
|
$ |
1,029,538 |
|
|
|
|
(1) |
|
We calculate our PV-10 value in accordance with the following table.
Management believes that the presentation of the non-GAAP financial
measure of PV-10 provides useful information to investors because it
is widely used by professional analysts and sophisticated investors in
evaluating oil and gas companies. Because many factors that are unique
to each individual company impact the amount of future income taxes
estimated to be paid, the use of a pre-tax measure is valuable when
comparing companies based on reserves. PV-10 is not a measure of
financial or operating performance under GAAP. PV-10 should not be
considered as an alternative to the standardized measure as defined
under GAAP. All firm transportation costs are included in the PV-10
calculation. However, costs associated with our capital lease
obligations are excluded from the PV-10 calculation. If these costs
were included, the December 31, 2006 PV-10 calculation would be
approximately $1,441,000. We have included a reconciliation to the
most directly comparable GAAP measureafter-tax discounted future net
cash flows. |
Reconciliation of PV-10 to Standardized Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Future cash inflows |
|
$ |
7,105,265 |
|
|
$ |
11,675,551 |
|
|
$ |
6,337,257 |
|
Future Production Costs |
|
|
(2,568,731 |
) |
|
|
(2,852,033 |
) |
|
|
(1,453,364 |
) |
Future Development Costs (including abandonments) |
|
|
(552,114 |
) |
|
|
(422,315 |
) |
|
|
(265,540 |
) |
|
|
|
|
|
|
|
|
|
|
Future net cash flows |
|
|
3,984,420 |
|
|
|
8,401,203 |
|
|
|
4,618,353 |
|
10% discount factor |
|
|
(2,484,756 |
) |
|
|
(5,349,337 |
) |
|
|
(2,963,121 |
) |
|
|
|
|
|
|
|
|
|
|
PV-10 (Non-GAAP measure) |
|
|
1,499,664 |
|
|
|
3,051,866 |
|
|
|
1,655,232 |
|
|
|
|
|
|
|
|
|
|
|
Undiscounted Income Taxes |
|
|
(1,500,533 |
) |
|
|
(3,251,265 |
) |
|
|
(1,745,782 |
) |
10% discount factor |
|
|
935,760 |
|
|
|
2,070,193 |
|
|
|
1,120,088 |
|
|
|
|
|
|
|
|
|
|
|
Discounted Income Taxes |
|
|
(564,773 |
) |
|
|
(1,181,072 |
) |
|
|
(625,694 |
) |
|
|
|
|
|
|
|
|
|
|
Standardized GAAP measure |
|
$ |
934,891 |
|
|
$ |
1,870,794 |
|
|
$ |
1,029,538 |
|
|
|
|
|
|
|
|
|
|
|
14
Competition
Competition throughout the country is regionalized. We operate in the eastern United States.
We believe that the gas market is highly fragmented and not dominated by any single producer. We
believe that several of our competitors have devoted far greater resources than we have to gas
exploration and development. We believe that competition within our market is based primarily on
operating cost and the proximity of gas fields to customers.
Employee and Labor Relations
As of December 31, 2006, CNX Gas had 192 employees. None of our employees is represented by a
union. We believe our relationship with our employees is satisfactory.
Regulations
The natural gas industry is subject to regulation by federal, state and local authorities
on matters such as employee health and safety, permitting and licensing requirements, air quality
standards, water pollution, the treatment, storage and disposal of wastes, plant and wildlife
protection, storage tanks, the reclamation of properties and plugging of wells after gas operations
are completed, the discharge or release of materials into the atmosphere and the environment, and
the effects of gas well operations on groundwater quality and availability. Additional regulations,
including regulations applicable to mine safety, may also be applicable to gas operations producing
coalbed methane in relation to active mining. The possibility exists that new legislation or
regulations may be adopted which would have a significant impact on our operations or our
customers ability to use gas and may require us or our customers to change operations
significantly or incur substantial costs.
Environmental Regulation of Gas Operations
Numerous governmental permits and approvals are required for gas operations. In order to
obtain such permits and approvals, we are, or may be, required to prepare and present to federal,
state or local authorities data pertaining to the effect or impact that any proposed exploration
for or production of gas may have upon the environment and public and employee health and safety.
Compliance with such permits and all other requirements imposed by such authorities may be costly
and time-consuming and may delay commencement or continuation of exploration or production
operations. Moreover, failure to comply may result in the imposition of significant fines and
penalties. Future legislation or regulations may increase and/or change the requirements for the
protection of the environment, health and safety and, as a consequence, our activities may be more
closely regulated. This type of legislation and regulation, as well as future interpretations of
existing laws, may result in substantial increases in equipment and operating costs to CNX Gas and
delays, interruptions or a termination of operations, the extent of which cannot be predicted.
Further, the imposition of new environmental regulations could include restrictions on our ability
to conduct certain operations such as hydraulic fracturing or disposal of waste.
It is not possible to quantify the costs of compliance with all applicable federal and
state environmental laws. While those costs have not been significant in the past, they could be
significant in the future. CNX Gas had no significant environmental control facility expenditures
for the twelve months ended 2006, 2005 and 2004. CNX Gas expects to incur capital expenditures of
$1,490 related to water treatment costs in 2007. Any environmental costs are in addition to well
closing costs; property restoration costs; and other, significant, non-capital environmental costs,
including costs incurred to obtain and maintain permits, to gather and submit required data to
regulatory authorities, to characterize and dispose of wastes and effluents, and to maintain
management operational practices with regard to potential environmental liabilities. Compliance
with these federal and state environmental laws has substantially increased the cost of gas
production, but is, in general, a cost common to all domestic gas producers.
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The magnitude of the liability and the cost of complying with environmental laws and
regulations cannot be predicted with certainty due to: the lack of specific environmental,
geologic, and hydrogeologic information available with respect to many sites; the potential for new
or changed laws and regulations; the development of new drilling, remediation, and detection
technologies and environmental controls; and the uncertainty regarding the timing of work with
respect to particular sites. As a result, we may incur material liabilities or costs related to
environmental matters in the future and such environmental liabilities or costs could adversely
affect our results and financial condition. In addition, there can be no assurance that changes in
laws or regulations would not affect the manner in which we are required to conduct our operations.
Further, given the retroactive nature of certain environmental laws, CNX Gas has incurred, and may
in the future incur, liabilities associated with: the investigation and remediation of the release
of hazardous substances; environmental conditions; and natural resource damages related to
properties and facilities currently or previously owned or operated as well as sites owned by third
parties to which CNX Gas or our subsidiaries sent waste materials for disposal.
CNX Gas is subject to various generally-applicable federal environmental laws, including
the following:
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the Clean Air Act; |
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the Clean Water Act; |
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the Toxic Substances Control Act; |
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the Endangered Species Act: |
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the Resource Conservation and Recovery Act; and |
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the Emergency Planning and Community Right-to-Know Act; |
as well as state laws of similar scope and substance in each state in which we operate.
These environmental laws require monitoring, reporting, permitting and/or approval of
many aspects of gas operations. Both federal and state inspectors regularly inspect facilities
during construction and during operations after construction. We have ongoing environmental
management, compliance and permitting programs designed to assist in compliance with such
environmental laws. We believe that we have obtained all required permits under federal and state
environmental laws for our current gas operations. Further, we believe that we are in substantial
compliance with such permits. However, if violations of permits, failure to obtain permits or other
violations of federal or state environmental laws are discovered, we could incur significant
liabilities: to correct such violations; to provide additional environmental controls; to obtain
required permits; and to pay fines which may be imposed by governmental agencies. New permit
requirements and other requirements imposed under federal and state environmental laws may cause us
to incur significant additional costs that could adversely affect our operating results.
From time to time, we have been the subject of investigations, administrative
proceedings, and litigation, by government agencies and third parties, relating to environmental
matters. We may become involved in future proceedings, litigation or investigations and incur
liabilities that could be materially adverse to us.
Federal Regulation of the Sale and Transportation of Gas
Various aspects of CNX Gas operations are regulated by agencies of the federal
government. The Federal Energy Regulatory Commission regulates the transportation and sale of
natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. While first sales by producers of natural gas, and all sales of condensate
and natural gas liquids can be made currently at uncontrolled market prices, Congress could reenact
price controls in the future. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act,
which removed all Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting
wellhead sales of natural gas effective January 1, 1993.
Regulations and orders set forth by the Federal Energy Regulatory Commission also impact
the business of CNX to a certain degree. Although the Federal Energy Regulatory Commission does
not directly regulate CNX Gas production activities, the Federal Energy Regulatory Commission has
stated that it intends for certain of its orders to foster increased competition within all phases
of the natural gas industry. Additionally, the Federal Energy Regulatory Commission continues to
review its transportation regulations, including whether to allocate all short-term capacity on the
basis of competitive auctions and whether changes to its long-term transportation policies may also
be appropriate to avoid a market bias toward short-term contracts. Additional Federal Energy
Regulatory Commission orders were adopted based on this review with the goal of increasing
competition for natural gas markets and transportation.
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The Federal Energy Regulatory Commission has also issued numerous orders confirming the sale
and abandonment of natural gas gathering facilities previously owned by interstate pipelines and
acknowledging that if the Federal Energy Regulatory Commission does not have jurisdiction over
services provided by these facilities, then such facilities and services may be subject to
regulation by state authorities in accordance with state law. A number of states have either
enacted new laws or are considering the adequacy of existing laws affecting gathering rates and/or
services. Other state regulation of gathering facilities generally includes various safety,
environmental, and in some circumstances, nondiscriminatory take requirements, but does not
generally entail rate regulation. Thus, natural gas gathering may receive greater regulatory
scrutiny of state agencies in the future. CNX Gas gathering operations could be adversely affected
should they be subject in the future to increased state regulation of rates or services, although
CNX Gas does not believe that it would be affected by such regulation any differently than other
natural gas producers or gatherers. In addition, the Federal Energy Regulatory Commissions
approval of transfers of previously-regulated gathering systems to independent or pipeline
affiliated gathering companies that are not subject to Federal Energy Regulatory Commission
regulation may affect competition for gathering or natural gas marketing services in areas served
by those systems and thus may affect both the costs and the nature of gathering services that will
be available to interested producers or shippers in the future.
CNX Gas owns certain natural gas pipeline facilities that it believes meet the
traditional tests which the Federal Energy Regulatory Commission has used to establish a pipelines
status as a gatherer not subject to the Federal Energy Regulatory Commission jurisdiction.
Additional proposals and proceedings that might affect the gas industry are pending
before Congress, the Federal Energy Regulatory Commission, the Minerals Management Service, state
commissions and the courts. CNX Gas cannot predict when or whether any such proposals may become
effective. In the past, the natural gas industry has been heavily regulated. There is no assurance
that the regulatory approach currently pursued by various agencies will continue indefinitely.
Notwithstanding the foregoing, CNX Gas does not anticipate that compliance with existing federal,
state and local laws, rules and regulations will have a material or significantly adverse effect
upon the capital expenditures, earnings or competitive position of CNX Gas or its subsidiaries. No
material portion of CNX Gas business is subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the federal government.
State Regulation of Gas OperationsUnited States
CNX Gas operations are also subject to regulation at the state and in some cases, county,
municipal and local governmental levels. Such regulation includes requiring permits for the
drilling of wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, the plugging and abandoning of wells, the
disposal of fluids used in connection with operations , and gas operations producing coalbed
methane in relation to active mining. CNX Gas operations are also subject to various conservation
laws and regulations. These include regulations that affect the size of drilling and spacing units
or proration units and the density of wells which may be drilled and the unitization or pooling of
gas properties. In addition, state conservation laws establish maximum rates of production from gas
wells, and generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. State regulation of gathering facilities generally includes
various safety, environmental and, in some circumstances, nondiscriminatory take requirements, but
does not generally entail rate regulation. These regulatory burdens may affect profitability, and
CNX Gas is unable to predict the future cost or impact of complying with such regulations.
Ownership of Mineral Rights
The majority of our drilling operations are conducted on properties related to CONSOL Energys
coal holdings. Our existing rights are often dependent on CONSOL Energy having obtained valid title
to its properties.
CONSOL Energys past practice has been to acquire ownership or leasehold rights to its coal
properties prior to conducting its coal mining operations. Given CONSOL Energys long history as a
coal producer we believe it has a well developed ownership position relating to its coal holdings.
Although CONSOL Energy generally attempts to obtain ownership or leasehold rights to CBM and/or
conventional gas related to its coal holdings, its ownership position relating to these property
estates is less developed. As is customary in the coal and gas industry, a summary review of the
title to coal, CBM and other gas rights is made on properties at the time of the acquisition of the
other rights in the properties. Prior to the commencement of gas drilling operations on those
properties, we conduct a thorough title examination and perform curative work with respect to
significant defects. To the extent title opinions or other investigations reflect title defects on
those properties, we are typically responsible for curing any title defects at our expense. We
generally will not commence our drilling operations on a property until we have cured any material
title defects on such property. We completed title work on substantially all of our producing
properties and believe that we have satisfactory title to our producing properties in accordance
with standards generally accepted in the gas industry.
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Our natural gas properties are subject to customary royalty and other interests and burdens
which we believe do not materially interfere with the use of or affect our carrying value of the
properties.
The following summary sets forth an analysis of provisions of Pennsylvania, Virginia and West
Virginia law relating to the ownership of CBM. These summaries do not purport to be complete and
are qualified in their entirety by reference to the provisions of applicable law and rights and the
laws relating to traditional natural gas resources may differ materially from the rights related to
CBM. These summaries are based on current law as of the date of this Annual Report.
Pennsylvania
In Pennsylvania, CBM that remains inside the coal seam is generally the property of the owner
of that coal seam where the gas is located. CBM can be sold in place or leased by the coal owner to
another party such as a producer who then would have the right to extract the gas from the coal
seam under the terms of the agreement with the coal owner. Once the gas migrates from the coal into
other strata, the coal owner no longer has clear title to that migrated gas. As a result, in
certain circumstances in Pennsylvania (e.g., in a gob or mine void), we may be required to obtain
other property interests (beyond ownership or leasehold interest in the coal rights or CBM) in
order to extract gas that is no longer located in the coal seam.
Virginia
The vast majority of CBM we produce as well as our proved reserves are in Virginia, which has
been the focus of our developmental efforts to date. In Virginia, the Virginia Supreme Court has
stated that the grant of coal rights only does not include rights to CBM absent an express grant of
CBM, natural gases, or minerals in general. The situation may be different if there is any
expression in the severance deed indicating more than mere coal is conveyed. This Court has also
found that the owner of the CBM did not have the right to fracture the coal in order to retrieve
the CBM and that the coal operator had the right to ventilate the CBM in the course of mining. In
Virginia, we believe that we control the relevant property rights in order to capture gas from the
vast majority of our producing properties.
In addition, Virginia has established the Virginia Gas and Oil Board and a procedure for the
development of CBM by an operator in those instances where the owner of the CBM has not leased it
to the operator or in situations where there are conflicting claims of ownership of the CBM. The
general practice is to force pool both the coal owner and the gas owner. In those instances, any
royalties otherwise payable are paid into escrow and the burden then is upon the conflicting
claimants to establish ownership by court action. The Virginia Gas and Oil Board does not make
ownership decisions.
West Virginia
In West Virginia, its Supreme Court has held that, in a conventional oil and gas lease
executed prior to the inception of widespread public knowledge regarding CBM operations, the oil
and gas lessee did not acquire the right to produce CBM. As of December 31, 2006, the West Virginia
courts have not clarified who owns CBM in West Virginia. Therefore, the ownership of CBM is an open
question in West Virginia.
West Virginia has enacted a law, the Coalbed Methane Well and Units Act (the West Virginia
Act), regulating the commercial recovery and marketing of CBM. Although the West Virginia Act does
not specify who owns, or has the right to exploit, CBM in West Virginia and instead refers
ownership disputes to judicial resolution, it contains provisions similar to Virginias forced
pooling law. Under the pooling provisions of the West Virginia Act, an applicant who proposes to
drill can prosecute an administrative proceeding with the West Virginia coalbed methane review
board to obtain authority to produce CBM from pooled acreage. Owners and claimants of CBM interests
who have not consented to the drilling are afforded certain elective forms of participation in the
drilling (e.g., royalty or owner) but their consent is not required to obtain a pooling order
authorizing the production of CBM by the operator within the boundaries of the drilling unit. The
West Virginia Act also provides that, where title to subsurface minerals has been severed in such a
way that title to coal and title to natural gas are vested in different persons, the operator of a
CBM well permitted, drilled and completed under color of title to the CBM from either the coal seam
owner or the natural gas owner has an affirmative defense to an action for willful trespass
relating to the drilling and commercial production of CBM from that well.
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We anticipate in future years to more actively explore for and develop Northern Appalachian
CBM in West Virginia. As indicated, we may need or desire to acquire additional rights from other
holders of real estate interests, including acquiring rights from other real estate interest
holders if the law at that time continues to lack clarity on ownership rights to CBM in West
Virginia. As we explore and develop this other acreage where CONSOL Energy has coal rights and has
leased/conveyed to us CONSOL Energys rights to CBM, we expect in accordance with our existing
procedures to have a title examination performed of CONSOL Energys rights to CBM. If we believe we
need to obtain additional rights from the holders of other real estate interests, we have developed
a methodology as part of deciding the feasibility of developing a particular tract to evaluate the
ability to locate and negotiate a royalty arrangement with those other holders or use force pooling
under the West Virginia Act.
Other States
We have been transferred rights to extract CBM held by CONSOL Energy in other states where it
has coal reserves, including the states which comprise the Illinois Basin and certain other western
basins. The ownership of CBM in these other states may be uncertain or could belong to other
holders of real estate interests and we may need to acquire additional rights from other holders of
real estate interests to extract and produce CBM in these other states.
GLOSSARY OF NATURAL GAS AND COAL TERMS
The following is a description of the meanings of some of the oil and gas industry terms used
in this Annual Report.
Appalachian Basin. A mountainous region in the eastern United States, running from northern
Alabama to New York, and including parts of Georgia, South Carolina, North Carolina, Tennessee,
Kentucky, Pennsylvania, Virginia, and all of West Virginia.
Bcf. Billion cubic feet of natural gas.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to
one bbl of crude oil, condensate or natural gas liquids.
Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one
pound of water by one degree Fahrenheit.
CBM. Coalbed methane.
Central Appalachia. As used in this Annual Report, Central Appalachia includes Virginia,
Tennessee, East Kentucky and southern West Virginia.
Coal Seam. A single layer or stratum of coal.
Completion. The installation of permanent equipment for the production of oil or natural gas,
or in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Developed acreage. The number of acres that are allocated or assignable to productive wells or
wells capable of production.
Development well. A well drilled within the proved boundaries of an oil or natural gas
reservoir with the intention of completing the stratigraphic horizon known to be productive.
Dry hole. A well found to be incapable of producing hydrocarbons in sufficient quantities such
that proceeds from the sale of such production exceed production expenses and taxes.
Exploitation. Ordinarily considered to be a form of development within a known reservoir.
Exploratory well. A well drilled to find and produce oil or gas reserves not classified as
proved, to find a new reservoir in a field previously found to be productive of oil or gas in
another reservoir or to extend a known reservoir.
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Farm-in or farm-out. An agreement under which the owner of a working interest in an oil or gas
lease assigns the working interest or a portion of the working interest to another party who
desires to drill on the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a farm-in while the
interest transferred by the assignor is a farm-out.
Field. An area consisting of either a single reservoir or multiple reservoirs, all grouped on
or related to the same individual geological structural feature and/or stratigraphic condition.
Frac well. A vertical well drilled in advance of mining and producing from zones artificially
fractured or stimulated and which is capable of producing natural gas.
Gathering system. Pipelines and other equipment used to move natural gas from the wellhead to
the trunk or the main transmission lines of a pipeline system.
Gob. The de-stressed zone associated with any full seam extraction of coal that extends above
and below the mined out coal seam, and which may be sealed or unsealed.
Gob gas. Gas produced from (a) a well drilled in advance of mining or after mining for the
purpose of extracting natural gas from the gob or (b) a frac well that is recompleted for the
purpose of extracting natural gas from the gob.
Gross acres or gross wells. The total acres or wells, as the case may be, in which a working
interest is owned.
Longwall mining. An automated form of underground coal mining characterized by high recovery
and extraction rates. A high-powered cutting machine is passed across the exposed face of coal,
shearing away broken coal, which is continuously hauled away by a floor-level conveyor system.
Longwall mining extracts all machine-minable coal between the floor and ceiling within a contiguous
block of coal, known as a panel, leaving no support pillars within the panel area. Longwall mining
is done under movable roof supports that are advanced as the bed is cut. The roof in the mined-out
area is allowed to fall as the mining advances.
Mcf. Thousand cubic feet of natural gas.
Mcfe. Thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to
one bbl of crude oil, condensate or natural gas liquids.
MMBtu. Million British thermal units.
Mmcf. Million cubic feet of natural gas.
Mmcfe. Million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to
one bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned in gross acres or
wells, as the case may be.
Northern Appalachia. As used in this Annual Report, Northern Appalachia includes Pennsylvania
and northern West Virginia.
NYMEX. The New York Mercantile Exchange.
Panel. A contiguous block of coal that generally comprises one operating unit.
Pay zone. The section of rock, from which gas is expected to be produced in commercial
quantities.
Pipeline imbalance (imbalance). We have an operational balancing agreement with Columbia Gas
Transmission Corporation (Columbia). This agreement is in accordance with the Council of
Petroleum Accountants Societies definition of producer imbalances, whereby the operator controls
the physical production and delivery of gas to a transporter. Contracted quantities of gas rarely
equal physical deliveries. As the operator, CNX Gas is responsible for monitoring this imbalance
and making adjustments to sales volumes as circumstances warrant. The imbalance agreement is
managed internally using the sales method of accounting. The sales method recognizes revenue when
the gas is taken and paid for by the purchaser.
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PV-10 or present value of estimated future net revenues. An estimate of the present value of
the estimated future net revenues from proved gas reserves at a date indicated after deducting
estimated production and ad valorem taxes, future capital costs and operating expenses, but before
deducting any estimates of income taxes. The estimated future net revenues are discounted at an
annual rate of 10% in accordance with the SECs practice, to determine their present value. The
present value is shown to indicate the effect of time on the value of the revenue stream and should
not be construed as being the fair market value of the properties. Estimates of future net revenues
are made using oil and natural gas prices and operating costs at the date indicated and held
constant for the life of the reserves.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production exceed production expenses and
taxes.
Proved developed reserves. Proved reserves that can be expected to be recovered from existing
wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids
that geological and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating conditions.
Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells
on undrilled acreage or from existing wells where a relatively major expenditure is required for
recompletion.
Reserve life index. This index is calculated by dividing total proved reserves by the
production from the previous year to estimate the number of years of remaining production.
Reservoir. A porous and permeable underground formation containing a natural accumulation of
producible oil and/or gas that is confined by impermeable rock or water barriers and is individual
and separate from other reservoirs.
Shut in. Stopping an oil or gas well from producing.
Tcfe. Trillion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to
one bbl of crude oil, condensate or natural gas liquids.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a
point that would permit the production of commercial quantities of oil or gas regardless of whether
or not such acreage contains proved reserves.
Vertical-to-horizontal well. A well in which the drilling from the surface initially proceeds
vertically until reaching a particular depth, at which point, the drill bit is turned to proceed at
up to 90 degrees from vertical in order to follow a particular stratum or pay zone.
Working interest. The operating interest that gives the owner the right to drill, produce and
conduct operating activities on the property and receive a share of production.
EXECUTIVE OFFICERS OF THE COMPANY
Incorporated by reference into this Part I is the information set forth in Part III, Item 10
under the caption Executive Officers of CNX Gas Corporation (included herein pursuant to Item
401(b) of Regulation S-K).
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ITEM 1A. RISK FACTORS
In addition to the trends and uncertainties described in Item I of this Annual Report and in
Managements Discussion and Analysis of Financial Condition and Results of Operations, CNX Gas is
subject to the trends and uncertainties set forth below.
Natural gas and oil prices are volatile, and a decline in natural gas and oil prices would
significantly affect our financial results and impede our growth.
Our revenue, profitability and cash flow depend upon the prices and demand for natural gas and
oil. The markets for these commodities are very volatile and even relatively modest drops in prices
can significantly affect our financial results and impede our growth. Changes in natural gas and
oil prices have a significant impact on the value of our reserves and on our cash flow. In the past
we have used hedging transactions to reduce our exposure to market price volatility when we deemed
it appropriate. If we choose not to engage in, or reduce our use of hedging arrangements in the
future, we may be more adversely affected by changes in natural gas and oil prices than our
competitors who engage in hedging arrangements to a greater extent than we do.
Prices for natural gas and oil may fluctuate widely in response to relatively minor changes in
the supply of and demand for natural gas and oil, market uncertainty and a variety of additional
factors that are beyond our control, such as:
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the domestic and foreign supply of natural gas and oil; |
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the price of foreign imports; |
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overall domestic and global economic conditions; |
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the consumption pattern of industrial consumers, electricity generators and residential users; |
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weather conditions; |
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technological advances affecting energy consumption; |
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domestic and foreign governmental regulations; |
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proximity and capacity of oil and gas pipelines and other transportation facilities; and |
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the price and availability of alternative fuels. |
Many of these factors may be beyond our control. Because approximately 100% of our estimated
proved reserves as of December 31, 2006 were natural gas reserves, our financial results are more
sensitive to movements in natural gas prices. Earlier in this decade, natural gas prices were
lower than they are today. Lower natural gas prices may not only decrease our revenues on a per
unit basis, but may also limit our access to capital. A significant decrease in price levels for
an extended period would negatively affect us in several ways including:
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our cash flow would be reduced, decreasing funds available for capital
expenditures employed to replace reserves or increase production; and |
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access to other sources of capital, such as equity or long-term debt markets,
could be severely limited or unavailable. |
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Additionally, lower natural gas prices may reduce the amount of natural gas that we can
produce economically. This may result in our having to make substantial downward adjustments to our
estimated proved reserves. If this occurs or if our estimates of development costs increase,
production data factors change, or our exploration results deteriorate, accounting rules may
require us to write down as a non-cash charge to earnings the carrying value of our oil and natural
gas properties. We are required to perform impairment tests on our assets whenever events or
changes in circumstances lead to a reduction of the estimated useful life or estimated future cash
flows that would indicate that the carrying amount may not be recoverable or whenever managements
plans change with respect to those assets. We may incur impairment charges in the future, which
could have a material adverse effect on our results of operations in the period taken.
We face uncertainties in estimating proved recoverable gas reserves, and inaccuracies in our
estimates could result in lower than expected reserve quantities and a lower present value of our
reserves.
Natural gas reserve engineering requires subjective estimates of underground accumulations of
natural gas and assumptions concerning future natural gas prices, production levels, and operating
and development costs. As a result, estimated quantities of proved reserves and projections of
future production rates and the timing of development expenditures may be incorrect. We have in the
past retained the services of independent petroleum engineers to prepare reports of our proved
reserves. Over time, material changes to reserve estimates may be made, taking into account the
results of actual drilling, testing, and production. Also, we make certain assumptions regarding
future natural gas prices, production levels, and operating and development costs that may prove
incorrect. Any significant variance from these assumptions to actual figures could greatly affect
our estimates of our reserves, the economically recoverable quantities of natural gas attributable
to any particular group of properties, the classifications of reserves based on risk of recovery,
and estimates of the future net cash flows. Numerous changes over time to the assumptions on which
our reserve estimates are based, as described above, often result in the actual quantities of gas
we ultimately recover being different from reserve estimates.
The present value of future net cash flows from our proved reserves is not necessarily the
same as the current market value of our estimated natural gas reserves. We base the estimated
discounted future net cash flows from our proved reserves on prices and costs. However, actual
future net cash flows from our gas and oil properties also will be affected by factors such as:
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geological conditions; |
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changes in governmental regulations and taxation; |
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assumptions governing future prices; |
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the amount and timing of actual production; |
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future operating costs; and |
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capital costs of drilling new wells. |
The timing of both our production and our incurrence of expenses in connection with the
development and production of natural gas properties will affect the timing of actual future net
cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount
factor we use when calculating discounted future net cash flows may not be the most appropriate
discount factor based on interest rates in effect from time to time and risks associated with us or
the natural gas and oil industry in general. In addition, if natural gas prices decline by $0.10
per Mcf, then the pre-tax PV-10 of our proved reserves as of December 31, 2006 would decrease from
$1,499,664 to $1,455,700.
The standardized GAAP measure associated with this decline of $0.10
per Mcf, would be approximately $907,483.
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Unless we replace our natural gas reserves, our reserves and production will decline, which would
adversely affect our business, financial condition, results of operations and cash flows.
Producing natural gas reservoirs generally are characterized by declining production rates
that vary depending upon reservoir characteristics and other factors. Because total estimated
proved reserves include our proved undeveloped reserves at December 31, 2006, production is
expected to decline even if those proved undeveloped reserves are developed and the wells produce
as expected. The rate of decline will change if production from our existing wells declines in a
different manner than we have estimated and can change under other circumstances. Thus, our future
natural gas reserves and production and, therefore, our cash flow and income are highly dependent
on our success in efficiently developing and exploiting our current reserves and economically
finding or acquiring additional recoverable reserves. We may not be able to develop, find or
acquire additional reserves to replace our current and future production at acceptable costs.
Our exploration and development activities may not be commercially successful.
The exploration for and production of gas involves numerous risks. The cost of drilling,
completing and operating wells for CBM or other gas is often uncertain, and a number of factors can
delay or prevent drilling operations or production, including:
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title problems; |
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pressure or irregularities in geologic formations; |
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equipment failures or repairs; |
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fires or other accidents; |
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adverse weather conditions; |
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reductions in natural gas and oil prices; |
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pipeline ruptures; and |
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unavailability or high cost of drilling rigs, other field services and equipment. |
Our future drilling activities may not be successful, and our drilling success rates could
decline. Unsuccessful drilling activities could result in higher costs without any corresponding
revenues.
We have a limited operating history in certain of our operating areas, and our increased focus on
new development projects in these and other unexplored areas increases the risks inherent in our
gas and oil activities.
We have not historically invested a significant portion of our capital budget in development
projects in areas outside of Virginia CBM; however, in 2007 and beyond we plan to conduct testing
and development activities in areas where we have little or no proved reserves, such as certain
areas in Pennsylvania and Kentucky. These exploration, drilling and production activities will be
subject to many risks, including the risk that methane gas is not present in sufficient quantities
in the coalseam to be produced economically. We have invested in property, and will continue to
invest in property, including undeveloped leasehold acreage, that we believe will result in
projects that will add value over time. Drilling for CBM, natural gas and oil may involve
unprofitable efforts, not only from dry wells but also from wells that are productive but do not
produce sufficient net reserves to return a profit after deducting drilling, operating and other
costs. We cannot be certain that the wells we drill in these new areas will be productive or that
we will recover all or any portion of our investments.
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Our business depends on transportation facilities owned by others. Disruption of, capacity
constraints in, or proximity to pipeline systems could limit sales of our gas.
We transport our gas to market by utilizing pipelines owned by others. If pipelines do not
exist near our producing wells, if pipeline capacity is limited or if pipeline capacity is
unexpectedly disrupted, our gas sales could be limited, reducing our profitability. If we cannot
access pipeline transportation, we may have to reduce our production of gas or vent our produced
gas to the atmosphere because we do not have facilities to store excess inventory. If our sales
are reduced because of transportation constraints, our revenues will be reduced, which will also
increase our unit costs. If we cannot obtain transportation capacity and we do not have the
ability to store gas, we may have to reduce production.
Increased industry activity may create shortages of field services, equipment and personnel, which
may increase our costs and may limit our ability to drill and produce from our oil and natural gas
properties
Due to current industry demands, well service providers and related equipment are in short
supply. The demand for qualified and experienced field personnel to drill wells and conduct field
operations, including geologists, geophysicists, engineers and other professionals in the natural
gas and oil industry can fluctuate significantly, often in correlation with natural gas and oil
prices, causing periodic shortages. These shortages may lead to escalating prices, the possibility
of poor services, inefficient drilling operations, and personnel injuries. Such pressures will
likely increase the actual cost of services, extend the time to secure such services and add costs
for damages due to accidents sustained from the over use of equipment and inexperienced personnel.
Higher oil and natural gas prices generally stimulate increased demand and result in increased
prices for drilling equipment, crews and associated supplies, equipment and services. We believe
that these shortages could continue. In addition, the costs and delivery times of equipment and
supplies are substantially greater in periods of peak demand. Accordingly, we cannot assure you
that we will be able to obtain necessary drilling equipment and supplies in a timely manner or on
satisfactory terms, and we may experience shortages of, or material increases in the cost of,
drilling equipment, crews and associated supplies, equipment and services in the future. Any such
delays and price increases could adversely affect our ability to pursue our drilling program and
our results of operations.
We operate in a highly competitive environment and many of our competitors have greater resources
than we do.
The gas industry is intensely competitive and we compete with companies from various regions
of the United States and may compete with foreign companies for domestic sales, many of whom are
larger and have greater financial, technological, human and other resources. If we are unable to
compete, our company, its operating results and financial position may be adversely affected. For
example, one of our competitive strengths is as a low-cost producer of gas. If our competitors can
produce gas at a lower cost than us, it would effectively eliminate our competitive strength in
that area.
In addition, larger companies may be able to pay more to acquire new properties for future
exploration, limiting our ability to replace gas we produce or to grow our production. Our ability
to acquire additional properties and to discover new resources also depends on our ability to
evaluate and select suitable properties and to consummate these transactions in a highly
competitive environment.
Acquisitions are subject to the risks and uncertainties of evaluating reserves and potential
liabilities and may be disruptive and difficult to integrate into our business
From time to time we consider various acquisition opportunities. We could be subject to
significant liabilities related to any completed acquisition. Generally, it is not feasible to
review in detail every individual property included in an acquisition. Ordinarily, a review is
focused on higher valued properties. However, even a detailed review of all properties and records
may not reveal existing or potential problems in all of the properties, nor will it permit us to
become sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. We will not always inspect every well we acquire, and environmental problems, such as
groundwater contamination, are not necessarily observable even when an inspection is performed.
In addition, there is intense competition for acquisition opportunities in our industry.
Competition for acquisitions may increase the cost of, or cause us to refrain from, completing
acquisitions. Our acquisition strategy is dependent upon, among other things, our ability to obtain
debt and equity financing and, in some cases, regulatory approvals. Our ability to pursue our
acquisition strategy may be hindered if we are not able to obtain financing on terms acceptable to
us or regulatory approvals.
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Acquisitions often pose integration risks and difficulties. In connection with future
acquisitions, the process of integrating acquired operations into our existing operations may
result in unforeseen operating difficulties and may require significant management attention and
financial resources that would otherwise be available for the ongoing development or expansion of
existing operations. Future acquisitions could result in our incurring additional debt, contingent
liabilities, expenses and diversion of resources, all of which could have a material adverse effect
on our financial condition and operating results.
The coal beds from which we produce methane gas frequently contain water and the methane gas
often contains impurities, both of which may hamper our ability to produce gas in commercial
quantities or economically.
Coal beds frequently contain water that must be removed in order for the gas to detach from
the coal and flow to the well bore. Our ability to remove and dispose of sufficient quantities of
water from the coal seam will determine whether or not we can produce gas in commercial quantities.
The cost of water disposal may affect our profitability. Further, a substantial amount of our gas
needs to be processed in order to make it salable to our intended customers. At times, the cost of
processing this gas relative to the quantity of gas from a particular well, or group of wells, may
outweigh the economic benefit of selling that gas, and our profitability may decrease due to the
reduced production and sale of gas.
We may be unable to retain our existing senior management team and/or our key personnel who have
expertise in coalbed methane extraction and our failure to continue to attract qualified new
personnel could adversely affect our business.
Our business requires disciplined execution at all levels of our organization to ensure that
we continually develop our reserves and produce gas at profitable levels. This execution requires
an experienced and talented management and production team. If we were to lose the benefit of the
experience, efforts and abilities of any of our key executives and/or the members of our team that
have developed substantial expertise in coalbed methane extraction, such as Nicholas DeIuliis, our
Chief Executive Officer and President and Ronald Smith, our Executive Vice President and Chief
Operating Officer, our business could be materially adversely affected. No employment agreements
have been or are expected to be executed with these key executives. Furthermore, our ability to
manage our growth, if any, will require us to continue to train, motivate and manage our employees
and to attract, motivate and retain additional qualified managerial and production personnel.
Competition for these types of personnel is intense, and we may not be successful in attracting,
assimilating and retaining the personnel required to grow and operate our business profitably.
We are party to, and may in the future become party to, joint ventures and other arrangements with
third parties that may impact our operations and our financial performance.
We have entered into several joint venture arrangements with third parties. For example, we
are involved with third parties in Knox Energy (exploration and production), Coalfield Pipeline
Company (Coalfield Pipeline) (gas pipeline) and Buchanan Generation, LLC (Buchanan Generation)
(peaker electrical power generation plant) and in a participation agreement with Kelly Oil & Gas,
Inc. (Kelly Oil), Excelsior Exploration Corporation, KWR Ventures, LLC and Ceja Corporation
(exploration and production). We may also enter into other arrangements like these in the future.
In many instances we depend on these third parties for elements of these arrangements that are
important to the success of the joint venture and the performance of these third parties
obligations or their ability to meet their obligations under these arrangements are outside our
control. If these parties do not meet or satisfy their obligations under these arrangements, the
performance and success of these arrangements may be adversely affected. If our current or future
joint venture partners are unable to meet their obligations we may be forced to undertake the
obligations ourselves and/or incur additional expenses in order to have some other party perform
such obligations. In such cases we may also be required to enforce our rights that may cause
disputes among our joint venture parties and us. If any of these events occur, they may adversely
impact us, our financial performance and results of operations, these joint ventures and/or our
ability to enter into future joint ventures.
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Government laws, regulations and other legal requirements relating to protection of the
environment, health and safety matters and others that govern our and CONSOL Energys businesses
increase our costs and may restrict our operations.
We and our principal stockholder, CONSOL Energy, are subject to laws, regulations and other
legal requirements enacted or adopted by federal, state and local, as well as foreign authorities
relating to protection of the environment, health and safety matters, including those legal
requirements that govern discharges of substances into the air and water, the management and
disposal of hazardous substances and wastes, the clean-up of contaminated sites, groundwater
quality and availability, plant and wildlife protection, reclamation and restoration of mining or
drilling properties after mining or drilling is completed, control of surface subsidence from
underground mining and work practices related to employee health and safety. Complying with these
requirements, including the terms of our and CONSOL Energys permits, has had, and will continue to
have, a significant effect on our respective costs of operations and competitive position. In
addition, we could incur substantial costs, including clean-up costs, fines and civil or criminal
sanctions and third party damage claims for personal injury, property damage, wrongful death, or
exposure to hazardous substances, as a result of violations of or liabilities under environmental
and health and safety laws. Moreover, given our relationship with CONSOL Energy, its compliance
with these laws and regulations could impact our ability to effectively produce gas from our wells.
Additionally, the gas industry is subject to extensive legislation and regulation, which is
under constant review for amendment or expansion. Any changes may affect, among other things, the
pricing or marketing of gas production. State and local authorities regulate various aspects of gas
drilling and production activities, including the drilling of wells (through permit and bonding
requirements), the spacing of wells, the unitization or pooling of gas properties, environmental
matters, safety standards, market sharing and well site restoration. If we fail to comply with
statutes and regulations, we may be subject to substantial penalties, which would decrease our
profitability.
We must obtain governmental permits and approvals for drilling operations, which can be a costly
and time consuming process and result in restrictions on our operations.
Regulatory authorities exercise considerable discretion in the timing and scope of permit
issuance. Requirements imposed by these authorities may be costly and time consuming and may result
in delays in the commencement or continuation of our exploration or production operations. For
example, we are often required to prepare and present to federal, state or local authorities data
pertaining to the effect or impact that proposed exploration for or production of gas may have on
the environment. Further, the public may comment on and otherwise engage in the permitting process,
including through intervention in the courts. Accordingly, the permits we need may not be issued,
or if issued, may not be issued in a timely fashion, or may involve requirements that restrict our
ability to conduct our operations or to do so profitably.
We may incur additional costs and delays to produce gas because we have to acquire additional
property rights to perfect our title to the gas estate.
Some of the gas rights we believe we control are in areas where we have not yet done any
exploratory or production drilling. Most of these properties were acquired by CONSOL Energy
primarily for the coal rights, and, in many cases were acquired years ago. While chain of title
work for the coal estate was generally fully developed, in many cases, the gas estate title work is
less robust. Our practice is to perform a thorough title examination of the gas estate before we
commence drilling activities and to acquire any additional rights needed to perfect our ownership
of the gas estate for development and production purposes. We may incur substantial costs to
acquire these additional property rights and the acquisition of the necessary rights may not be
feasible in some cases. Our inability to obtain these rights may adversely impact our ability to
develop those properties. Some states permit us to produce the gas without perfected ownership
under an administrative process known as forced pooling, which require us to give notice to all
potential claimants and pay royalties into escrow until the undetermined rights are resolved. As a
result, we may have to pay royalties to produce gas on acreage that we control and these costs may
be material. Further, the forced pooling process is time-consuming and may delay our drilling
program in the affected areas.
In addition, although CONSOL Energy has conveyed to us all of their rights to extract and
produce CBM from locations where they possess rights to coal, in some cases CONSOL Energy may not
possess these rights. If we are unable in such cases to obtain those rights from their owners, we
will not enjoy the rights to develop the CBM with CONSOL Energys mining of coal, as provided in
the master cooperation and safety agreement. Our failure to obtain these rights may adversely
impact our ability in the future to increase production and reserves. For example, we have
substantial acreage in West Virginia for which we have not reviewed the title to determine what, if
any, additional rights would be needed to produce CBM from those locations or the feasibility of
obtaining those rights.
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In addition to acquiring these property right assets on an as is, where is basis, we have
assumed all of the liabilities related to these assets, even if those liabilities were as a result
of activities occurring prior to CONSOL Energys transfer of those assets to us. Our assumption of
these liabilities is subject to the following allocation: we will be responsible for the first
$10,000 of aggregate unknown liabilities; CONSOL Energy will be responsible for the next $40,000 of
aggregate unknown liabilities; and we will be responsible for any additional unknown liabilities
over $50,000. We will also be responsible for any unknown liabilities which were not asserted in
writing by August 7, 2010.
We need to use unproven technologies to extract coalbed methane on some of our properties.
Our ability to extract gas in coal seams with lower gas content per ton of coal such as the
Pittsburgh #8 seam requires the use of advanced technologies that are still being developed and
tested. Horizontal drilling is the advanced technology currently being used. This technique,
applied in coal, requires a well design that promotes simultaneous production of water and methane
without significant back-pressure, a well that can be subsequently mined through without
jeopardizing mine-safety and a well that will ensure well bore integrity throughout its projected
life.
Other persons could have ownership rights in our advanced extraction techniques which could force
us to cease using those techniques or pay royalties.
Although we believe that we hold sufficient rights to all of our advanced extraction
techniques, other persons could contest our rights and claim ownership of one or more of our
advanced techniques for extracting CBM. For example, a third party has asserted that several of our
drilling techniques infringed several patents that they hold. A successful challenge to one or
more of our advanced extraction techniques could adversely impact our financial performance and
results of operation. We might have to pay a royalty which would increase our production costs or
cease using that technique which could raise our production costs or decrease our production of
CBM. In addition, we could incur substantial costs in defending patent infringement claims,
obtaining patent licenses, engaging in interference and opposition proceedings or other challenges
to our patent rights or intellectual property rights made by third parties or in bringing such
proceedings.
Currently the vast majority of our producing properties are located in three counties in
southwestern Virginia, making us vulnerable to risks associated with having our production
concentrated in one area.
The vast majority of our producing properties are geographically concentrated in three
counties in Virginia. As a result of this concentration, we may be disproportionately exposed to
the impact of delays or interruptions of production from these wells caused by significant
governmental regulation, transportation capacity constraints, curtailment of production, natural
disasters or interruption of transportation of natural gas produced from the wells in this basin or
other events which impact this area.
We do not insure against all potential operating risks. We may incur substantial losses and be
subject to substantial liability claims as a result of our natural gas operations.
We maintain insurance for some, but not all, of the potential risks and liabilities associated
with our business. For some risks, we may not obtain insurance if we believe the cost of available
insurance is excessive relative to the risks presented. As a result of market conditions, premiums
and deductibles for certain insurance policies can increase substantially, and in some instances,
certain insurance may become unavailable or available only for reduced amounts of coverage. As a
result, we may not be able to renew our existing insurance policies or procure other desirable
insurance on commercially reasonable terms, if at all. Although we maintain insurance at levels we
believe are appropriate and consistent with industry practice, we are not fully insured against all
risks, including drilling and completion risks that are generally not recoverable from third
parties or insurance. In addition, pollution and environmental risks generally are not fully
insurable. As part of our separation from CONSOL Energy, we assumed all of the liabilities related
to the gas assets and operations which were transferred to us, including liabilities resulting from
operations prior to the effective date of the separation. Arrangements with CONSOL Energy
significantly limit our seeking indemnification from CONSOL Energy for unknown liabilities that we
have assumed. Losses and liabilities from uninsured and underinsured events and delay in the
payment of insurance proceeds could have a material adverse effect on our financial condition and
results of operations.
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Risks Relating to Our Relationship with CONSOL Energy
Our principal stockholder, CONSOL Energy, is in a position to affect our ongoing operations,
corporate transactions and other matters, and some of our directors also serve on its board of
directors and/or are employees of CONSOL Energy, creating potential conflicts of interest.
Our principal stockholder, CONSOL Energy, owns 81.5% of our outstanding shares of common
stock. As a result, CONSOL Energy will be able to determine the outcome of all corporate actions
requiring stockholder approval. For example, CONSOL Energy will continue to control decisions with
respect to:
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amendments to our certificate of incorporation and bylaws. |
Any exercise by CONSOL Energy of its control rights may be in its own best interest which may
not be in the best interest of our other stockholders and our company. CONSOL Energys ability to
control our company may also make investing in our stock less attractive. These factors in turn may
have an adverse effect on the price of our common stock.
In addition, some of our directors serve as directors or officers of CONSOL Energy, and/or own
CONSOL Energy stock, stock units or options to purchase CONSOL Energy stock, or they may be
entitled to participate in the CONSOL Energy compensation plans. CONSOL Energy provides, and may in
the future provide additional, cash- and equity-based compensation to employees or others based on
CONSOL Energys performance. These arrangements and ownership interests or cash- or equity-based
awards could create, or appear to create, potential conflicts of interest when directors or
executive officers who own CONSOL Energy stock or stock options or who participate in the CONSOL
Energy equity plan arrangements are faced with decisions that could have different implications for
CONSOL Energy than they do for us. These potential conflicts of interest may not be resolved in our
favor.
Potential conflicts may arise between us and CONSOL Energy that may not be resolved in our favor.
The relationship between CONSOL Energy and us may give rise to conflicts of interest with
respect to, among other things, transactions and agreements among CONSOL Energy and us, issuances
of additional voting securities and the election of directors. When the interests of CONSOL Energy
diverge from our interests, CONSOL Energy may exercise its substantial influence and control over
us in favor of its own interests over our interests. Our certificate of incorporation and the
master cooperation and safety agreement entitle CONSOL Energy to various corporate opportunities
which might otherwise have belonged to us and relieve CONSOL Energy and its directors, officers and
employees from owing us fiduciary duties with respect to such opportunities.
Our intercompany agreements with CONSOL Energy are not the result of arms-length negotiations.
We have entered into agreements with CONSOL Energy which govern various transactions between
us and our ongoing relationship, including registration rights, tax sharing and indemnification.
All of these agreements were entered into while we were a wholly-owned subsidiary of CONSOL Energy,
and were negotiated in the overall context of CONSOL Energy creating CNX Gas. As a result, these
agreements were not negotiated at arms-length. Accordingly, certain rights of CONSOL Energy,
particularly the rights relating to the number of demand and piggy-back registration rights that
CONSOL Energy will have, the assumption by us of the registration expenses related to the exercise
of these rights, our indemnification of CONSOL Energy for certain liabilities under these
agreements, our payment of taxes and the retention of tax attributes may be more favorable to
CONSOL Energy than if the agreements had been the subject of independent negotiation. We and CONSOL
Energy and its other affiliates may enter into other material transactions and agreements from time
to time in the future which also may not be deemed to be independently negotiated.
Our agreements with CONSOL Energy may limit our ability to obtain capital, make acquisitions or
effect other business combinations.
Our business strategy anticipates future acquisitions of natural gas and oil properties and
companies. Any acquisition that we undertake would be subject to the limitations and restrictions
set forth in our agreements with CONSOL Energy and could be subject to our ability to access
capital from outside sources on acceptable terms through the issuance of our common stock or other
securities.
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Our prior and continuing relationship with CONSOL Energy exposes us to risks attributable to CONSOL
Energys businesses.
We and CONSOL Energy are obligated to indemnify each other for certain matters as set forth in
our agreements with CONSOL Energy. As a result, any claims made against us that are properly
attributable to CONSOL Energy (or conversely, claims against CONSOL Energy that are properly
attributable to us) in accordance with these arrangements could require us or CONSOL Energy to
exercise our respective rights under the master separation agreement and the master cooperation and
safety agreement. In addition, we have an agreement with CONSOL Energy that we will refrain from
taking certain actions that would result in CONSOL Energy being in default under its debt
instruments. Those debt instruments currently contain covenants that would be breached if we borrow
from a third party unless we contemporaneously guaranteed indebtedness of CONSOL Energy under those
debt instruments. In addition, those debt instruments contain covenants that would be breached by
our granting liens on certain assets unless we contemporaneously grant a pari passu lien securing
the indebtedness of CONSOL Energy under those debt instruments. In connection with our obtaining an
unsecured credit facility with a group of commercial lenders, we guaranteed CONSOL Energys
$250,000 7.875% notes due March 1, 2012. We are exposed to the risk that, in these circumstances,
CONSOL Energy cannot, or will not, make the required payment or in turn that we are required to
make a required payment to CONSOL Energy. If this were to occur, our business and financial
performance could be adversely affected.
CONSOL Energy Inc. has advised us that as of the date of this Annual Report, CONSOL Energy has no
plan or intention regarding its shares of our common stock and if CONSOL Energy were to make a
distribution or otherwise dispose of its remaining ownership interest in us, our common stock price
could be adversely affected.
Unless and until CONSOL Energy distributes to its stockholders, either in a tax-free spin-off
or one or more special dividends, or sells the controlling amount of our common stock it owns, we
will face the risks discussed in this Annual Report relating to CONSOL Energys control of us and
potential conflicts of interest between CONSOL Energy and us. CONSOL Energy may elect not to make
such a distribution or sale or it could at any time make that distribution or sale. Additionally,
the market price of our common stock could decline as a result of market sales by CONSOL Energy, a
distribution of our common stock to CONSOL Energys stockholders or the perception that such sales
or distributions will occur. These sales or distributions also might make it difficult for us to
sell equity securities in the future at a time and at a price that we deem appropriate. Future
sales of our common stock could impact the price at which the shares purchased or acquired by our
investors may be sold in the future.
We must coordinate some of our gas production activities with coal mining activities in the same
area, which could adversely affect our financial condition or operations.
In many places where we extract CBM, the coal estate is dominant. Where our principal
stockholder conducts mining activity, CONSOL Energy could exercise its rights to determine when and
where certain drilling can take place in order to ensure the safety of the mine or to protect the
mineability of the coal. For example, if CONSOL Energy is required to cease mining activities due
to an event causing a coal mine to be idled, that cessation of coal mining could prohibit us from
producing gas from that or related sites until the coal mining activities commence again, which
could adversely affect our financial condition or operations.
We may lose certain synergistic advantages by separating ourselves from our current owner.
Because approximately 13.5% of our gas production is associated with active mining activities
and 16.0% is associated with previously mined areas by our principal stockholder, coordination
between mining and gas operations can optimize overall energy production. If CONSOL Energy were to
dispose of a significant interest in us, coordination between us and CONSOL Energys mining
subsidiaries may be more difficult to accomplish.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our corporate headquarters are located at 4000 Brownsville Road, South Park, PA 15129-9545.
Our other properties are described under Gas OperationsAreas of Operation in ITEM 1.
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ITEM 3. LEGAL PROCEEDINGS
On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against
CNX Gas Company LLC and Island Creek Coal Company in the Circuit Court for the
County of Tazewell, Virginia. CNX Gas has not formally been served with this lawsuit.
The lawsuit alleges that CNX Gas conspired and has violated the Virginia Antitrust Act
and has tortiously interfered with GeoMets contractual relations, prospective
contracts and business expectancies. GeoMet seeks injunctive relief, actual damages of
$561,000, treble damages and punitive damages in the amount of $350. CNX Gas
believes this lawsuit to be without merit and intends to vigorously defend it.
CNX Gas is currently undergoing an audit by Buchanan County, Virginia local taxing authorities
for the tax years 1998 through 2004. To date, the County auditors have completed review of the 1998
through 2001 period; as of December 31, 2006, we continued to receive requests relating to the 2002
through 2004 period. For each of these years from 1998 through 2004, CNX Gas has filed appropriate
returns and has paid applicable license taxes based on wellhead price calculations. The audit is
ongoing with no resolution being proposed by Buchanan County as of December 31, 2006. Additionally,
on April 29, 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 us in the Circuit Court of the County of Buchanan (At Law No. CL05000149-00) for
the year 2002. The complaint alleges that we failed to properly calculate the amount of license
taxes we owed to Buchanan County related to our production and sale of CBM gas in Buchanan County.
Buchanan County is seeking a determination by the court that we have calculated, and continue to
calculate, the license tax in an improper manner. We have continued to pay Buchanan County taxes
based on our method of calculating the taxes. However, we have been accruing an additional
liability on our balance sheet in an amount based on the difference between our calculation of the
tax and Buchanan Countys 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. CNX Gas management believes that the final resolution of this matter will not
have a material effect on our financial position, results of operations, or cash flows.
In October 2005, CDX Gas, LLC (CDX) alleged that certain of our vertical to horizontal CBM
drilling methods infringe several patents which they own. CDX demanded that we enter into a
business arrangement with CDX to use its patented technology. Alternatively, CDX informally
demanded a royalty of nine to ten percent of the gross production from the wells we drill utilizing
the technology allegedly covered by their patents. We believe that approximately 31 of our
producing wells to date could be covered by their claim. We deny all of these allegations and we
are vigorously contesting them. On November 14, 2005, we filed a complaint for declaratory
judgment in the U.S. District Court for the Western District of Pennsylvania (C.A. No. 05-1574),
seeking a judicial determination that we do not infringe any claim of any valid and enforceable
CDX patent. CDX filed an answer and counterclaim denying our allegations of invalidity and
alleging that we infringe certain claims of their patents. A hearing was held before a
Court-appointed Special Master with regard to the scope of the asserted CDX patents and the Special
Masters report and recommendations was adopted by order of the Court on October 13, 2006. As a
result of that order and subject to appellate review, certain of our wells may be found to infringe
certain of the CDX claims of the patents in suit, if those patents are ultimately determined to be
valid and enforceable. The report of CDXs damages expert suggests that CDX will seek (i)
reasonable royalty damages on production from allegedly infringing wells at a royalty rate of 10%,
or approximately $1,900, based on projected production through June 2007, and (ii) lost profits
damages of approximately $23,600 for allegedly infringing wells drilled though August 2006, which
assumes that CNX Gas would have no choice but to have entered into a joint operating arrangement
with CDX. We believe that there is no basis in the law for this lost profits theory. We
continue to believe that we do not infringe any properly construed claim of any valid, enforceable
patent. We cannot predict the ultimate outcome of this lawsuit; however, CNX Gas management
believes that the final resolution of this matter will not have a material effect on our financial
position, results of operations or cash flows.
In 2004, Yukon Pocahontas Coal Company, Buchanan Coal Company, and Sayers-Pocahontas Coal
Company filed a complaint against Consolidation Coal Company (CCC), a subsidiary of CONSOL Energy
in the Circuit Court of Buchanan County, Virginia, seeking damages and injunctive relief in
connection with the deposit of untreated water from mining activities at CCCs Buchanan Mine into
nearby void spaces in the mine of one of CONSOL Energys other subsidiaries, Island Creek Coal
Company (ICCC). CCC believes that it had, and continues to have, the right to store water in
these void areas. On September 21, 2006, the plaintiffs filed an amended complaint in the Circuit
Court of Buchanan County, Virginia (Case No. CL04-91) which, among other things, added CONSOL
Energy, ICCC and CNX Gas Company LLC as additional defendants. The amended complaint alleges, among
other things, that CNX Gas Company LLC, as lessee and operator under certain coalbed methane gas
leases from plaintiffs, had a duty to prevent CCC from depositing water into the mine voids and
failed to do so. The proposed amended complaint seeks $150,000 in damages from the additional
defendants, plus costs, interest and attorneys fees. CNX Gas Company LLC denies that it has any
liability in this matter and intends to vigorously defend this action.
31
In 1999, CNX Gas was named in a suit brought by a group of royalty owners that lease gas
development rights to CNX Gas in southwest Virginia. The suit alleged the underpayment of royalties
to the group of royalty owners and to a class of plaintiffs who have yet to be determined. 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, and
subsequently in 2002 paid, approximately $7,000 to the group of royalty owners that brought the
suit. An estimate of the payment was appropriately accrued in other cost of goods sold in previous
periods. A final payment was made to the plaintiffs in 2003 for approximately $6,000 to adjust all
royalties owed to the plaintiffs from the date of the court ruling forward, which effectively
settled this case. CNX Gas has also recognized an estimated liability for other similar plaintiffs
yet to be determined outside of the aforementioned suit. This amount is included in other
liabilities on the balance sheet. To date, approximately $3,900 has been paid to various royalty
owners using the court determined deductions from the settled case. CNX Gas management believes
that the final resolution of this matter will not have a material effect on our financial position,
results of operations, or cash flows.
In addition to the foregoing, CNX Gas is subject to various pending and threatened lawsuits
and claims arising in the ordinary course of its business. While the relief claimed in these
matters may be significant, we are unable to predict with certainty the ultimate outcome of such
lawsuits and claims. We have established reserves for pending litigation which we believe are
adequate, and after consultation with counsel and giving appropriate consideration to available
insurance, we believe that the ultimate outcome of any matter currently pending against CNX Gas
will not materially affect the financial position, results of operations, or cash flows of CNX Gas.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
32
PART II
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ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
The shares of CNX Gas Corporation common stock are listed and traded on the New York Stock
Exchange (NYSE), under the symbol CXG. Our common stock began trading on January 19, 2006,
following the effectiveness of our resale registration statement on Form S-1.
The quarterly high and low share price for CNX Gas stock was as follows for the 2006 quarters ended:
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
March 31 |
|
$ |
26.50 |
|
|
$ |
20.13 |
|
June 30 |
|
$ |
32.99 |
|
|
$ |
24.50 |
|
September 30 |
|
$ |
30.10 |
|
|
$ |
21.84 |
|
December 31 |
|
$ |
28.47 |
|
|
$ |
22.12 |
|
As of December 31, 2006 there were 10 holders of record of the Companys common stock; we
believe that there are significantly more beneficial holders of our stock.
STOCK PERFORMANCE GRAPH
The following performance graph compares the cumulative shareholders return on the common
stock of CNX Gas Corporation (CXG) to the cumulative return for the same period of the S&P Oil and
Gas Exploration and Production index and the S&P MidCap 400 Index. The chart below was structured
in a monthly format rather than yearly because CNX Gas has only been a public company since January
2006.
The graph assumes that the value of the investment in CNX Gas common stock and each index was
$100 at January 19, 2006 (the date CNX Gas shares were listed on the NYSE). The graph also
assumes that all dividends, if any, were reinvested and that investments were held through December
31, 2006.
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Base Period
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Months Ending |
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Company / Index
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Jan-19-06 |
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Jan-06 |
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Feb-06 |
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Mar-06 |
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Apr-06 |
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May-06 |
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Jun-06 |
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Jul-06 |
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Aug-06 |
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Sep-06 |
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Oct-06 |
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Nov-06 |
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Dec-06 |
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CNX Gas Corporation
|
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|
100 |
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|
|
|
106.93 |
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|
|
|
95.73 |
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|
115.56 |
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|
126.67 |
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|
126.40 |
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|
133.33 |
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|
120.27 |
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114.71 |
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|
102.98 |
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|
116.22 |
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|
123.56 |
|
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|
113.33 |
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|
S&P MidCap 400 Index
|
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|
|
100 |
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|
|
|
101.24 |
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|
|
|
100.39 |
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|
|
|
102.89 |
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|
|
104.34 |
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|
|
|
99.64 |
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|
|
|
99.66 |
|
|
|
|
96.82 |
|
|
|
|
97.92 |
|
|
|
|
98.58 |
|
|
|
|
102.68 |
|
|
|
|
105.98 |
|
|
|
|
105.47 |
|
|
|
S&P Oil & Gas
Exploration &
Production
|
|
|
|
100 |
|
|
|
|
101.81 |
|
|
|
|
90.92 |
|
|
|
|
93.20 |
|
|
|
|
95.12 |
|
|
|
|
91.01 |
|
|
|
|
96.25 |
|
|
|
|
100.04 |
|
|
|
|
95.76 |
|
|
|
|
92.46 |
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|
|
|
98.21 |
|
|
|
|
105.52 |
|
|
|
|
95.84 |
|
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|
COMPARISON
OF CUMMULATIVE TOTAL RETURN
The
foregoing graph shall not be deemed to be filed as part of the
Form 10-K and does not constitute soliciting material and should not be deemed filed or
incorporated by reference into any other filing of CNX Gas under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent CNX specifically incorporates the graph by
reference.
33
We currently retain our earnings for the development of our business and do not expect to pay
any cash dividends. Other than the special dividend of approximately $420,200 we paid to CONSOL
Energy with the net proceeds from the private placement of the shares of CNX Gas described below,
we have not paid any cash dividends from the date of our inception.
See Part III, Item 11, Executive Compensation for information relating to CNX Gas equity
compensation plans.
Recent Sales of Unregistered Securities
During the past three years, we have issued and sold unregistered securities in the
transactions described below:
(1) In July of 2005, we issued 100 shares of common stock to Consolidation Coal Company in
exchange for one hundred dollars in connection with the incorporation of CNX Gas. We relied on
the exemption under Section 4(2) of the Securities Act of 1933, as amended (the Securities
Act), in connection with the offer and sale of those shares.
(2) On August 1, 2005, we issued 122,896,567 shares of common stock to our then sole
stockholder, Consolidation Coal Company, in exchange for the contribution to us of all of
CONSOL Energy Inc.s (Consolidation Coal Companys sole stockholder) gas business. We relied on
the exemption under Section 4(2) of the Securities Act in connection with the offer and sale of
those shares.
(3) On August 8, 2005, we completed a private placement of 24,292,754 shares of common
stock, 21,778,867 of which were offered and sold to qualified institutional buyers pursuant to
Rule 144A under the Securities Act, 1,086,980 of which were offered and sold to foreign buyers
pursuant to Regulation S promulgated under the Securities Act and 1,426,907 of which were
offered and sold to accredited investors pursuant Rule 506 under the Securities Act. Friedman,
Billings, Ramsey & Co., Inc. (FBR) served as the initial purchaser under the Rule 144A and
Regulation S offerings and served as our placement agent with respect to the Rule 506 offering.
In the Rule 144A and Regulation S offerings, we sold the securities to FBR at a price of $15.04
per share, which was a $0.96 per share discount over the gross offering price to the investors
of $16.00 per share. In the Rule 506 offering, we sold shares to the investors at $16.00 per
share and paid FBR a $0.96 per share commission. Aggregate net proceeds to CNX Gas for the
total offering, after deducting discounts and commissions of $23,321 was $365,363. CNX Gas
relied on subscription agreements and associated questionnaires in order to satisfy itself that
the requirements of Rule 144A, Regulation S and Rule 506, as applicable, were satisfied. All
net proceeds of the above offering were paid to Consolidation Coal Company as a special
dividend.
(4) On August 11, 2005, following the exercise by FBR of an over-allotment option in
connection with the above referenced private placement, we completed the sale of 3,643,913
shares of common stock, 822,702 of which were offered and sold to qualified institutional
buyers pursuant to Rule 144A under the Securities Act, 51,300 of which were offered and sold to
foreign buyers pursuant to Regulation S promulgated under the Securities Act and 2,769,911 of
which were offered and sold to accredited investors pursuant Rule 506 under the Securities Act.
FBR served as the initial purchaser under the Rule 144A and Regulation S offerings and served
as our placement agent with respect to the Rule 506 offering. In the Rule 144A and Regulation S
offerings, we sold the securities to FBR at a price of $15.04 per share, which was a $0.96 per
share discount over the gross offering price to the investors of $16.00 per share. In the Rule
506 offering, we sold shares to the investors at $16.00 per share and paid FBR a $0.96 per
share commission. Aggregate net proceeds to CNX Gas for the total offering, after deducting
discounts and commissions of $3,498 was $54,804. CNX Gas relied on subscription agreements and
associated questionnaires in order to satisfy itself that the requirements of Rule 144A,
Regulation S and Rule 506, as applicable, were satisfied. All net proceeds of the above
offering were paid to Consolidation Coal Company as a special dividend.
(5) In reliance on Rule 701 and Rule 506 of the Securities Act of 1933, during August
2005, CNX Gas issued options to purchase CNX Gas common stock to our employees and executive
officers at an exercise price of $16.00 per share and restricted stock units to our
non-employee and non-CONSOL Energy employee directors. We also granted a small number of
options to new employees in September 2005 at an exercise price of $20.50 per share, and in
November 2005, at an exercise price of $20.75 per share. A total of 358,370 options to purchase
CNX Gas common stock were granted to CNX Gas employees, other than our executive officers.
Messrs. DeIuliis, Smith, Johnson and Bench received stock options in the aggregate amount of
670,556 shares and Mr. Johnson received 2,969 restricted stock units. Similarly, we granted
restricted stock units to each director of CNX Gas that is not an employee of CNX Gas or CONSOL
Energy. Mr. Baxter, chairman of the board of directors, was granted 60,000 restricted stock
units. Each other such director received 10,000 restricted stock units. The foregoing one-time
grants were made in consideration for future service of the employees, executive officers and
directors to CNX Gas.
The registration statement on Form S-1 (SEC File No. 333-127483), as amended, filed by the
Company was declared effective by the Securities and Exchange Commission on January 18, 2006. CNX
Gas registered for sale 27,936,667 shares of common stock, all of which were held by selling
stockholders named in the registration statement. Under the registration statement, the shares can
be offered and sold by the selling stockholders in one or more transactions at fixed prices,
prevailing market prices or negotiated prices. CNX Gas did not sell any shares for our own account
and did not receive any proceeds from the sale of securities by any selling stockholders. CNX Gas
incurred expenses as detailed in the registration statement of approximately $1,170.
34
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial and operating data for, and
as of the end of, each of the periods indicated. The selected consolidated financial data for, and
as of the end of, each of the twelve months ended December 31, 2006, 2005, 2004, and 2003 are
derived from our audited consolidated financial statements, including the consolidated balance
sheets at December 31, 2006 and 2005 and the related consolidated statements of income and cash
flows for each of the twelve months ended December 31, 2006, 2005, 2004, and 2003, and the notes
thereto appearing herein. The selected consolidated financial data for, and as of the end of, the
twelve months ended December 31, 2002 is derived from our unaudited consolidated financial
statements, and in the opinion of management include all adjustments, consisting only of normal
recurring accruals, that are necessary for a fair presentation of our financial position and
operating results for these periods. The selected consolidated financial and operating data are not
necessarily indicative of the results that may be expected for any future period. The selected
consolidated financial and operating data should be read in conjunction with Managements
Discussion and Analysis of Results of Operations and Financial Condition and the financial
statements and related notes included in this Annual Report.
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS OF INCOME DATA |
|
Twelve Months Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
RESULTS OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
385,056 |
|
|
$ |
277,031 |
|
|
$ |
214,721 |
|
|
$ |
145,884 |
|
|
$ |
119,463 |
|
Related Party Sales |
|
|
8,490 |
|
|
|
6,052 |
|
|
|
22,036 |
|
|
|
32,572 |
|
|
|
9,542 |
|
Royalty Interest Gas Sales |
|
|
51,054 |
|
|
|
45,351 |
|
|
|
41,858 |
|
|
|
32,442 |
|
|
|
19,880 |
|
Purchased Gas Sales |
|
|
43,973 |
|
|
|
275,148 |
|
|
|
112,005 |
|
|
|
|
|
|
|
|
|
Other Income |
|
|
25,286 |
|
|
|
9,859 |
|
|
|
6,916 |
|
|
|
4,485 |
|
|
|
2,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE AND OTHER
INCOME |
|
|
513,859 |
|
|
|
613,441 |
|
|
|
397,536 |
|
|
|
215,383 |
|
|
|
150,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
|
31,096 |
|
|
|
26,794 |
|
|
|
23,939 |
|
|
|
20,761 |
|
|
|
16,297 |
|
Gathering and Compression
Costs |
|
|
55,091 |
|
|
|
40,623 |
|
|
|
37,021 |
|
|
|
28,914 |
|
|
|
24,749 |
|
Royalty Interest Gas Costs |
|
|
41,998 |
|
|
|
36,641 |
|
|
|
32,914 |
|
|
|
24,200 |
|
|
|
12,214 |
|
Purchased Gas Costs |
|
|
44,843 |
|
|
|
278,720 |
|
|
|
113,063 |
|
|
|
|
|
|
|
|
|
Other |
|
|
6,868 |
|
|
|
9,721 |
|
|
|
9,494 |
|
|
|
15,902 |
|
|
|
11,909 |
|
General and Administrative |
|
|
38,654 |
|
|
|
19,171 |
|
|
|
15,530 |
|
|
|
11,995 |
|
|
|
8,712 |
|
Depreciation, Depletion and
Amortization |
|
|
37,999 |
|
|
|
35,039 |
|
|
|
32,889 |
|
|
|
33,600 |
|
|
|
34,368 |
|
Interest Expense |
|
|
870 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COSTS AND EXPENSES |
|
|
257,419 |
|
|
|
446,723 |
|
|
|
264,850 |
|
|
|
135,372 |
|
|
|
108,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
and Cumulative Effect of
Change in Accounting
Principle |
|
|
256,440 |
|
|
|
166,718 |
|
|
|
132,686 |
|
|
|
80,011 |
|
|
|
42,704 |
|
Income Taxes |
|
|
96,573 |
|
|
|
64,550 |
|
|
|
51,898 |
|
|
|
31,202 |
|
|
|
16,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Cumulative
Effect of Change in
Accounting Principle |
|
|
159,867 |
|
|
|
102,168 |
|
|
|
80,788 |
|
|
|
48,809 |
|
|
|
26,027 |
|
Cumulative Effect of Change
in Accounting for Gas Well
Plugging Costs (Net of Tax
Impact of $1,879) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
159,867 |
|
|
$ |
102,168 |
|
|
$ |
80,788 |
|
|
$ |
51,714 |
|
|
$ |
26,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share from
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
$ |
0.40 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
$ |
0.40 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share from Net
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
$ |
0.42 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
$ |
0.42 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of
Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
150,845,518 |
|
|
|
134,071,334 |
|
|
|
122,896,667 |
|
|
|
122,896,667 |
|
|
|
122,896,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive |
|
|
151,017,456 |
|
|
|
134,137,219 |
|
|
|
122,988,359 |
|
|
|
122,988,359 |
|
|
|
122,988,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEETS DATA |
|
As of December 31, |
(In thousands) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Working Capital (Deficiency) |
|
$ |
115,824 |
|
|
$ |
3,720 |
|
|
$ |
(35,030 |
) |
|
$ |
(7,971 |
) |
|
$ |
2,868 |
|
Total Assets |
|
|
1,155,001 |
|
|
|
859,167 |
|
|
|
718,859 |
|
|
|
664,635 |
|
|
|
598,236 |
|
Capital Lease Obligation (Including current portion) |
|
|
66,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Credits and Other Liabilities |
|
|
153,977 |
|
|
|
109,226 |
|
|
|
205,614 |
|
|
|
170,520 |
|
|
|
114,902 |
|
Stockholders Equity |
|
|
880,215 |
|
|
|
679,472 |
|
|
|
462,556 |
|
|
|
464,232 |
|
|
|
468,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
CASH FLOW STATEMENTS DATA |
|
Ended December 31, |
(In thousands) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Net Cash Provided by Operating Activities |
|
$ |
243,569 |
|
|
$ |
144,997 |
|
|
$ |
175,350 |
|
|
$ |
143,133 |
|
|
$ |
88,643 |
|
Net Cash (Used in) Investing Activities |
|
|
(156,020 |
) |
|
|
(108,287 |
) |
|
|
(93,114 |
) |
|
|
(90,605 |
) |
|
|
(101,472 |
) |
Net Cash (Used in) Provided by Financing Activities |
|
|
(449 |
) |
|
|
(16,640 |
) |
|
|
(82,237 |
) |
|
|
(52,526 |
) |
|
|
12,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
|
|
Ended December 31, |
OTHER OPERATING DATA |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Net Sales Volumes (Bcf) (1) |
|
|
56.14 |
|
|
|
48.39 |
|
|
|
48.56 |
|
|
|
44.46 |
|
|
|
41.30 |
|
Average Sales Price Including Effects of Financial
Settlements ($ per Mcf) (1)(2) |
|
$ |
7.04 |
|
|
$ |
5.90 |
|
|
$ |
4.90 |
|
|
$ |
4.03 |
|
|
$ |
3.13 |
|
Total Average Costs ($ Per Mcf) (1) |
|
$ |
3.02 |
|
|
$ |
2.72 |
|
|
$ |
2.45 |
|
|
$ |
2.43 |
|
|
$ |
2.25 |
|
Net Estimated Proved Reserves (Bcfe) (1)(3) |
|
|
1,265 |
|
|
|
1,130 |
|
|
|
1,045 |
|
|
|
1,004 |
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
OTHER FINANCIAL DATA |
|
Ended December 31, |
(In thousands) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Capital Expenditures |
|
$ |
154,243 |
|
|
$ |
110,752 |
|
|
$ |
89,753 |
|
|
$ |
83,869 |
|
|
$ |
61,705 |
|
EBIT (4) |
|
|
253,857 |
|
|
|
166,314 |
|
|
|
132,686 |
|
|
|
80,011 |
|
|
|
42,704 |
|
EBITDA (4) |
|
|
291,856 |
|
|
|
201,353 |
|
|
|
165,575 |
|
|
|
113,611 |
|
|
|
77,072 |
|
|
|
|
(1) |
|
For entities that are not wholly owned but in which CNX Gas owns at
least a 50% equity interest, includes a percentage of their net
production, sales or reserves equal to CNX Gas percentage equity
ownership. Knox Energy is included in the equity earnings data in
2006, 2005, 2004, 2003 and part of 2002. Greene Energy is included in
the equity earnings in 2002. Sales of gas produced by equity
affiliates were 0.22 Bcf for the twelve months ended December 2006,
0.23 Bcf for the twelve months ended December 31, 2005, 0.20 Bcf for
the twelve months ended December 31, 2004, 0.08 Bcf for the twelve
months ended December 31, 2003 and 0.22 Bcf for the twelve months
ended December 31, 2002. |
|
(2) |
|
Represents average net sales price after the effect of derivative transactions. |
|
(3) |
|
Represents proved developed and proved undeveloped gas reserves at
period end for total operations including equity affiliates, which are
immaterial. |
|
(4) |
|
EBIT is defined as earnings before deducting net interest expense
(interest expense less interest income) and income taxes. EBITDA is
defined as earnings before deducting net interest expense (interest
expense less interest income), income taxes and depreciation,
depletion and amortization. Although EBIT and EBITDA are not measures
of performance calculated in accordance with accounting principles
generally accepted in the United States of America, management
believes that they are useful to an investor in evaluating CNX Gas
because they are used as measures to evaluate a companys operating
performance before debt expense and cash flow. EBIT and EBITDA do not
purport to represent cash generated by operating activities and should
not be considered in isolation or as substitute for measures of
performance in accordance with accounting principles generally
accepted in the United States of America. In addition, because EBIT
and EBITDA are not calculated identically by all companies, the
presentation here may not be comparable to other similarly titled
measures of other companies. Managements discretionary use of funds
depicted by EBIT and EBITDA may be limited by working capital, debt
service and capital expenditure requirements, and by restrictions
related to legal requirements, commitments and uncertainties. A
reconciliation of EBIT and EBITDA to financial net income is as
follows: |
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
|
|
|
Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Net Income |
|
$ |
159,867 |
|
|
$ |
102,168 |
|
|
$ |
80,788 |
|
|
$ |
51,714 |
|
|
$ |
26,027 |
|
Add: Interest Expense |
|
|
870 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Interest Income |
|
|
3,453 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Cumulative Effect of Changes in
Accounting for Gas Well Plugging Costs, Net
of Income Taxes of $1,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,905 |
|
|
|
|
|
Add: Income Tax Expense |
|
|
96,573 |
|
|
|
64,550 |
|
|
|
51,898 |
|
|
|
31,202 |
|
|
|
16,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Net Interest and Taxes (EBIT) |
|
|
253,857 |
|
|
|
166,314 |
|
|
|
132,686 |
|
|
|
80,011 |
|
|
|
42,704 |
|
Add: Depreciation, Depletion and Amortization |
|
|
37,999 |
|
|
|
35,039 |
|
|
|
32,889 |
|
|
|
33,600 |
|
|
|
34,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Net Interest, Taxes and
Depreciation, Depletion and Amortization
(EBITDA) |
|
$ |
291,856 |
|
|
$ |
201,353 |
|
|
$ |
165,575 |
|
|
$ |
113,611 |
|
|
$ |
77,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Selected
Consolidated Financial and Other Data and our consolidated financial statements and related notes
appearing elsewhere in this Annual Report. This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. See PART
IForward Looking Statements and PART I-Item 1.A Risk Factors.
Overview
We are a natural gas exploration, development, production and gathering company, operating
primarily in the Appalachian Basin. We are primarily a CBM gas producer with industry-leading
expertise in this type of gas extraction.
Effective as of August 8, 2005, we separated our gas business from CONSOL Energy. We undertook
this separation to achieve the following objectives:
|
|
|
achieve a higher valuation for our business than we believe could be achieved if we remained part of CONSOL Energy; |
|
|
|
|
allow us to use our own capital and borrowing capability, rather
than compete for capital with the mining business, to more rapidly
expand gas production from our proved reserves and unproven
acreage; and |
|
|
|
|
allow our key managers to focus solely on the growth and operation of CNX Gas. |
The success of our operations substantially depends upon rights we received from CONSOL Energy
as a part of our separation. CONSOL Energy transferred to CNX Gas various subsidiaries and joint
venture interests as well as all of their ownership or rights to CBM and natural gas and certain
related surface rights. In addition, CONSOL Energy has given us significant rights to conduct gas
production operations associated with their coal mining activity. These rights are not dependent
upon any continuing ownership in us by CONSOL Energy. We also have established other agreements
with CONSOL Energy under which they will, among other things, provide us certain corporate staff
services and coordinate our tax filings.
In August 2005, CNX Gas sold 27.9 million shares in a private placement transaction. The
aggregate net proceeds of the transaction (approximately $420,200) were used to pay a special
dividend to CONSOL Energy. CONSOL Energy continues to beneficially own 81.5% of our outstanding
common stock.
We do not currently have any plans to pay dividends; rather, we intend to invest available
cash into the development of our business, provided that we can do so at rates of return that
exceed our cost of capital.
Our goal is to create shareholder value by efficiently increasing production and adding
reserves, with a continued emphasis on safety. We believe that by working safely, we can enhance
our productivity and continue to be a cost leader in the industry. During 2006, we achieved the
following:
|
|
|
completed another year with no employee-related lost time accident. We have accumulated
over 2 million man hours without a lost time accident; |
37
|
|
|
increased our 2006 production by 16.0% from 2005 to 56 Bcf, despite capacity constraints on the Columbia pipeline; |
|
|
|
|
generated net income of nearly $160,000 and increased our cash balance by $87,000 to $107,000; |
|
|
|
|
increased our proved reserve base by replacing 340.0% of our production; |
|
|
|
|
brought more than 250 additional wells online; |
|
|
|
|
maintained our low cost structure relative to our peer group; |
|
|
|
|
entered into a 15-year transportation agreement on the Jewell Ridge Pipeline in October
2006 to provide an additional outlet for our production; |
|
|
|
|
significantly increased our operations in our Mountaineer CBM play in Northern
Appalachia and began operations in two new areas Nittany, a CBM play in Central
Pennsylvania and Cardinal, a New Albany shale play in the Illinois Basin; and |
|
|
|
|
invested in the infrastructure necessary for continued growth, including increased
staffing, a new information management software platform and a new long-term incentive
compensation program that directly aligns the interests of our managers with the interests
of our shareholders. |
Outlook
In 2007, we expect to produce 64 Bcf of gas.
Our 2007 capital expenditures are projected to be $312,000. This capital budget includes
significant infrastructure capital that is required for the company to achieve its strategic vision
of producing 100 Bcf per year by 2010. CNX Gas will continue to re-invest in its core business as
long as it can achieve expected rates of return that exceed its weighted average cost of capital.
In 2007, we expect to drill a total of 401 wells that consist of 278 in Virginia, 55 in
Tennessee and other areas, 57 in Mountaineer, 8 in Nittany, and 3 in Cardinal.
38
Results of Operations
Twelve Months Ended December 31, 2006 compared with Twelve Months Ended December 31, 2005
(Amounts reported in thousands)
Net Income
Net income changed primarily due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
|
Change |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
385,056 |
|
|
$ |
277,031 |
|
|
$ |
108,025 |
|
|
|
39.0 |
% |
Related Party Sales |
|
|
8,490 |
|
|
|
6,052 |
|
|
|
2,438 |
|
|
|
40.3 |
% |
Royalty Interest Gas Sales |
|
|
51,054 |
|
|
|
45,351 |
|
|
|
5,703 |
|
|
|
12.6 |
% |
Purchased Gas Sales |
|
|
43,973 |
|
|
|
275,148 |
|
|
|
(231,175 |
) |
|
|
(84.0 |
)% |
Other Income |
|
|
25,286 |
|
|
|
9,859 |
|
|
|
15,427 |
|
|
|
156.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
|
513,859 |
|
|
|
613,441 |
|
|
|
(99,582 |
) |
|
|
(16.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
|
31,096 |
|
|
|
26,794 |
|
|
|
4,302 |
|
|
|
16.1 |
% |
Gathering and Compression Costs |
|
|
55,091 |
|
|
|
40,623 |
|
|
|
14,468 |
|
|
|
35.6 |
% |
Royalty Interest Gas Costs |
|
|
41,998 |
|
|
|
36,641 |
|
|
|
5,357 |
|
|
|
14.6 |
% |
Purchased Gas Costs |
|
|
44,843 |
|
|
|
278,720 |
|
|
|
(233,877 |
) |
|
|
(83.9 |
)% |
Other |
|
|
6,868 |
|
|
|
9,721 |
|
|
|
(2,853 |
) |
|
|
(29.3 |
)% |
General and Administrative |
|
|
38,654 |
|
|
|
19,171 |
|
|
|
19,483 |
|
|
|
101.6 |
% |
Depreciation, Depletion and Amortization |
|
|
37,999 |
|
|
|
35,039 |
|
|
|
2,960 |
|
|
|
8.4 |
% |
Interest Expense |
|
|
870 |
|
|
|
14 |
|
|
|
856 |
|
|
|
6,114.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
|
257,419 |
|
|
|
446,723 |
|
|
|
(189,304 |
) |
|
|
(42.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
256,440 |
|
|
|
166,718 |
|
|
|
89,722 |
|
|
|
53.8 |
% |
Income Taxes |
|
|
96,573 |
|
|
|
64,550 |
|
|
|
32,023 |
|
|
|
49.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
159,867 |
|
|
$ |
102,168 |
|
|
$ |
57,699 |
|
|
|
56.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2006 was improved primarily due to increases in average sales price and
production.
Revenue and Other Income
Revenue and other income decreased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
|
Change |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
385,056 |
|
|
$ |
277,031 |
|
|
$ |
108,025 |
|
|
|
39.0 |
% |
Related Party Sales |
|
|
8,490 |
|
|
|
6,052 |
|
|
|
2,438 |
|
|
|
40.3 |
% |
Royalty Interest Gas Sales |
|
|
51,054 |
|
|
|
45,351 |
|
|
|
5,703 |
|
|
|
12.6 |
% |
Purchased Gas Sales |
|
|
43,973 |
|
|
|
275,148 |
|
|
|
(231,175 |
) |
|
|
(84.0 |
)% |
Other Income |
|
|
25,286 |
|
|
|
9,859 |
|
|
|
15,427 |
|
|
|
156.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
$ |
513,859 |
|
|
$ |
613,441 |
|
|
$ |
(99,582 |
) |
|
|
(16.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in outside sales, related party sales, and royalty interest gas sales was
primarily due to increased production and average sales price in 2006 compared to 2005. Both
purchased gas sales and purchased gas costs have decreased in the current period as a result of the
adoption of a new accounting standard effective January 1, 2006. This reduction is the result of
applying Emerging Issues Task Force No. 04-13 Accounting for Purchases and Sales of Inventory with
the same Counterparty (EITF 04-13) in the current year, which requires the combining of matching
buy/sell transactions, done in contemplation of one another, that were committed to on or after
January 1, 2006. Other income increased as a result of insurance recoveries for losses we
sustained from prior year CONSOL Energy mining incidents. It also increased due to additional royalty income
and an increase in interest income as a result of the increase to our cash balance throughout the
current year.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
55.9 |
|
|
|
48.2 |
|
|
|
7.7 |
|
|
|
16.0 |
% |
Average Sales Price (per Mcf) |
|
$ |
7.04 |
|
|
$ |
5.88 |
|
|
$ |
1.16 |
|
|
|
19.7 |
% |
The increase in average sales price is primarily the result of selling the majority of our
current year production at market rates that were higher than the prices we sold our gas under
hedging contracts in the prior year. CNX Gas enters into physical gas supply transactions with
various counterparties for terms varying in length. CNX Gas has also entered into financial gas
swap transactions that qualify as financial cash flow hedges. These financial gas swap transactions
exist parallel to the underlying physical transactions. These physical and financial hedges
represented approximately 27% of our produced gas sales volumes for the twelve months ended
December 31, 2006 at an average price of $7.42 per Mcf. In the prior year these hedges represented
approximately 70% at an average price of $4.77 per Mcf.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Royalty Interest Gas Sales Volumes (Bcf) |
|
|
7.6 |
|
|
|
6.6 |
|
|
|
1.0 |
|
|
|
15.2 |
% |
Average Sales Price (per Mcf) |
|
$ |
6.76 |
|
|
$ |
6.92 |
|
|
$ |
(0.16 |
) |
|
|
(2.3 |
)% |
Included in royalty interest gas sales are the revenues related to the portion of production
associated with royalty interest owners. The decrease in sales price is a function of the average
CNX Gas price, before the effects of financial swap transactions, being higher in the prior year
than in the current year. Volumes increased as a result of our current year drilling program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Purchased Gas Sales Volumes (Bcf) |
|
|
6.1 |
|
|
|
28.7 |
|
|
|
(22.6 |
) |
|
|
(78.7 |
)% |
Average Sales Price (per Mcf) |
|
$ |
7.20 |
|
|
$ |
9.59 |
|
|
$ |
(2.39 |
) |
|
|
(24.9 |
)% |
Included in purchased gas sales revenue are volumes of gas we simultaneously purchased from
and sold to the same counterparties between the segmentation and interruptible pools on the
Columbia Gas Transmission Corporation (TCO) pipeline in order to satisfy obligations to certain
customers. In accordance with Emerging Issues Task Force Issue No. 99-19 Reporting Revenue Gross
as a Principal versus Net as an Agent (EITF 99-19), we have historically recorded our revenues and
our costs on a gross basis. However, because we adopted EITF 04-13 on January 1, 2006, purchased
gas sales and volumes have decreased. The net result for transactions that meet the above criteria
is reflected in transportation expense in the current year. Additionally, there are small volumes
of gas we purchase from third party producers at market prices less our gathering charge, which we
then resell.
Other income consists of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
|
Change |
|
Royalty Income |
|
$ |
10,230 |
|
|
$ |
8,158 |
|
|
$ |
2,072 |
|
|
|
25.4 |
% |
Insurance Proceeds |
|
|
10,165 |
|
|
|
|
|
|
|
10,165 |
|
|
|
100.0 |
% |
Interest Income |
|
|
3,453 |
|
|
|
418 |
|
|
|
3,035 |
|
|
|
726.1 |
% |
Third Party Gathering Revenue |
|
|
1,341 |
|
|
|
1,110 |
|
|
|
231 |
|
|
|
20.8 |
% |
Other Miscellaneous |
|
|
97 |
|
|
|
173 |
|
|
|
(76 |
) |
|
|
(43.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
$ |
25,286 |
|
|
$ |
9,859 |
|
|
$ |
15,427 |
|
|
|
156.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income increased in 2006 compared to 2005 due to increased gas prices and additional
production on existing contracts. Royalty income received from third parties is calculated as a
percentage of the third parties sales price.
Insurance proceeds relate to the settlement of claims for losses we sustained from CONSOL
Energy mining incidents that adversely affected our gob gas production in 2005.
Interest income increased in 2006 as a result of increased earnings and the fact that CNX Gas
retained cash collections as a separate stand alone company for the entire year. For most of 2005,
CNX Gas was part of CONSOL Energy and only retained cash after separation from CONSOL Energy.
40
Costs and Expenses
Both purchased gas sales and purchased gas costs have decreased in the current period as a
result of the adoption of a new accounting standard effective January 1, 2006. This reduction is
the result of applying EITF 04-13 in the current year, which requires the combining of matching
buy/sell transactions, done in contemplation of one another, that were committed to on or after
January 1, 2006. Separate from the effects of the accounting change described above, firm
transportation costs, administrative expense and costs associated with increased production are
higher and are made up of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
|
Change |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
$ |
31,096 |
|
|
$ |
26,794 |
|
|
$ |
4,302 |
|
|
|
16.1 |
% |
Gathering and Compression Costs |
|
|
55,091 |
|
|
|
40,623 |
|
|
|
14,468 |
|
|
|
35.6 |
% |
Royalty Interest Gas Costs |
|
|
41,998 |
|
|
|
36,641 |
|
|
|
5,357 |
|
|
|
14.6 |
% |
Purchased Gas Costs |
|
|
44,843 |
|
|
|
278,720 |
|
|
|
(233,877 |
) |
|
|
(83.9 |
)% |
Other |
|
|
6,868 |
|
|
|
9,721 |
|
|
|
(2,853 |
) |
|
|
(29.3 |
)% |
General and Administrative |
|
|
38,654 |
|
|
|
19,171 |
|
|
|
19,483 |
|
|
|
101.6 |
% |
Depreciation, Depletion and Amortization |
|
|
37,999 |
|
|
|
35,039 |
|
|
|
2,960 |
|
|
|
8.4 |
% |
Interest Expense |
|
|
870 |
|
|
|
14 |
|
|
|
856 |
|
|
|
6,114.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
$ |
257,419 |
|
|
$ |
446,723 |
|
|
$ |
(189,304 |
) |
|
|
(42.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
55.9 |
|
|
|
48.2 |
|
|
|
7.7 |
|
|
|
16.0 |
% |
Average Lifting Costs (per Mcf) |
|
$ |
0.56 |
|
|
$ |
0.56 |
|
|
$ |
|
|
|
|
0.0 |
% |
Lifting costs per Mcf remained flat due to increased production from our ongoing drilling
program. Slightly higher production taxes, as a result of higher pricing, were offset by savings
in well service costs on a per Mcf basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
55.9 |
|
|
|
48.2 |
|
|
|
7.7 |
|
|
|
16.0 |
% |
Average Gathering and Compression Costs (per Mcf) |
|
$ |
0.99 |
|
|
$ |
0.84 |
|
|
$ |
0.15 |
|
|
|
17.9 |
% |
The increase in gathering and compression costs per unit was attributable to an additional
$0.07 per Mcf charge for the purchase of firm transportation capacity on the Columbia pipeline
acquired to ensure deliverability of our gas. Due to the application of EITF 04-13, the combining
of matching buy/sell transactions accounts for an additional $0.06 per Mcf increase in the current
period. Although the net costs associated with similar buy/sell transactions were incurred during
the prior period, they were not recorded as part of gathering and compression costs. Instead, they
were recorded on a gross basis as purchased gas sales and purchased gas costs. Gathering and
compression costs have also increased approximately $0.05 per Mcf due to additional power expenses
related to both increased megawatt hour rates charged by our power provider and the use of more
electric compressors during the current year that were previously powered by gas for most of the
prior year. Maintenance and various other related transactions have decreased $0.03 per Mcf as a
result of increased production and the compressor conversions. The sales production used to
calculate this unit cost does not include volumes from third parties flowing on our lines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Royalty Interest Gas Sales Volumes (Bcf) |
|
|
7.6 |
|
|
|
6.6 |
|
|
|
1.0 |
|
|
|
15.2 |
% |
Average Cost (per Mcf) |
|
$ |
5.56 |
|
|
$ |
5.59 |
|
|
$ |
(0.03 |
) |
|
|
(0.5 |
)% |
Included in royalty interest gas costs are the expenses related to the portion of production
associated with royalty interest owners. The decrease in sales price is a function of the average
CNX Gas price, before the effects of financial swap transactions, being higher in the prior year
than in the current year. Volumes increased as a result of additional wells coming online from our
on-going drilling program.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Purchased Gas Cost Volumes (Bcf) |
|
|
6.1 |
|
|
|
28.7 |
|
|
|
(22.6 |
) |
|
|
(78.7 |
)% |
Average Purchased Gas Costs (per Mcf) |
|
$ |
7.34 |
|
|
$ |
9.71 |
|
|
$ |
(2.37 |
) |
|
|
(24.4 |
)% |
Included in purchased gas costs are volumes of gas we simultaneously purchased from and sold
to the same counterparties between the segmentation and interruptible pools on the Columbia
pipeline in order to satisfy obligations to certain customers. In accordance with Emerging Issues
Task Force Issue No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent (EITF
99-19), we have historically recorded our revenues and our costs on a gross basis. However,
because we adopted EITF 04-13 on January 1, 2006, purchased gas costs and volumes have decreased.
The net result for transactions that meet the above criteria is reflected in transportation expense
in the current year.
Other costs and expenses decreased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
|
Change |
|
Well Site General Maintenance |
|
$ |
3,750 |
|
|
$ |
3,781 |
|
|
$ |
(31 |
) |
|
|
(0.8 |
)% |
Gob Collection Costs |
|
|
3,012 |
|
|
|
3,280 |
|
|
|
(268 |
) |
|
|
(8.2 |
)% |
Land Broker Fees |
|
|
1,156 |
|
|
|
977 |
|
|
|
179 |
|
|
|
18.3 |
% |
Land Rentals |
|
|
576 |
|
|
|
635 |
|
|
|
(59 |
) |
|
|
(9.3 |
)% |
Imbalance |
|
|
(648 |
) |
|
|
899 |
|
|
|
(1,547 |
) |
|
|
(172.1 |
)% |
Equity in (Earnings) Loss of Affiliates |
|
|
(978 |
) |
|
|
149 |
|
|
|
(1,127 |
) |
|
|
(756.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Costs and Expenses |
|
$ |
6,868 |
|
|
$ |
9,721 |
|
|
$ |
(2,853 |
) |
|
|
(29.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Well site general maintenance costs from the on-going drilling program were generally flat,
despite increased production and drilling.
Gob collection costs decreased slightly in 2006 due to the reduced number of gob wells drilled
because of the idling of the CONSOL Energy VP-8 mine.
The gas imbalance has shifted from an under-delivered position in 2005 to an over-delivered
position in 2006, and therefore resulted in income for 2006 compared to expense in 2005. Because
contracted quantities of gas delivered to the pipeline rarely equal physical deliveries to
customers, CNX Gas is responsible for monitoring this imbalance and requesting adjustments to
contracted volumes as circumstances warrant. This decrease in imbalance cost was offset by
corresponding decreases in gas sales revenue.
Equity in (earnings) loss of affiliates improved in 2006 compared to 2005 because Knox Energy
had higher earnings in 2006 compared to 2005 primarily due to production increases at the joint
venture and additional service revenue. Buchanan Generations incurred losses that were higher in
the current year primarily due to the facility being run for less megawatt hours in 2006 compared
to 2005.
General and administrative costs increased to $38,654 in 2006 from $19,171 in 2005 primarily
due to additional costs related to becoming a separate publicly traded company as a result of the
separation of CNX Gas from CONSOL Energy. These increased costs include additional staffing and
facilities, incentive compensation plans, stock option plans, legal and accounting fees,
Sarbanes-Oxley compliance fees, implementation fees for the information management software
platform and various other service costs.
Depreciation, depletion and amortization have increased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
|
Change |
|
Production |
|
$ |
24,668 |
|
|
$ |
23,531 |
|
|
$ |
1,137 |
|
|
|
4.8 |
% |
Gathering |
|
|
13,331 |
|
|
|
11,508 |
|
|
|
1,823 |
|
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation, Depletion and Amortization |
|
$ |
37,999 |
|
|
$ |
35,039 |
|
|
$ |
2,960 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The increase in production related depreciation, depletion and amortization is due to the net
effect of additional volumes in the current year and a slightly lower unit-of-production rate in
2006 compared to 2005. Rates are generally calculated using the net book value of assets on January
1st divided by proved developed reserves. Gathering depreciation, depletion and
amortization is recorded on the straight-line method and increased due to additional assets being
placed in service in 2006, including the effect of the Jewell Ridge lateral.
Interest expense increased as a result of the imputed interest associated with recording the
Jewell Ridge lateral arrangement as a capital lease for financial accounting and reporting
purposes.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Variance |
|
Change |
Earnings Before Income Taxes |
|
$ |
256,440 |
|
|
$ |
166,718 |
|
|
$ |
89,722 |
|
|
|
53.8 |
% |
Tax Expense |
|
$ |
96,573 |
|
|
$ |
64,550 |
|
|
$ |
32,023 |
|
|
|
49.6 |
% |
Effective Income Tax Rate |
|
|
37.7 |
% |
|
|
38.7 |
% |
|
|
(1.0 |
)% |
|
|
|
|
CNX Gas effective tax rate decreased in 2006 primarily due to a reduction in state tax
rates.
Issues Regarding Coal Mining Activities
A portion of our gas production is associated with coal mining activities at CONSOL Energys
Buchanan Mine. These mining activities require the removal of water from the mine and the
ventilation of the mine. Several lawsuits and permit appeals have been filed that could affect the
removal of water from the mine. Separately, a lawsuit has been filed with respect to a ventilation
fan that could affect the ventilation of the mine. If operations at CONSOL Energys Buchanan Mine
are adversely affected as a result of these legal proceedings, our gas production relating to
mining activities would be adversely affected.
Twelve Months Ended December 31, 2005 compared with Twelve Months Ended December 31, 2004
(Amounts reported in thousands)
Net Income
Net income changed primarily due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
277,031 |
|
|
$ |
214,721 |
|
|
$ |
62,310 |
|
|
|
29.0 |
% |
Related Party Sales |
|
|
6,052 |
|
|
|
22,036 |
|
|
|
(15,984 |
) |
|
|
(72.5 |
)% |
Royalty Interest Gas Sales |
|
|
45,351 |
|
|
|
41,858 |
|
|
|
3,493 |
|
|
|
8.3 |
% |
Purchased Gas Sales |
|
|
275,148 |
|
|
|
112,005 |
|
|
|
163,143 |
|
|
|
145.7 |
% |
Other Income |
|
|
9,859 |
|
|
|
6,916 |
|
|
|
2,943 |
|
|
|
42.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
|
613,441 |
|
|
|
397,536 |
|
|
|
215,905 |
|
|
|
54.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
|
26,794 |
|
|
|
23,939 |
|
|
|
2,855 |
|
|
|
11.9 |
% |
Gathering and Compression Costs |
|
|
40,623 |
|
|
|
37,021 |
|
|
|
3,602 |
|
|
|
9.7 |
% |
Royalty Interest Gas Costs |
|
|
36,641 |
|
|
|
32,914 |
|
|
|
3,727 |
|
|
|
11.3 |
% |
Purchased Gas Costs |
|
|
278,720 |
|
|
|
113,063 |
|
|
|
165,657 |
|
|
|
146.5 |
% |
Other |
|
|
9,721 |
|
|
|
9,494 |
|
|
|
227 |
|
|
|
2.4 |
% |
General and Administrative |
|
|
19,171 |
|
|
|
15,530 |
|
|
|
3,641 |
|
|
|
23.4 |
% |
Depreciation, Depletion and Amortization |
|
|
35,039 |
|
|
|
32,889 |
|
|
|
2,150 |
|
|
|
6.5 |
% |
Interest Expense |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
|
446,723 |
|
|
|
264,850 |
|
|
|
181,873 |
|
|
|
68.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
166,718 |
|
|
|
132,686 |
|
|
|
34,032 |
|
|
|
25.6 |
% |
Income Taxes |
|
|
64,550 |
|
|
|
51,898 |
|
|
|
12,652 |
|
|
|
24.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
102,168 |
|
|
$ |
80,788 |
|
|
$ |
21,380 |
|
|
|
26.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2005 was improved primarily due to increased average sales prices. The
increased revenues were offset, in part, by higher costs attributable to production taxes,
royalties, firm transportation charges and general administrative charges.
43
Revenue and Other Income
Revenue and other income increased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
277,031 |
|
|
$ |
214,721 |
|
|
$ |
62,310 |
|
|
|
29.0 |
% |
Related Party Sales |
|
|
6,052 |
|
|
|
22,036 |
|
|
|
(15,984 |
) |
|
|
(72.5 |
)% |
Royalty Interest Gas Sales |
|
|
45,351 |
|
|
|
41,858 |
|
|
|
3,493 |
|
|
|
8.3 |
% |
Purchased Gas Sales |
|
|
275,148 |
|
|
|
112,005 |
|
|
|
163,143 |
|
|
|
145.7 |
% |
Other Income |
|
|
9,859 |
|
|
|
6,916 |
|
|
|
2,943 |
|
|
|
42.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
$ |
613,441 |
|
|
$ |
397,536 |
|
|
$ |
215,905 |
|
|
|
54.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in outside sales revenue was primarily due to a higher average sales price per
thousand cubic feet in 2005 compared to 2004. Related party sales decreased due to the impacts of
the Buchanan mine incidents. Royalty interest gas sales increased due to increased prices.
Purchased gas sales revenue increased due to the additional matching buy/sell arrangements required
to sell our gas. Other income increased due to increased royalty income, increased third party
gathering revenue, increased interest income and other miscellaneous income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
48.2 |
|
|
|
48.4 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
)% |
Average Sales Price (per Mcf) |
|
$ |
5.88 |
|
|
$ |
4.90 |
|
|
$ |
0.98 |
|
|
|
20.0 |
% |
We believe the 2005 gas market price increases were largely driven by continued concerns over
levels of North American gas production, as well as increased oil prices and favorable economic
conditions in the United States that encourage demand for natural gas. The adverse effect of the
2005 hurricane season also shut-in significant portions of Gulf Coast gas, increasing the tight
supply of gas, and leading to even higher prices in 2005. CNX Gas enters into various physical gas
supply transactions with both gas marketers and other counterparties for terms varying in length.
CNX Gas has also entered into various gas swap transactions that qualify as financial cash flow
hedges. These gas swap transactions exist parallel to the underlying physical transactions. These
physical and financial hedges represented approximately 70% of our produced gas sales volumes for
the twelve months ended December 31, 2005 at an average price of $4.77 per Mcf. Despite the loss of
approximately 4.0 Bcf related to the CONSOL Energy Buchanan Mine incidents and 1.4 Bcf related to
maintenance related capacity constraints on CNX Gas transportation capacity on the Columbia
interstate pipeline, sales volumes are only slightly lower in the 2005 period compared to the 2004
period. CNX Gas was able to offset these production losses with additional volumes coming online
from our on-going drilling program, and by successfully initiating a frac well enhancement and
stimulation program on wells unaffected by the mine incidents throughout the current year.
As a result of increased demand for pipeline use on the Columbia interstate pipeline and the
potential for curtailment on portions of the shipment capacity allocated to CNX Gas, we purchased
firm transportation capacity on the pipeline during 2005. This arrangement offset a portion of the
expected impact from periodic curtailments. In April 2005, CNX Gas was given notice by Columbia
regarding reductions in allowable gas flows due to routine maintenance and construction activities.
Interruptible gas was completely shut in and our contracted firm transportation flows were reduced
by 60%, which resulted in reduced revenues of approximately $6.8 million along with other smaller
curtailments throughout the year that were also eventually lifted. Although CNX Gas anticipates
that these pipeline constraints will be an on-going issue for the foreseeable future, we intend to
gain access to the ETNG pipeline, which is south of our Central Appalachia operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Royalty Interest Gas Sales Volumes (Bcf) |
|
|
6.6 |
|
|
|
6.9 |
|
|
|
(0.3 |
) |
|
|
(4.3 |
)% |
Average Sales Price (per Mcf) |
|
$ |
6.92 |
|
|
$ |
6.06 |
|
|
$ |
0.86 |
|
|
|
14.2 |
% |
44
Included in royalty interest gas sales are the revenues related to the portion of production
associated with royalty interest owners. The increase in sales price is a function of the average
CNX Gas price, before the effects of financial swap transactions being higher in the current year
than in the prior year. Volumes decreased as a result of curtailments and maintenance related
capacity constraints, which were partially offset by additional wells coming online from our
on-going drilling program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Purchased Gas Sales Volumes (Bcf) |
|
|
28.7 |
|
|
|
17.5 |
|
|
|
11.2 |
|
|
|
64.0 |
% |
Average Sales Price (per Mcf) |
|
$ |
9.59 |
|
|
$ |
6.39 |
|
|
$ |
3.20 |
|
|
|
50.1 |
% |
Additionally, we simultaneously purchased gas from and sold gas to other counterparties
between the segmentation and interruptible pools on the Columbia pipeline in order to satisfy
obligations to certain customers. In accordance with EITF 99-19, we have increased our revenues and
our costs. Sales of purchased gas volumes have increased primarily due to CNX Gas utilizing higher
levels of firm transportation throughout the 2005 period that required us to purchase from and sell
to other counterparties. CNX Gas began to enter into this type of transaction in May of 2004.
Other income consists of royalty income, third party gathering revenue and other miscellaneous
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Royalty Income |
|
$ |
8,158 |
|
|
$ |
5,726 |
|
|
$ |
2,432 |
|
|
|
42.5 |
% |
Third Party Gathering Revenue |
|
|
1,110 |
|
|
|
1,109 |
|
|
|
1 |
|
|
|
0.1 |
% |
Interest Income |
|
|
418 |
|
|
|
|
|
|
|
418 |
|
|
|
100.0 |
% |
Other Miscellaneous |
|
|
173 |
|
|
|
81 |
|
|
|
92 |
|
|
|
113.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
$ |
9,859 |
|
|
$ |
6,916 |
|
|
$ |
2,943 |
|
|
|
42.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income increased in 2005 compared to 2004 due to increased gas prices and additional
production on existing contracts. Royalty income received from third parties is calculated as a
percentage of the third parties sales price.
Interest income increased $418 in 2005 as a result of CNX Gas retaining cash collections as a
separate stand alone company. In 2004 CNX Gas was part of CONSOL Energys securitization program
and retained no cash resulting in zero interest income.
Other Miscellaneous consisted of additional income from miscellaneous transactions that
occurred throughout both periods, none of which were individually material.
Costs and Expenses
Increased costs and expenses in 2005 were impacted by purchased gas, increased firm transport,
higher prices resulting in higher royalties and higher administrative expense and are made up of
the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
$ |
26,794 |
|
|
$ |
23,939 |
|
|
$ |
2,855 |
|
|
|
11.9 |
% |
Gathering and Compression Costs |
|
|
40,623 |
|
|
|
37,021 |
|
|
|
3,602 |
|
|
|
9.7 |
% |
Royalty Interest Gas Costs |
|
|
36,641 |
|
|
|
32,914 |
|
|
|
3,727 |
|
|
|
11.3 |
% |
Purchased Gas Costs |
|
|
278,720 |
|
|
|
113,063 |
|
|
|
165,657 |
|
|
|
146.5 |
% |
Other |
|
|
9,721 |
|
|
|
9,494 |
|
|
|
227 |
|
|
|
2.4 |
% |
General and Administrative |
|
|
19,171 |
|
|
|
15,530 |
|
|
|
3,641 |
|
|
|
23.4 |
% |
Depreciation, Depletion and Amortization |
|
|
35,039 |
|
|
|
32,889 |
|
|
|
2,150 |
|
|
|
6.5 |
% |
Interest Expense |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
$ |
446,723 |
|
|
$ |
264,850 |
|
|
$ |
181,873 |
|
|
|
68.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
48.2 |
|
|
|
48.4 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
)% |
Average Lifting Costs (per Mcf) |
|
$ |
0.56 |
|
|
$ |
0.50 |
|
|
$ |
0.06 |
|
|
|
12.0 |
% |
45
Lifting costs per unit sold increased $0.06 per Mcf in the period, of which $0.03 per Mcf was
due to higher production taxes in 2005 compared to 2004 driven by higher realized sales price. Well
maintenance fees increased $0.02 per Mcf due to additional wells being serviced in the current
year. Various other transactions, none of which were individually material, also contributed to the
increase in per unit costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
48.2 |
|
|
|
48.4 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
)% |
Average Gathering and Compression Costs (per Mcf) |
|
$ |
0.84 |
|
|
$ |
0.77 |
|
|
$ |
0.07 |
|
|
|
9.1 |
% |
The increase in gathering and compression costs per unit was attributable to an additional
$0.04 per Mcf charge for the purchase of firm transportation capacity on the Columbia interstate
pipeline because of potential curtailments on portions of shipment capacity allocated to CNX Gas as
a result of increased demand for pipeline access in the 2005 period. CNX Gas began to purchase firm
transportation capacity on the pipeline in May 2004. Gathering and compression costs per unit also
increased approximately $0.02 per Mcf due to additional power expense, as a result of converting
several compressors from gas powered to electric powered in the current year. Gathering and
compression unit costs also increased due to various other transactions, none of which were
individually material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Royalty Interest Gas Sales Volumes (Bcf) |
|
|
6.6 |
|
|
|
6.9 |
|
|
|
(0.3 |
) |
|
|
(4.3 |
)% |
Average Cost (per Mcf) |
|
$ |
5.59 |
|
|
$ |
4.76 |
|
|
$ |
0.83 |
|
|
|
17.4 |
% |
Included in royalty interest gas costs are the expenses related to the portion of production
associated with royalty interest owners. The increase in sales price is a function of the average
CNX Gas price, before the effects of financial swap transactions, being higher in the current year
than in the prior year. Volumes decreased as a result of curtailments and maintenance related
capacity constraints, which were partially offset by additional wells coming online from our
on-going drilling program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2005 |
|
2004 |
|
Variance |
|
Change |
Purchased Gas Cost Volumes (Bcf) |
|
|
28.7 |
|
|
|
17.5 |
|
|
|
11.2 |
|
|
|
64.0 |
% |
Average Purchased Gas Costs (per Mcf) |
|
$ |
9.71 |
|
|
$ |
6.45 |
|
|
$ |
3.26 |
|
|
|
50.5 |
% |
In connection with the purchase of firm transportation capacity on the Columbia pipeline, we
purchased from and sold to other gas suppliers, which increased our revenues and our costs. CNX Gas
believes this type of transaction may continue as a result of increased capacity demands on the
Columbia pipeline. The 2004 period included a smaller volume of firm transportation activity as CNX
Gas did not begin to purchase this capacity until May of 2004.
Other costs and expenses increased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Well Site General Maintenance |
|
$ |
3,781 |
|
|
$ |
3,135 |
|
|
$ |
646 |
|
|
|
20.6 |
% |
Gob Collection Costs |
|
|
3,280 |
|
|
|
3,401 |
|
|
|
(121 |
) |
|
|
(3.6 |
)% |
Land Broker Fees |
|
|
977 |
|
|
|
266 |
|
|
|
711 |
|
|
|
267.3 |
% |
Imbalance |
|
|
899 |
|
|
|
(266 |
) |
|
|
1,165 |
|
|
|
438.0 |
% |
Land Rentals |
|
|
635 |
|
|
|
535 |
|
|
|
100 |
|
|
|
18.7 |
% |
Equity in (Earnings) Loss of Affiliates |
|
|
149 |
|
|
|
2,423 |
|
|
|
(2,274 |
) |
|
|
(93.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Costs and Expenses |
|
$ |
9,721 |
|
|
$ |
9,494 |
|
|
$ |
227 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Well site general maintenance costs increased in 2005 due to the additional wells being
drilled as part of the on-going drilling program.
Land Broker Fees have increased due to the expanded effort to prepare/permit well sites.
The gas imbalance has shifted from an over-delivered position in 2004 to an under-delivered
position in 2005, and therefore resulted in expense for 2005 compared to income in 2004. Because
contracted quantities of gas delivered to the pipeline rarely equal physical deliveries to
customers, CNX Gas is responsible for monitoring this imbalance and requesting adjustments to
contracted volumes as circumstances warrant. This increase in imbalance cost was offset by
corresponding increases in gas sales revenue.
46
Equity in (earnings) loss of affiliates improved in 2005 compared to 2004 because Knox Energy
had earnings in 2005 compared to a loss in 2004. This is primarily due to production increases and
additional service revenue. CNX Gas owns a 50% interest in this joint venture. CNX Gas production
percentage increased due to a settlement agreement between CNX Gas and our partner in the joint
venture in which CNX Gas now fully owns more wells. Prior to the settlement agreement, CNX Gas
shared ownership interest in these wells proportionately with our partner. Additionally, Buchanan
Generations losses were lower in the current year primarily due to the facility being run for more
megawatt hours in 2005 compared to 2004. This improvement was offset, in part, by increased fuel
charges due to higher average gas sales prices in 2005 compared to 2004.
General and administrative increased to $19,171 in 2005 from $15,530 in 2004 primarily due to
higher charges for legal fees, accounting fees, payroll processing and other service costs.
Additional costs have been incurred as a result of the separation of CNX Gas from CONSOL Energy.
Depreciation, depletion and amortization have increased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Production |
|
$ |
23,531 |
|
|
$ |
22,353 |
|
|
$ |
1,178 |
|
|
|
5.3 |
% |
Gathering |
|
|
11,508 |
|
|
|
10,536 |
|
|
|
972 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation, Depletion and Amortization |
|
$ |
35,039 |
|
|
$ |
32,889 |
|
|
$ |
2,150 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in production related depreciation, depletion and amortization was primarily due
to a slightly higher unit-of-production rate in 2005 compared to 2004. Rates are generally
calculated using the net book value of assets at the end of the year divided by proved developed
reserves. Gathering depreciation, depletion and amortization is recorded on the straight-line
method and increased due to additional assets coming on line in 2005.
Interest expense relates to charges for activity on the $200 million credit facility
established in October of 2005.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2005 |
|
|
2004 |
|
|
Variance |
|
|
Change |
|
Earnings Before Income Taxes |
|
$ |
166,718 |
|
|
$ |
132,686 |
|
|
$ |
34,032 |
|
|
|
25.6 |
% |
Tax Expense |
|
$ |
64,550 |
|
|
$ |
51,898 |
|
|
$ |
12,652 |
|
|
|
24.4 |
% |
Effective Income Tax Rate |
|
|
38.7 |
% |
|
|
39.1 |
% |
|
|
(0.4 |
)% |
|
|
|
|
CNX Gas effective tax rate decreased in 2005 primarily due to a special deduction
provided by the American Jobs Creation Act of 2004.
47
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make judgments, estimates and
assumptions that affect reported amounts of assets and liabilities in the consolidated financial
statements and at the date of the financial statements, as well as the reported amounts of income
and expenses during the reporting period. Note 1 of the Notes to the Consolidated Annual Financial
Statements included in this Annual Report describes the significant accounting policies and methods
used in the preparation of the consolidated financial statements. Actual results could differ from
those estimates upon subsequent resolution of identified matters. Management believes that the
estimates utilized are reasonable. The following critical accounting policies are materially
impacted by judgments, assumptions and estimates used in the preparation of the consolidated
financial statements.
Derivative Instruments
CNX Gas measures every derivative instrument (including certain derivative instruments
embedded in other contracts) at fair value and records them on the balance sheet as either an asset
or liability. Changes in fair value of derivatives are recorded currently in earnings unless
special hedge accounting criteria are met. For derivatives designated as fair value hedges, the
changes in fair value of both the derivative instrument and the hedged item are recorded in
earnings. For derivatives designated as cash flow hedges, the effective portions of changes in fair
value of the derivative are reported in other comprehensive income or loss and reclassified into
earnings in the same period or periods which the forecasted transaction affects earnings. The
ineffective portions of hedges are recognized in earnings in the current period.
CNX Gas formally assesses, both at inception of the hedge and on an ongoing basis, whether
each derivative is highly effective in offsetting changes in fair values or cash flows of the
hedged item. If it is determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, CNX Gas will discontinue hedge accounting
prospectively.
Stock-Based Compensation
Effective January 1, 2006, CNX Gas adopted the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123R), using the modified
prospective transition method and therefore has not restated results for prior periods. Under this
transition method, stock-based compensation expense for the year ended December 31, 2006 includes
compensation expense for all stock-based compensation awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). Stock-based
compensation expense for all stock-based compensation awards granted after January 1, 2006 is based
on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. CNX Gas
recognizes these compensation costs on a straight-line basis over the requisite service period of
the award, which is generally the option vesting term. Prior to the adoption of SFAS 123R, CNX Gas
recognized stock-based compensation expense in accordance with Accounting Principles Board Opinion
No. 25. Accounting for Stock Issued to Employees, (APB 25). In March 2005, the Securities and
Exchange Commission (the SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the
SECs interpretation of SFAS 123R and the valuation of share-based payments for public companies.
CNX Gas has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 11 to the
Consolidated Financial Statements for a further discussion on stock-based compensation.
Effective October 11, 2006, CNX Gas adopted a long-term incentive program. This program allows
for the award of performance share units (PSUs). A PSU represents a contingent right to receive a
cash payment, determined by reference to the value of one share of the companys common stock. The
total number of units earned, if any, by a participant will be based on the companys total
stockholder return relative to the stockholder return of a pre-determined peer group of companies.
The performance period is from October 11, 2006 to December 31, 2009. CNX Gas recognizes
compensation costs on a straight-line basis over the requisite service period, based on the fair
value of the PSUs. The fair value of the PSUs will be re-valued quarterly using a Monte Carlo
lattice model.
48
Reserve Estimates
Our estimates of proved natural gas reserves and future net revenues from them are based upon
reserve analyses that rely upon various assumptions, including those required by the SEC, as to
natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability
of funds. Any significant variance in these assumptions could materially affect the estimated
quantity of our reserves. As a result, our estimates of our proved natural gas reserves are
inherently imprecise. Actual future production, natural gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable natural gas reserves may vary
substantially from our estimates contained in the reserve reports. In addition, our proved reserves
may be subject to downward or upward revision based upon production history, results of future
exploration and development, prevailing natural gas prices, mechanical difficulties, governmental
regulation and other factors, many of which are beyond our control.
Successful Efforts Accounting
We are required to select among alternative acceptable accounting policies. There are two
generally acceptable methods for accounting for oil and gas producing activities. The full-cost
method allows the capitalization of all costs associated with exploring for, acquiring and
developing oil and natural gas reserves. The successful efforts method allows only for the
capitalization of costs directly associated with exploring for, acquiring and developing proved
natural gas properties. Costs related to exploration that are not successful are expensed when it
is determined that commercially productive gas reserves were not found. We have elected to use the
successful efforts method to account for our gas producing activities.
Contingencies
CNX Gas is currently involved in certain legal proceedings. We have accrued our estimate of
the probable costs for the resolution of these claims. This estimate has been developed in
consultation with legal counsel involved in the defense of these matters and is based upon an
analysis of potential results, assuming a combination of litigation and settlement strategies. We
do not believe these proceedings will have a material adverse effect on our consolidated financial
position. It is possible, however, that future results of operations for any particular quarter or
annual period could be materially affected by changes in our assumptions or the effectiveness of
our strategies related to these proceedings.
Deferred Taxes
CNX Gas accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS No. 109) which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax basis of recorded assets and liabilities. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not
that some portion of the deferred tax asset will not be realized. At December 31, 2006, CNX Gas had
deferred tax liabilities in excess of deferred tax assets of approximately $123,000. The deferred
tax asset components are evaluated periodically to determine if a valuation allowance is necessary.
No valuation allowance has been recognized because CNX Gas has determined that it is more likely
than not that all of these deferred tax assets will be realized.
Well Plugging Obligations
Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143) requires that the fair value of an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of fair value can be
made. The present value of the estimated asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset. Asset retirement obligations relate to the closure of gas
wells upon exhaustion of gas reserves. Changes in the variables used to calculate the liabilities
can have a significant effect on the gas well closing liabilities. The amounts of assets and
liabilities recorded are dependent upon a number of variables, including the estimated future
retirement costs, estimated proved reserves, assumptions involving profit margins, inflation rates,
and the assumed credit-adjusted risk-free interest rate.
SFAS No. 143 requires depreciation of the capitalized asset retirement cost and accretion of
the asset retirement obligation over time. The depreciation will generally be determined on a
units-of-production basis, whereas the accretion to be recognized will escalate over the life of
the producing assets, typically as production declines.
49
Liquidity and Capital Resources
We intend to satisfy our future working capital requirements and fund our capital expenditures
with cash from operations and our $200,000 credit facility. Our credit agreement provides for a
revolving credit facility in an initial aggregate outstanding principal amount of up to $200,000
(with the ability to request an increase in the aggregate outstanding principal amount up to
$300,000), including borrowings and letters of credit. We may use borrowings under the credit
agreement for general corporate purposes, including transaction fees, letters of credit,
acquisitions, capital expenditures and working capital. Our obligations under our credit agreement
are not secured by a lien on our assets.
As a result of our status as a majority-owned subsidiary of CONSOL Energy and having entered
into a credit agreement with third party commercial lenders, CNX Gas and its subsidiaries are
guarantors of CONSOL Energys 7.875% notes due March 1, 2012 in the principal amount of
approximately $250,000, which require all subsidiaries of CONSOL Energy that incur third party debt
to also guarantee the 7.875% notes. In addition, if CNX Gas were to grant liens to a lender as
part of a future borrowing, the indenture governing the 7.875% notes and the agreement governing
CONSOL Energys 8.25% medium term notes due June 1, 2007 require CNX Gas to ratably secure both the
7.875% notes and the medium term notes.
We believe that cash generated from operations and borrowings under our credit facility will
be sufficient to meet our working capital requirements, anticipated capital expenditures (other
than major acquisitions), and to provide required financial resources. Nevertheless, our ability to
satisfy our working capital requirements or fund planned capital expenditures will depend upon our
future operating performance, which will be affected by prevailing economic conditions in the gas
industry and other financial and business factors, some of which are beyond our control.
We have also entered into various gas swap transactions that qualify as financial cash flow
hedges, which exist parallel to the underlying physical transactions. The fair value of these
contracts was a net asset of $4,083 at December 31, 2006. The ineffective portion of the changes in
the fair value of these contracts was immaterial for the twelve months ended December 31, 2006.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
Year to |
|
Year to |
|
|
|
|
Date |
|
Date |
|
Change |
Cash provided by operating activities |
|
$ |
243,569 |
|
|
$ |
144,997 |
|
|
$ |
98,572 |
|
Cash used in investing activities |
|
$ |
(156,020 |
) |
|
$ |
(108,287 |
) |
|
$ |
(47,733 |
) |
Cash used in financing activities |
|
$ |
(449 |
) |
|
$ |
(16,640 |
) |
|
$ |
16,191 |
|
After the separation from CONSOL Energy in August 2005, the receivables and subsequent cash
receipts we generate from sales now remain with CNX Gas, which have
increased the cash provided by operations in the current year. These
were previously treated as a component of financing costs in the
prior year. The increase in cash used in investing activities is the
result of our expanded capital budget program designed to increase
production and develop our acreage positions.
Contractual Commitments
The following is a summary of our significant contractual obligations at December 31, 2006 (in
thousands). We estimate payments related to these items, net of any applicable reimbursements, at
December 31, 2006 to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
|
(In thousands) |
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
Total |
|
Long Term Debt Obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital Lease Obligations |
|
|
2,573 |
|
|
|
5,751 |
|
|
|
6,660 |
|
|
|
51,486 |
|
|
|
66,470 |
|
Operating Lease Obligations |
|
|
794 |
|
|
|
1,393 |
|
|
|
1,137 |
|
|
|
299 |
|
|
|
3,623 |
|
Gas Firm Transportation Obligations |
|
|
7,897 |
|
|
|
14,642 |
|
|
|
12,430 |
|
|
|
21,453 |
|
|
|
56,422 |
|
Other Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,862 |
|
|
|
13,862 |
|
Well Plugging Liabilities |
|
|
401 |
|
|
|
801 |
|
|
|
801 |
|
|
|
7,211 |
|
|
|
9,214 |
|
Pension |
|
|
3 |
|
|
|
14 |
|
|
|
23 |
|
|
|
149 |
|
|
|
189 |
|
Postretirement Benefits Other than Pension |
|
|
12 |
|
|
|
68 |
|
|
|
154 |
|
|
|
2,091 |
|
|
|
2,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
$ |
11,680 |
|
|
$ |
22,669 |
|
|
$ |
21,205 |
|
|
$ |
96,551 |
|
|
$ |
152,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This item represents legal contingencies reflected on the balance sheet for potential settlements of the two cases referenced in Note 15 of our annual financial statements. Due to the uncertainty
surrounding these settlements, it is difficult to predict if and when a payout may take place. |
50
As discussed in Critical Accounting Policies and in the Notes to our Consolidated Financial
Statements included in this Annual Report, our determination of these long-term liabilities is
calculated annually and is based on several assumptions, including then prevailing conditions,
which may change from year to year. In any year, if our assumptions are inaccurate, we could be
required to expend greater amounts than anticipated.
$200,000 Credit Facility.
As described above, we and our wholly-owned subsidiaries are party to a credit agreement dated
as of October 7, 2005 with a group of commercial lenders. This credit agreement provides for a
revolving credit facility in an initial aggregate outstanding principal amount of up to $200,000
(with the ability to request an increase in the aggregate outstanding principal amount up to
$300,000), including borrowings and letters of credit. We may use borrowings under the new credit
agreement for general corporate purposes, including transaction fees, letters of credit,
acquisitions, capital expenditures and working capital.
At December 31, 2006, CNX Gas does not have any outstanding debt,
however our borrowing base is reduced by $16,867 related
to outstanding letters of credit.
Our ability to borrow and obtain letters of credit under the credit agreement is generally
limited to a borrowing base. The required number of lenders will determine this borrowing base by
calculating a loan value of CNX Gas proved reserves and reducing that number by an equity cushion
determined by these lenders.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet transactions, arrangements, obligations or other
relationships with unconsolidated entities or others that are likely to have a material current or
future effect on our condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources which are not disclosed in the
notes to the consolidated financial statements.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and requires additional disclosures about
fair value measurements. SFAS 157 aims to improve the consistency and comparability of fair value
measurements by creating a single definition of fair value. The Statement emphasizes that fair
value is not entity-specific, but instead is a market-based measurement of an asset or liability.
SFAS 157 upholds the requirements of previously issued pronouncements concerning fair value
measurements and expands the required disclosures. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, however earlier application
is permitted provided the reporting entity has not yet issued financial statements for that fiscal
year. We do not expect that this guidance will have a significant impact on CNX Gas.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158),
which requires the recognition of the funded status of defined benefit postretirement plans and
related disclosures. SFAS 158 was issued to address concerns that prior standards on employers
accounting for defined benefit postretirement plans failed to communicate the funded status of
those plans in a complete and understandable way and to require an employer to recognize completely
in earnings or other comprehensive income the financial impact of certain events affecting the
plans funded status when those events occurred. This Statement is effective for financial
statements issued for fiscal years ending after December 15, 2006. Retrospective application of
this Statement is not permitted. The overall actuarially estimated financial impact of this
Statement increased accumulated other comprehensive income by $761, decreased long term liabilities
by $1,246, and decreased deferred tax assets by $485 as of December 31, 2006. Additionally, SFAS
158 contains another provision which requires an employer to measure the funded status of each of
its plans as of the date of its year-end statement of financial position. This provision becomes
effective for CNX Gas for its December 31, 2008 year-end. The funded status of CNX Gas pension
and other postretirement benefit plans are currently measured as of September 30.
51
In September 2006, the FASB issued Financial Accounting Standards Board Staff Position No. AUG
AIR-1, Accounting for Planned Major Maintenance Activities (FSP AUG AIR-1), which amended certain
provisions in the American Institute of Certified Public Accountants (AICPA) Industry Audit Guide,
Audits of Airlines (Airline Guide), and Accounting Principals Board Opinion No. 28: Interim
Financial Reporting. The Board rescinded the accrue-in-advance method of accounting for planned
major maintenance activities as it results in the recognition of liabilities that do not meet the
definition of a liability in FASB Concepts Statement No. 6, Elements of Financial Statements,
because it causes the recognition of a liability in a period prior to the occurrence of the
transaction or event obligating the entity. The guidance in FSP AUG AIR-1 shall be applied to the
first fiscal year beginning after December 15, 2006. Earlier adoption is permitted as of the
beginning of an entitys fiscal year. The guidance in FSP AUG AIR-1 shall be applied
retrospectively for all financial statements presented, unless it is impracticable to do so. We do
not expect this guidance to have a significant annual financial impact on CNX Gas.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (SAB 108). SAB 108 was issued to provide interpretive guidance on how the effects of the
carryover reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The provisions of SAB 108 are effective for CNX Gas for its December 31, 2006
year-end. The adoption of SAB 108 had no impact on CNX Gas consolidated financial statements.
In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109 (FIN
48). FIN 48 provides a model for how a company should recognize, measure, present and disclose in
its financial statements uncertain tax positions that it has taken or expects to take on a tax
return. We are in the process of evaluating the financial impact of adopting FIN 48, which will be
effective for CNX Gas beginning in 2007, but do not expect any significant impact.
In September 2005, the Financial Accounting Standards Board ratified the consensus reached by
the Emerging Issues Task Force (EITF) on Issue No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty. The issue defines when a purchase and a sale of inventory
with the same party that operates in the same line of business is recorded at fair value or
considered a single non-monetary transaction subject to the fair value exception of APB Opinion No.
29. The purchase and sale transactions may be pursuant to a single contractual arrangement or
separate contractual arrangements and the inventory purchased or sold may be in the form of raw
materials, work-in-process, or finished goods. In general, two or more transactions with the same
party are treated as one if they are entered into in contemplation of each other. The rules apply
to new arrangements entered into in reporting periods beginning after March 15, 2006. The
accounting for transactions that CNX Gas considers matching buy/sell transactions were affected by
this consensus and therefore, in the first quarter of 2006 these transactions were recorded on a
net basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In addition to the risks inherent in our operations, CNX Gas is exposed to financial, market,
political and economic risks. The following discussion provides additional detail regarding CNX
Gas exposure to the risks of changing natural gas prices.
CNX Gas uses fixed-price contracts and derivative commodity instruments that qualify as
cash-flow hedges under Statement of Financial Accounting Standards No. 133, as amended, to minimize
exposure to market price volatility in the sale of natural gas. Our risk management policy strictly
prohibits the use of derivatives for speculative purposes.
CNX Gas has established risk management policies and procedures to strengthen the internal
control environment of the marketing of commodities produced from our asset base. All of the
derivative instruments are held for purposes other than trading. They are used primarily to reduce
uncertainty and volatility and cover underlying exposures. CNX Gas market risk strategy
incorporates fundamental risk management tools to assess market price risk and establish a
framework in which management can maintain a portfolio of transactions within pre-defined risk
parameters.
CNX Gas believes that the use of derivative instruments along with the risk assessment
procedures and internal controls do not expose CNX Gas to material risk. However, the use of
derivative instruments without other risk assessment procedures could materially affect CNX Gas
results of operations depending on interest rates, exchange rates or market prices. Nevertheless,
we believe that use of these instruments will not have a material adverse effect on our financial
position or liquidity.
For a summary of accounting policies related to derivative instruments, see Note 1 of the
notes to the consolidated annual financial statements included in this Annual Report.
52
Sensitivity analyses of the incremental effects on pre-tax income for the twelve months ended
December 31, 2006 of a hypothetical 10% and 25% change in natural gas prices for open derivative
instruments as of December 31, 2006 are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
Incremental Decrease Assuming a |
|
|
Hypothetical Price Increase of: |
|
|
10% |
|
25% |
|
|
(In millions) |
Pre-Tax Income (1) |
|
$ |
8.1 |
|
|
$ |
31.0 |
|
|
|
|
(1) |
|
CNX Gas remains at risk for possible changes in the market
value of these derivative instruments; however, such risk
should be reduced by price changes in the underlying hedged
item. The effect of this offset is not reflected in the
sensitivity analyses. CNX Gas entered into derivative
instruments to convert the market prices related to portions
of the 2007 through 2008 anticipated sales of natural gas to
fixed prices. The sensitivity analyses reflect an inverse
relationship between increases in commodity prices and a
benefit to earnings. When commodity prices increase, pretax
income decreases. As of December 31, 2006, the fair value of
these contracts was a net gain of $2,491 (net of $1,592
deferred tax). We will continually evaluate the portfolio of
derivative commodity instruments and adjust the strategy to
anticipated market conditions and risks accordingly. |
Hedging Volumes
As of December 31, 2006, our hedged volumes for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Three Months |
|
Three Months |
|
|
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
|
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
Total Year |
2007 Fixed Price Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Mcf |
|
|
3,197,970 |
|
|
|
3,223,503 |
|
|
|
3,274,035 |
|
|
|
3,274,035 |
|
|
|
12,969,543 |
|
Weighted Average Hedge Price/Mcf |
|
$ |
7.89 |
|
|
$ |
7.89 |
|
|
$ |
7.89 |
|
|
$ |
7.89 |
|
|
$ |
7.89 |
|
2008 Fixed Price Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Mcf |
|
|
1,847,716 |
|
|
|
1,847,716 |
|
|
|
1,868,020 |
|
|
|
1,868,020 |
|
|
|
7,431,472 |
|
Weighted Average Hedge Price/Mcf |
|
$ |
7.20 |
|
|
$ |
7.20 |
|
|
$ |
7.20 |
|
|
$ |
7.20 |
|
|
$ |
7.20 |
|
CNX Gas is exposed to credit risk in the event of nonperformance by counterparties. The
creditworthiness of counterparties is subject to continuing review.
All of CNX Gas transactions are denominated in U.S. dollars, and as a result, we do not have
material exposure to currency exchange-rate risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
Page |
Financial Statements |
|
|
|
|
|
|
|
54 |
|
|
|
|
56 |
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
53
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of CNX Gas Corporation:
We have completed an integrated audit of CNX Gas Corporations 2006 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2006 and audits
of its 2005 and 2004 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of CNX Gas Corporation and its
subsidiaries (CNX Gas) at December 31, 2006 and 2005, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2006 in conformity
with accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of CNX Gas management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, CNX Gas changed the manner in
which it accounts for stock-based compensation; defined benefit pension, other postretirement
benefit plans and other employee benefits; and purchases and sales of gas with the same
counterparty in 2006.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A., that CNX Gas maintained effective
internal control over financial reporting as of December 31, 2006 based on criteria established
in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion, CNX Gas maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control Integrated Framework issued by the COSO. CNX
Gas management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on managements assessment and on the
effectiveness of CNX Gas internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
54
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 19, 2007
55
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
385,056 |
|
|
$ |
277,031 |
|
|
$ |
214,721 |
|
Related Party Sales |
|
|
8,490 |
|
|
|
6,052 |
|
|
|
22,036 |
|
Royalty Interest Gas Sales |
|
|
51,054 |
|
|
|
45,351 |
|
|
|
41,858 |
|
Purchased Gas Sales |
|
|
43,973 |
|
|
|
275,148 |
|
|
|
112,005 |
|
Other Income |
|
|
25,286 |
|
|
|
9,859 |
|
|
|
6,916 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
|
513,859 |
|
|
|
613,441 |
|
|
|
397,536 |
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
|
31,096 |
|
|
|
26,794 |
|
|
|
23,939 |
|
Gathering and Compression Costs |
|
|
55,091 |
|
|
|
40,623 |
|
|
|
37,021 |
|
Royalty Interest Gas Costs |
|
|
41,998 |
|
|
|
36,641 |
|
|
|
32,914 |
|
Purchased Gas Costs |
|
|
44,843 |
|
|
|
278,720 |
|
|
|
113,063 |
|
Other |
|
|
6,868 |
|
|
|
9,721 |
|
|
|
9,494 |
|
General and Administrative |
|
|
38,654 |
|
|
|
19,171 |
|
|
|
15,530 |
|
Depreciation, Depletion and Amortization |
|
|
37,999 |
|
|
|
35,039 |
|
|
|
32,889 |
|
Interest Expense |
|
|
870 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
|
257,419 |
|
|
|
446,723 |
|
|
|
264,850 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
256,440 |
|
|
|
166,718 |
|
|
|
132,686 |
|
Income Taxes |
|
|
96,573 |
|
|
|
64,550 |
|
|
|
51,898 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
159,867 |
|
|
$ |
102,168 |
|
|
$ |
80,788 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
150,845,518 |
|
|
|
134,071,334 |
|
|
|
122,896,667 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive |
|
|
151,017,456 |
|
|
|
134,137,219 |
|
|
|
122,988,359 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
56
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
107,173 |
|
|
$ |
20,073 |
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
Trade |
|
|
46,062 |
|
|
|
41,121 |
|
Net Related Party |
|
|
2,745 |
|
|
|
728 |
|
Other |
|
|
2,291 |
|
|
|
550 |
|
Deferred Taxes |
|
|
|
|
|
|
9,339 |
|
Derivatives |
|
|
10,548 |
|
|
|
|
|
Other Current Assets |
|
|
3,917 |
|
|
|
2,378 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
172,736 |
|
|
|
74,189 |
|
Property,
Plant and Equipment, Net |
|
|
918,162 |
|
|
|
723,547 |
|
Other Assets |
|
|
11,820 |
|
|
|
11,903 |
|
Investments in Equity Affiliates |
|
|
52,283 |
|
|
|
49,528 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,155,001 |
|
|
$ |
859,167 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts Payable |
|
$ |
27,872 |
|
|
$ |
22,541 |
|
Accrued Royalties Payable |
|
|
11,960 |
|
|
|
10,504 |
|
Accrued Severance Taxes |
|
|
2,576 |
|
|
|
2,747 |
|
Accrued Income Taxes |
|
|
2,191 |
|
|
|
5,518 |
|
Deferred Taxes |
|
|
3,091 |
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
23,777 |
|
Other Current Liabilities |
|
|
9,222 |
|
|
|
5,382 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
56,912 |
|
|
|
70,469 |
|
Deferred Taxes |
|
|
120,008 |
|
|
|
47,736 |
|
Capital Lease Obligation |
|
|
63,897 |
|
|
|
|
|
Other Liabilities |
|
|
15,977 |
|
|
|
14,310 |
|
Well Plugging Liabilities |
|
|
9,214 |
|
|
|
10,908 |
|
Derivatives |
|
|
6,465 |
|
|
|
32,909 |
|
Postretirement Benefits Other Than Pension |
|
|
2,313 |
|
|
|
3,363 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
274,786 |
|
|
|
179,695 |
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Common Stock, $.01 par value; 200,000,000
Shares Authorized, 150,864,075 Issued and
Outstanding at December 31, 2006 and 150,833,334
Issued and Outstanding at December 31, 2005 |
|
|
1,508 |
|
|
|
1,508 |
|
Capital in Excess of Par Value |
|
|
781,960 |
|
|
|
779,509 |
|
Retained Earnings (Deficit) |
|
|
94,337 |
|
|
|
(65,530 |
) |
Accumulated Other Comprehensive Income (Loss) |
|
|
2,410 |
|
|
|
(34,733 |
) |
Unearned Compensation on Restricted Stock Units |
|
|
|
|
|
|
(1,282 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
880,215 |
|
|
|
679,472 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,155,001 |
|
|
$ |
859,167 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
57
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Unearned |
|
|
|
|
|
|
|
|
|
|
Capital In |
|
|
Retained |
|
|
Other |
|
|
Compensation |
|
|
Total |
|
|
|
Common |
|
|
Excess of |
|
|
Earnings |
|
|
Comprehensive |
|
|
on Restricted |
|
|
Stockholders |
|
|
|
Stock |
|
|
Par Value |
|
|
(Deficit) |
|
|
Income (Loss) |
|
|
Stock Units |
|
|
Equity |
|
Balance at December 31, 2003 |
|
$ |
|
|
|
$ |
297,947 |
|
|
$ |
171,681 |
|
|
$ |
(5,396 |
) |
|
$ |
|
|
|
$ |
464,232 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
80,788 |
|
|
|
|
|
|
|
|
|
|
|
80,788 |
|
Gas Cash Flow Hedge (Net of $146 tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227 |
)(a) |
|
|
|
|
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
80,788 |
|
|
|
(227 |
) |
|
|
|
|
|
|
80,561 |
|
Return of Capital to Parent |
|
|
|
|
|
|
(82,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
|
|
|
|
215,710 |
|
|
|
252,469 |
|
|
|
(5,623 |
) |
|
|
|
|
|
|
462,556 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
102,168 |
|
|
|
|
|
|
|
|
|
|
|
102,168 |
|
Gas Cash Flow Hedge (Net of $18,542 tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,110 |
)(b) |
|
|
|
|
|
|
(29,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
102,168 |
|
|
|
(29,110 |
) |
|
|
|
|
|
|
73,058 |
|
Issuance of Common Stock |
|
|
1,508 |
|
|
|
418,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420,167 |
|
Effect of Tax Basis Step-up |
|
|
|
|
|
|
165,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,042 |
|
Issuance of Restricted Stock units under the
Equity Incentive Plan (92,969 units) |
|
|
|
|
|
|
1,487 |
|
|
|
|
|
|
|
|
|
|
|
(1,487 |
) |
|
|
|
|
Stock-Based Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205 |
|
|
|
205 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
(420,167 |
) |
|
|
|
|
|
|
|
|
|
|
(420,167 |
) |
Return of Capital to Parent |
|
|
|
|
|
|
(21,389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
1,508 |
|
|
|
779,509 |
|
|
|
(65,530 |
) |
|
|
(34,733 |
) |
|
|
(1,282 |
) |
|
|
679,472 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
159,867 |
|
|
|
|
|
|
|
|
|
|
|
159,867 |
|
Gas Cash Flow Hedge (Net of $23,859 tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,382 |
(c) |
|
|
|
|
|
|
36,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
159,867 |
|
|
|
36,382 |
|
|
|
|
|
|
|
196,249 |
|
Initial adjustment upon adoption of FAS 158
(net of $485 tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
761 |
|
|
|
|
|
|
|
761 |
|
Elimination of Unearned Compensation on
Restricted Stock Units |
|
|
|
|
|
|
(1,282 |
) |
|
|
|
|
|
|
|
|
|
|
1,282 |
|
|
|
|
|
Stock-Based Compensation |
|
|
|
|
|
|
3,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
1,508 |
|
|
$ |
781,960 |
|
|
$ |
94,337 |
|
|
$ |
2,410 |
(d) |
|
$ |
|
|
|
$ |
880,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Of the ($227) net change in accumulated other comprehensive income (loss) in the period, ($20,047) represents the settlements recognized in net income. |
|
(b) |
|
Of the ($29,110) net change in accumulated other
comprehensive income (loss) in the period, ($30,948) represents the settlements recognized in net income. |
|
(c) |
|
Of the $36,382 net change in accumulated other comprehensive
income (loss) in the period, $18,148 represents the settlements recognized in net income. |
|
(d) |
|
Comprised of unrealized transition adjustments of $592 OPEB revaluation and $169 Pension revaluation. Also, $1,649 of deferred net gains on financial instruments. |
The accompanying notes are an integral part of these consolidated financial statements.
58
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
159,867 |
|
|
$ |
102,168 |
|
|
$ |
80,788 |
|
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, Depletion and Amortization |
|
|
37,999 |
|
|
|
35,039 |
|
|
|
32,889 |
|
Compensation from Restricted Stock Unit Grants |
|
|
529 |
|
|
|
205 |
|
|
|
|
|
Compensation from Stock Option Grants |
|
|
3,204 |
|
|
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
60,358 |
|
|
|
46,779 |
|
|
|
50,957 |
|
Equity in (Income) Loss of Affiliates |
|
|
(978 |
) |
|
|
149 |
|
|
|
2,423 |
|
Changes in Operating Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
(6,682 |
) |
|
|
(40,236 |
) |
|
|
(783 |
) |
Related Party Receivable |
|
|
(2,017 |
) |
|
|
(728 |
) |
|
|
|
|
Other Current Assets |
|
|
(2,284 |
) |
|
|
3,542 |
|
|
|
(2,111 |
) |
Changes in Other Assets |
|
|
83 |
|
|
|
(4,951 |
) |
|
|
(2,367 |
) |
Changes in Operating Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable |
|
|
(7,343 |
) |
|
|
(8,936 |
) |
|
|
2,597 |
|
Income Taxes |
|
|
(3,327 |
) |
|
|
5,650 |
|
|
|
941 |
|
Other Current Liabilities |
|
|
2,552 |
|
|
|
14,861 |
|
|
|
4,241 |
|
Changes in Other Liabilities |
|
|
1,668 |
|
|
|
(8,600 |
) |
|
|
5,583 |
|
Other |
|
|
(60 |
) |
|
|
55 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
243,569 |
|
|
|
144,997 |
|
|
|
175,350 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(154,243 |
) |
|
|
(110,752 |
) |
|
|
(89,753 |
) |
Investment in Equity Affiliates |
|
|
(1,777 |
) |
|
|
2,465 |
|
|
|
(3,361 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
|
(156,020 |
) |
|
|
(108,287 |
) |
|
|
(93,114 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Payments |
|
|
(449 |
) |
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
|
|
|
|
420,167 |
|
|
|
|
|
Dividends Paid |
|
|
|
|
|
|
(420,167 |
) |
|
|
|
|
Payments to Parent |
|
|
|
|
|
|
(16,640 |
) |
|
|
(82,237 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities |
|
|
(449 |
) |
|
|
(16,640 |
) |
|
|
(82,237 |
) |
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
87,100 |
|
|
|
20,070 |
|
|
|
(1 |
) |
Cash and Cash Equivalents at Beginning of Year |
|
|
20,073 |
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Year End |
|
$ |
107,173 |
|
|
$ |
20,073 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
See Note 12 Supplemental Cash Flow Information
59
CNX GAS CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1Significant Accounting Policies:
Nature of Operations
CNX Gas Corporation (CNX Gas) is a natural gas producer with an emphasis on Appalachian area
natural gas drilling, gathering and sales. CNX Gas is one of the largest U.S. producers of Coal Bed
Methane (CBM), and is one of the largest owners of proved gas reserves in the Appalachian Basin.
CNX Gas gathers gas from wells it operates, and those operated by others, to interstate pipelines
by way of the Cardinal States Gathering Company (CSGC) pipeline, the Jewell Ridge lateral pipeline
and the Coalfield Pipeline Company pipeline. CNX Gas finances drilling activities through existing
operations.
As of December 31, 2004, CNX Gas was not a legal entity and there were no outstanding shares
of common stock. However, carved out financial statements were prepared in accordance with
Regulation S-X Article 3 General instructions as to financial statements and SAB Topic 1-B1
Costs reflected in historical financial statements and are presented for comparative purposes.
Shares of CNX Gas common stock were not issued until 2005. As of January 19, 2006, CNX Gas became
a publicly traded company (trading under the symbol CXG on the NYSE) operating in the energy
sector.
Basis of Consolidation
The consolidated financial statements include the accounts of majority-owned and controlled
subsidiaries. All significant intercompany transactions and accounts have been eliminated in
consolidation. The equity method of accounting is used for investments in affiliates and other
joint ventures over which CNX Gas has significant influence but does not have effective control.
CNX Gas also evaluates consolidation of entities under Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires
management to evaluate whether an entity or interest is a variable interest entity and whether CNX
Gas is the primary beneficiary. Consolidation is required if both of these criteria are met. CNX
Gas has no variable interest entities.
CNX Gas has the following investments accounted for under the equity method of accounting:
|
|
|
|
|
|
|
CNX Gas % |
Investee |
|
Ownership |
Knox Energy, LLC |
|
|
50 |
% |
Coalfield Pipeline Company |
|
|
50 |
% |
Buchanan Generation, LLC |
|
|
50 |
% |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and various disclosures.
Actual results could differ from those estimates. The most significant estimates included in the
preparation of the financial statements are related to well plugging liabilities, proved gas
reserves, income taxes, employee benefit related obligations and stock based compensation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in financial institutions as well as all
highly liquid short-term securities with original maturities of three months or less. As indicated
on the cash flow statement, all cash transactions prior to separation from CONSOL Energy were
considered either capital contributions or return of capital.
60
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. CNX
Gas reserves for specific accounts receivable when it is probable that all or a part of an
outstanding balance will not be collected. CNX Gas regularly reviews collectibility and establishes
or adjusts the allowance as necessary using the specific identification method. Account balances
are charged off against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. There were no reserves for uncollectible amounts in
the periods presented.
Property, Plant and Equipment
CNX Gas follows the successful efforts method of accounting for gas properties. Accordingly,
costs of property acquisitions, successful exploratory wells, development wells and related support
equipment and facilities are capitalized. Costs of unsuccessful exploratory wells are expensed when
such wells are determined to be non-productive, or if the determination cannot be made after
finding sufficient quantities of reserves to continue evaluating the viability of the project.
Upon the sale or retirement of a complete or partial unit of proved property, the cost and
related accumulated depletion are eliminated from the property accounts, and the resultant gain or
loss is recognized in operating income.
CNX Gas computes depreciation on gathering assets using the straight line method over their
estimated economic lives, which range from 30-40 years. CNX Gas amortizes acquisition costs on
proved gas properties and mineral interests using the ratio of current production to the estimated
aggregate proved gas reserves. Wells and related equipment and intangible drilling costs are
amortized on a units of production method using the ratio of current production to the estimated
aggregate proved developed gas reserves. Units-of-production amortization rates are revised
whenever there is an indication of the need for revision, but at least once a year, and accounted
for prospectively.
Impairment of Long-Lived Assets
Impairment of long-lived assets is recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets
carrying value. The carrying value of the assets is then reduced to their estimated fair value
which is usually measured based on an estimate of future discounted cash flows. No impairments were
recorded during any of the years presented.
Income Taxes
CNX Gas is included in the consolidated federal income tax return of CONSOL Energy. Income
taxes are calculated as if CNX Gas files a tax return on a separate company basis. Deferred tax
assets and liabilities are recognized for the expected future tax consequences of events that have
been recognized in CNX Gas financial statements or separate tax return that would be filed on a
separate company basis. Deferred taxes result from differences between the financial and tax bases
of CNX Gas assets and liabilities and are adjusted for changes in tax rates and tax laws when
changes are enacted. Valuation allowances are recorded to reduce deferred tax assets where it is
more likely than not that a deferred tax benefit will not be realized. Separate company state tax
returns are filed in those states in which CNX Gas is registered to do business.
Gas Well Plugging Costs
CNX Gas accrues for dismantling and removing costs of gas related facilities using the
accounting treatment prescribed by Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations. This statement requires the fair value of an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable estimate of fair
value can be made. The present value of the estimated asset retirement costs is capitalized as part
of the carrying amount of the long-lived asset. Depreciation of the capitalized asset retirement
cost is generally determined on a units-of-production basis. Accretion of the asset retirement
obligation is recognized over time and generally will escalate over the life of the producing
asset, typically as production declines. Asset retirement obligations primarily relate to the
plugging of gas wells upon exhaustion of the gas reserves. Under previously applied accounting
standards, such obligations were recognized ratably over the life of the producing assets,
primarily on a units-of-production basis.
Accrued costs of dismantling and removing gas related facilities are regularly reviewed by
management and are revised for changes in future estimated costs and regulatory requirements.
61
Revenue Recognition
Sales are recognized when title passes to the customers. This occurs at the contractual point
of delivery.
We have an operational gas balancing agreement with Columbia pipeline. The imbalance agreement
is managed internally using the sales method of accounting. The sales method recognizes revenue
when the gas is taken and paid for by the purchaser.
Included in royalty interest gas sales are the revenues related to the portion of production
associated with royalty interest owners.
CNX Gas sells gas to accommodate the delivery points of its customers. In general,
this gas is purchased at market price and re-sold on the same day at market price less a small
transaction fee. CNX Gas also provides gathering services to third parties by way of matching
buy/sell transactions. These revenues and expenses are recorded gross in the statement of operations and
recognized immediately in earnings.
Royalty Recognition
Royalty costs for gas rights are included in royalty interest gas costs when the related
revenue for the gas sale is recognized. These royalty costs are paid in cash in accordance with the
terms of each agreement. Revenues for gas sold related to production under royalty contracts,
versus owned by CNX Gas, are separately identified and recorded on a gross basis. The recognized
revenues for these transactions are not net of related royalty fees.
Contingencies
CNX Gas and our subsidiaries from time to time 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.
Liabilities are recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Estimates are developed through consultation with legal counsel
involved in the defense and are based upon an analysis of potential results, assuming a combination
of litigation and settlement strategies. Environmental liabilities are not discounted or reduced by
possible recoveries from third parties.
Derivative Instruments
CNX Gas measures every derivative instrument (including certain derivative instruments
embedded in other contracts) at fair value and records them on the balance sheet as either an asset
or liability. Changes in fair value of derivatives are recorded currently in earnings unless
special hedge accounting criteria are met. For derivatives designated as fair value hedges, the
changes in fair value of both the derivative instrument and the hedged item are recorded in
earnings. For derivatives designated as cash flow hedges, the effective portions of changes in fair
value of the derivative are reported in other comprehensive income or loss and reclassified into
earnings in the same period or periods which the forecasted transaction affects earnings. The
ineffective portions of hedges are recognized in earnings in the current period.
CNX Gas formally assesses, both at inception of the hedge and on an ongoing basis, whether
each derivative is highly effective in offsetting changes in fair values or cash flows of the
hedged item. If it is determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, CNX Gas will discontinue hedge accounting
prospectively.
62
Stock-Based Compensation
Effective January 1, 2006, CNX Gas adopted the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123R), using the modified
prospective transition method and therefore has not restated results for prior periods. Under this
transition method, stock-based compensation expense for the year ended December 31, 2006 includes
compensation expense for all stock-based compensation awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). Stock-based
compensation expense for all stock-based compensation awards granted after January 1, 2006 is based
on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. CNX Gas
recognizes these compensation costs on a straight-line basis over the requisite service period of
the award, which is generally the option vesting term. Prior to the adoption of SFAS 123R, CNX Gas
recognized stock-based compensation expense in accordance with Accounting Principles Board Opinion
No. 25. Accounting for Stock Issued to Employees, (APB 25). In March 2005, the Securities and
Exchange Commission (the SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the
SECs interpretation of SFAS 123R and the valuation of share-based payments for public companies.
CNX Gas has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 11 to the
Consolidated Financial Statements for a further discussion on stock-based compensation.
Effective October 11, 2006, CNX Gas adopted a long-term incentive program. This program allows
for the award of performance share units (PSUs). A PSU represents a contingent right to receive a
cash payment, determined by reference to the value of one share of the companys common stock. The
total number of units earned, if any, by a participant will be based on the companys total
stockholder return relative to the stockholder return of a pre-determined peer group of companies.
The performance period is from October 11, 2006 to December 31, 2009. CNX Gas recognizes
compensation costs on a straight-line basis over the requisite service period, based on the fair
value of the PSUs. The fair value of the PSUs will be re-valued quarterly using a Monte Carlo
lattice model.
Earnings Per Share
On June 21, 2005, the Board of Directors of CONSOL Energy authorized the incorporation of CNX
Gas. On June 30, 2005, CNX Gas was incorporated and issued 100 shares of its $0.01 par value common
stock to Consolidation Coal Company, a wholly-owned subsidiary of CONSOL Energy. CNX Gas was
incorporated to conduct CONSOL Energys gas exploration and production activities. In August 2005,
CONSOL Energy contributed or leased substantially all of the assets of its gas business, including
all of CONSOL Energys rights to CBM associated with 4.5 billion tons of coal reserves owned or
controlled by CONSOL Energy as well as all of CONSOL Energys rights to conventional gas. In
exchange for its contribution of assets, CONSOL Energy received approximately 122.9 million shares
of CNX Gas common stock. CNX Gas entered into various agreements with CONSOL Energy that will
define various operating and service relationships between the two companies.
In August 2005, CNX Gas entered into an agreement to sell approximately 24.3 million shares in
a private transaction and granted a 30-day option to purchase an additional 3.6 million shares. In
August 2005, CNX Gas closed on the sale of all 27.9 million shares. The shares were sold to
qualified institutional, foreign and accredited investors in a private transaction exempt from
registration under Rule 144A, Regulation S and Regulation D. The proceeds (approximately $420,167,
which includes proceeds from the additional 3.6 million shares) were used to pay a special dividend
to Consolidation Coal Company. In addition, CONSOL Energy paid approximately $6,000 in expenses
related to this transaction. Later, in August 2005, a Registration Statement on Form S-1 was filed
with the SEC with respect to those shares. The registration statement was declared effective on
January 18, 2006.
Basic earnings per share are computed by dividing net income by the weighted average shares
outstanding during the twelve months ended December 31, 2006, 2005 and 2004. However, because CNX
Gas was formed as a subsidiary of CONSOL Energy, the number of shares issued following formation is
utilized for the 2004 period presented. Diluted 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 assumed exercise of stock options, if dilutive, and the assumed
redemption of restricted stock units. The number of additional shares is calculated by assuming the
outstanding stock options were exercised and the restricted stock units were converted into shares
and the proceeds from such activity were used to acquire shares of common stock at the average
market price during the reporting period. There were no anti-dilutive shares at December 31, 2006.
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net Income |
|
$ |
159,867 |
|
|
$ |
102,168 |
|
|
$ |
80,788 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
150,845,518 |
|
|
|
134,071,334 |
|
|
|
122,896,667 |
|
Effect of stock options |
|
|
171,938 |
|
|
|
65,885 |
|
|
|
91,692 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive |
|
|
151,017,456 |
|
|
|
134,137,219 |
|
|
|
122,988,359 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.06 |
|
|
$ |
0.76 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the United States of
America, and requires additional disclosures about fair value measurements. SFAS 157 aims to
improve the consistency and comparability of fair value measurements by creating a single
definition of fair value. The Statement emphasizes that fair value is not entity-specific, but
instead is a market-based measurement of an asset or liability. SFAS 157 upholds the requirements
of previously issued pronouncements concerning fair value measurements and expands the required
disclosures. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, however earlier application is permitted provided the reporting
entity has not yet issued financial statements for that fiscal year. We do not expect that this
guidance will have a significant impact on CNX Gas.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158),
which requires the recognition of the funded status of defined benefit postretirement plans and
related disclosures. SFAS 158 was issued to address concerns that prior standards on employers
accounting for defined benefit postretirement plans failed to communicate the funded status of
those plans in a complete and understandable way and to require an employer to recognize completely
in earnings or other comprehensive income the financial impact of certain events affecting the
plans funded status when those events occurred. This Statement was adopted by CNX Gas on December
31, 2006 as indicated on Note 10. The overall actuarially estimated financial impact of this
Statement increased accumulated other comprehensive income by $761, decreased long term liabilities
by $1,246, and decreased deferred tax assets by $485 as of December 31, 2006. Additionally, SFAS
158 contains another provision which requires an employer to measure the funded status of each of
its plans as of the date of its year-end statement of financial position. This provision becomes
effective for CNX Gas for its December 31, 2008 year-end. The funded status of CNX Gas pension
and other postretirement benefit plans are currently measured as of September 30.
In September 2006, the FASB issued Financial Accounting Standards Board Staff Position No. AUG
AIR-1, Accounting for Planned Major Maintenance Activities (FSP AUG AIR-1), which amended certain
provisions in the American Institute of Certified Public Accountants (AICPA) Industry Audit Guide,
Audits of Airlines (Airline Guide), and Accounting Principals Board Opinion No. 28: Interim
Financial Reporting. The Board rescinded the accrue-in-advance method of accounting for planned
major maintenance activities as it results in the recognition of liabilities that do not meet the
definition of a liability in FASB Concepts Statement No. 6, Elements of Financial Statements,
because it causes the recognition of a liability in a period prior to the occurrence of the
transaction or event obligating the entity. The guidance in FSP AUG AIR-1 shall be applied to the
first fiscal year beginning after December 15, 2006. Earlier adoption is permitted as of the
beginning of an entitys fiscal year. The guidance in FSP AUG AIR-1 shall be applied
retrospectively for all financial statements presented, unless it is impracticable to do so. We do
not expect this guidance will have a significant annual financial impact on CNX Gas.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (SAB 108). SAB 108 was issued to provide interpretive guidance on how the effects of the
carryover reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The provisions of SAB 108 are effective for CNX Gas for its December 31, 2006
year-end. The adoption of SAB 108 had no impact on CNX Gas consolidated financial statements.
64
In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109 (FIN
48). FIN 48 provides a model for how a company should recognize, measure, present and disclose in
its financial statements uncertain tax positions that it has taken or expects to take on a tax
return. We are in the process of evaluating the financial impact of adopting FIN 48, which will be
effective for CNX Gas beginning in 2007, but do not expect any significant impact.
In September 2005, the Financial Accounting Standards Board ratified the consensus reached by
the Emerging Issues Task Force (EITF) on Issue No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty. The issue defines when a purchase and a sale of inventory
with the same party that operates in the same line of business is recorded at fair value or
considered a single non-monetary transaction subject to the fair value exception of APB Opinion No.
29. The purchase and sale transactions may be pursuant to a single contractual arrangement or
separate contractual arrangements and the inventory purchased or sold may be in the form of raw
materials, work-in-process, or finished goods. In general, two or more transactions with the same
party are treated as one if they are entered into in contemplation of each other. The rules apply
to new arrangements entered into in reporting periods beginning after March 15, 2006. The
accounting for transactions that CNX Gas considers matching buy/sell transactions were affected by
this consensus and therefore, in the first quarter of 2006 these transactions were recorded on a
net basis.
Reclassifications:
Certain amounts in prior periods have been reclassified to conform with the report
classifications of the year ended December 31, 2006 with no effect on previously reported net
income or stockholders equity. The reclassifications include the netting of firm transportation
obligations previously recorded in current assets and current
liabilities, reclassifications within
property, plant and equipment, reclassifications between other costs and administrative costs,
and the reporting of royalty interest gas sales and royalty interest gas costs
Note 2Transactions with Related Parties:
CNX Gas sells gas to CONSOL Energy on a basis reflecting the monthly average price received by
CNX Gas from third party sales. CNX Gas also sells gas to Buchanan Generation, LLC, in which CNX
Gas has a 50% interest, on both a market and discounted basis, depending upon the circumstances.
CNX Gas also purchases various supplies from CONSOL Energys wholly owned subsidiary, Fairmont
Supply; the cost of these items reflect current market prices and are included in cost of goods
sold as arms-length transactions. The following table reflects the amounts of these transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Sales of Gas-Related Party |
|
$ |
8,490 |
|
|
$ |
6,052 |
|
|
$ |
22,036 |
|
Supply Purchases |
|
$ |
210 |
|
|
$ |
135 |
|
|
$ |
137 |
|
CNX Gas utilizes certain services and engages in operating transactions in the normal course
of business with CONSOL Energy. The following represents a summary of the significant transactions
of this nature:
General and administrative expenses contain fees of $3,954, $5,669, and $6,327 for the twelve
months ended December 31, 2006, 2005, and 2004, respectively, for certain accounting and
administrative services provided by CONSOL Energy. These fees are allocated to CNX Gas based on
annual estimated hours worked on CNX Gas versus total hours available.
CNX Gas paid CONSOL Energy $37,241 and $12,233 for federal and state taxes related to income
for the twelve months ended December 31, 2006 and 2005, respectively.
65
CONSOL Energy currently incurs drilling costs related to gob gas production due to the
necessity to de-gas coal mines prior to production for safety reasons. The cost to CONSOL Energy
for drilling these wells was as follows: $8,917 in 2006, $6,200 in 2005, and $9,100 in 2004. CNX
Gas captures and markets the gas from these wells and, therefore, benefits from this drilling
activity, although CNX Gas is not burdened with the cost to drill gob wells. CNX Gas is
responsible for the costs incurred to gather and deliver the gob gas to market. All gob well
drilling costs are borne by CONSOL Energy and only the collection and processing costs are recorded
in CNX Gas financial statements. CNX Gas master cooperation and safety agreement with CONSOL
Energy retained this cost structure after its separation from CONSOL Energy in August 2005.
CNX Gas employees may also participate in certain benefit programs administered by CONSOL
Energy, which are discussed further in Note 10. Our allocation of pension expense was $526 up to
the point of separation in 2005, and $1,433 for the twelve months ended December 31, 2004.
Employees may also participate in a defined contribution investment plan administered by
CONSOL Energy. Amounts charged to expense by CNX Gas for the investment plan were $646, $442, and
$337 for the twelve months ended December 31, 2006, 2005, and 2004, respectively. CONSOL Energy
charges CNX Gas the actual amounts contributed by CONSOL Energy on behalf of CNX Gas employees.
Eligible employees may also participate in a long-term disability plan administered by CONSOL
Energy. Benefits for this plan are based on a percentage of monthly earnings, offset by all other
income benefits available to the disabled. CNX Gas allocation of the long-term disability plan
expense under this plan was $321, $228, and $140 for the twelve months ended December 31, 2006,
2005, and 2004, respectively. Allocation of the expense for this plan is based on the percentage of
CNX Gas active salary employees compared to the total active salary employees covered by the plan.
CNX Gas also participates in certain CONSOL Energy sponsored benefit plans which provide
medical and life benefits to employees that retire with at least twenty years of service and have
attained age 55 or fifteen years of service and have attained age 62. Additionally, any salaried
employees that are hired or rehired effective August 1, 2004 or later will not become eligible for
retiree health benefits. In lieu of traditional retiree health coverage, if certain eligibility
requirements are met, these employees may be eligible to receive a retiree medical spending
allowance of one thousand dollars per year of service at retirement. In addition to the change in
eligibility requirements, other changes have been made to the medical plan which covers eligible
salaried employees and retirees. These changes include a cost sharing structure where essentially
all participants contribute a minimum of 20% of plan costs. Annual cost increases in excess of 6%
are paid entirely by the Plan participants. CNX Gas does not expect to contribute to the other
postretirement benefit plan in 2007 and instead expects to pay benefit claims as they become due.
CNX Gas is insured through CONSOL Energy for workers compensation claims in several states
and is self-insured for these claims in Virginia. Workers compensation expense for these benefits
was $16, $34, and $22 for the twelve months ended December 31, 2006, 2005, and 2004, respectively.
CONSOL Energy has provided financial guarantees on behalf of CNX Gas. As discussed in Note
15, CNX Gas anticipates that these parental guarantees will be transferred from CONSOL Energy to
CNX Gas over time. We also believe that these parental guarantees will expire without being
funded, and therefore will not have a material adverse effect on the financial statements.
CNX Gas is insured through CONSOL Energys business interruption insurance, and pays allocated
premiums directly to CONSOL Energy. During the current year, CNX Gas received proceeds from this
policy of $10,165 related to CONSOL Energy mine incidents in the prior year.
Note 3Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Other Royalty Income |
|
$ |
10,230 |
|
|
$ |
8,158 |
|
|
$ |
5,726 |
|
Insurance Proceeds |
|
|
10,165 |
|
|
|
|
|
|
|
|
|
Interest Income |
|
|
3,453 |
|
|
|
418 |
|
|
|
|
|
Third Party Gathering Revenue |
|
|
1,341 |
|
|
|
1,110 |
|
|
|
1,109 |
|
Miscellaneous |
|
|
97 |
|
|
|
173 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
$ |
25,286 |
|
|
$ |
9,859 |
|
|
$ |
6,916 |
|
|
|
|
|
|
|
|
|
|
|
66
Note 4Income Taxes:
Income taxes provided on earnings consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
30,032 |
|
|
$ |
14,713 |
|
|
$ |
941 |
|
State |
|
|
6,183 |
|
|
|
3,058 |
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
52,646 |
|
|
|
38,957 |
|
|
|
42,250 |
|
State |
|
|
7,712 |
|
|
|
7,822 |
|
|
|
8,707 |
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense |
|
$ |
96,573 |
|
|
$ |
64,550 |
|
|
$ |
51,898 |
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Capital Lease Obligations |
|
$ |
25,896 |
|
|
$ |
|
|
Derivatives |
|
|
|
|
|
|
22,266 |
|
Well Plugging |
|
|
3,590 |
|
|
|
4,285 |
|
Other Postretirement Benefits |
|
|
901 |
|
|
|
1,321 |
|
Stock-Based Compensation |
|
|
1,455 |
|
|
|
|
|
Other |
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets |
|
|
33,425 |
|
|
|
27,872 |
|
|
|
|
|
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
|
|
(145,179 |
) |
|
|
(58,588 |
) |
Investment in Equity Affiliates |
|
|
(8,501 |
) |
|
|
(7,681 |
) |
Derivatives |
|
|
(1,906 |
) |
|
|
|
|
Other |
|
|
(938 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities |
|
|
(156,524 |
) |
|
|
(66,269 |
) |
|
|
|
|
|
|
|
Net Deferred Tax Liabilities |
|
$ |
(123,099 |
) |
|
$ |
(38,397 |
) |
|
|
|
|
|
|
|
CNX Gas has implemented the qualified production activities deduction as enacted by the
American Jobs Creation Act of 2004. The deduction is currently equal to 3% of qualified production
activities income as limited by taxable income and is also limited by 50 percent of the employers
W-2 wages for the tax year. CNX Gas has estimated the deduction to be $2,762 for 2006.
For the twelve months ended December 31, 2005, CNX Gas fully utilized $9,503 of net operating
loss that was carried forward from the previous year.
The following is a reconciliation, stated as a percentage of pretax income, of the U.S.
statutory federal income tax rate to CNX Gas effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Dollars |
|
|
Rate |
|
|
Dollars |
|
|
Rate |
|
|
Dollars |
|
|
Rate |
|
Statutory U.S. Federal Income Tax Rate |
|
$ |
89,754 |
|
|
|
35.0 |
% |
|
$ |
58,351 |
|
|
|
35.0 |
% |
|
$ |
46,440 |
|
|
|
35.0 |
% |
Net Effect of State Income Tax |
|
|
9,032 |
|
|
|
3.5 |
% |
|
|
7,072 |
|
|
|
4.2 |
% |
|
|
5,659 |
|
|
|
4.3 |
% |
Effect of Manufacturers Deduction |
|
|
(967 |
) |
|
|
(0.4 |
)% |
|
|
(455 |
) |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
% |
Other |
|
|
(1,246 |
) |
|
|
(0.4 |
)% |
|
|
(418 |
) |
|
|
(0.2 |
)% |
|
|
(201 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense/ Effective Rate |
|
$ |
96,573 |
|
|
|
37.7 |
% |
|
$ |
64,550 |
|
|
|
38.7 |
% |
|
$ |
51,898 |
|
|
|
39.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Note 5Gas Well Plugging Costs:
The reconciliation of changes in the asset retirement obligations at December 31, 2006 and
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Balance at beginning of period |
|
$ |
10,908 |
|
|
$ |
8,685 |
|
Accretion expense |
|
|
517 |
|
|
|
660 |
|
Payments |
|
|
(183 |
) |
|
|
(1,086 |
) |
Liabilities
incurred |
|
|
1,348 |
|
|
|
945 |
|
Revisions in estimated cash flows |
|
|
(3,376 |
) |
|
|
1,807 |
|
Other |
|
|
|
|
|
|
(103 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
9,214 |
|
|
$ |
10,908 |
|
|
|
|
|
|
|
|
Note 6Property, Plant and Equipment:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Surface Lands |
|
$ |
37,055 |
|
|
$ |
26,573 |
|
Mineral Interests |
|
|
55,623 |
|
|
|
55,621 |
|
Wells and Related Equipment |
|
|
112,009 |
|
|
|
83,633 |
|
Intangible Drilling |
|
|
383,605 |
|
|
|
312,467 |
|
Gathering Assets |
|
|
520,906 |
|
|
|
402,681 |
|
Gas Well Plugging |
|
|
5,652 |
|
|
|
7,680 |
|
Capitalized Internal Software |
|
|
6,433 |
|
|
|
36 |
|
|
|
|
|
|
|
|
Total Property, Plant and Equipment |
|
|
1,121,283 |
|
|
|
888,691 |
|
Accumulated
Depreciation, Depletion and Amortization |
|
|
(203,121 |
) |
|
|
(165,144 |
) |
|
|
|
|
|
|
|
Property and Equipment, net |
|
$ |
918,162 |
|
|
$ |
723,547 |
|
|
|
|
|
|
|
|
Property,
plant and equipment includes gross assets acquired under capital leases of $66,919 at
December 31, 2006 with related amounts in accumulated
depreciation,
depletion and amortization of $781 at December 31, 2006.
There were no capital lease obligations at December 31, 2005.
Note 7Credit Facility:
In 2005, CNX Gas entered into a credit agreement for a revolving credit facility in an initial
aggregate outstanding principal amount of up to $200,000 (with the ability to request an increase
in the aggregate outstanding principal amount up to $300,000), including borrowings and letters of
credit. CNX Gas may use borrowings under the new credit agreement for general corporate purposes,
including transaction fees, letters of credit, acquisitions, capital expenditures and working
capital. The $200,000 credit agreement for CNX Gas is unsecured, however it does contain a negative
pledge provision providing that CNX Gas assets cannot be used to secure any other obligations. Fees
and interest rate spreads are based on the percentage of facility utilization, measured quarterly.
Covenants in the facility limit our ability to dispose of assets, make investments, purchase or
redeem CNX Gas stock and merge with another corporation. The facility includes a leverage ratio
covenant of not more than 3.0 to 1.0, measured quarterly. As there was no debt outstanding at
December 31, 2006, the leverage ratio was met at December 31, 2006. The facility also includes an
interest coverage ratio of no less than 3.0 to 1.0 measured quarterly. The interest coverage ratio
covenant was met, as interest expense was immaterial.
At December 31, 2006, the CNX Gas credit agreement had no borrowings outstanding and $16,867
of letters of credit outstanding, leaving $183,133 of capacity available for borrowings and the
issuance of letters of credit.
As a result of entering into the $200,000 credit agreement, CNX Gas and subsidiaries have
executed a Supplemental Indenture and are guarantors of CONSOL Energys 7.875% notes due March 1,
2012 in the principal amount of approximately $250,000. In addition, if CNX Gas were to grant liens
to a lender as part of a future borrowing, the indenture and the agreement governing CONSOL
Energys 8.25% medium term notes due 2007 in the principal amount of $45,000 would require CNX Gas
to ratably secure both the 7.875% notes and the 8.25% medium term notes.
68
Note 8Other Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Short Term Incentive Compensation Plan |
|
$ |
3,944 |
|
|
$ |
2,755 |
|
Current Portion of Capital Lease |
|
|
2,573 |
|
|
|
|
|
Accrued Payroll |
|
|
1,582 |
|
|
|
1,781 |
|
Other |
|
|
613 |
|
|
|
590 |
|
Gas Firm Transportation |
|
|
510 |
|
|
|
256 |
|
|
|
|
|
|
|
|
Total Other Current Liabilities |
|
$ |
9,222 |
|
|
$ |
5,382 |
|
|
|
|
|
|
|
|
Note 9Leases:
CNX Gas uses various leased facilities and equipment in our operations, which qualify as
operating leases. CNX Gas also recorded a pipeline transportation arrangement as a capital lease in
2006. Future minimum lease payments under these leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2007 |
|
$ |
7,380 |
|
|
$ |
794 |
|
2008 |
|
|
7,380 |
|
|
|
695 |
|
2009 |
|
|
7,380 |
|
|
|
698 |
|
2010 |
|
|
7,380 |
|
|
|
701 |
|
2011 |
|
|
7,380 |
|
|
|
436 |
|
Thereafter |
|
|
72,461 |
|
|
|
299 |
|
|
|
|
|
|
|
|
Total Minimum Lease Payments |
|
$ |
109,361 |
|
|
$ |
3,623 |
|
|
|
|
|
|
|
|
Less Imputed Interest |
|
|
42,891 |
|
|
|
|
|
Present Value of Minimum Lease Payments |
|
$ |
66,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Amount Due in One Year |
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-term Capital Lease Obligation |
|
$ |
63,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense under operating leases was $3,495, $2,892, and $1,566 for the twelve months
ended December 31, 2006, 2005, and 2004, respectively.
Note 10Pension and Other Postretirement Benefits:
Changes In Accounting Standards
In the year ended December 31, 2006, CNX Gas adopted Statement of Financial Accounting
Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans (FAS 158), which requires the recognition of the funded status of defined benefit
postretirement plans and related disclosures. While it does not impact net income, this resulted in
a one-time adjustment to accumulated other comprehensive income in shareholders equity of $169 and
$592 (net of tax) for the Pension Plan and other postretirement plans, respectively.
Defined Benefit Pension Plan
As of December 31, 2005, CNX Gas participated in a non-contributory defined benefit retirement
plan, administered by CONSOL Energy, covering substantially all salaried employees. The pension
benefit obligation earned by salaried CNX Gas employees prior to the date of separation from CONSOL
Energy remains with CONSOL Energy. As of the date of separation, any incremental pension liability
earned by CNX Gas salaried employees, as a result of service after August 1, 2005, is the
obligation of CNX Gas. The benefits for this plan are based primarily on years of service and
employees compensation near retirement. On January 1, 2006, an amendment was made to the CONSOL
Energy Inc. Employee Retirement Plan that suspended all service accruals of gas employees in this
plan. In its place, an identical plan, the CNX Gas Corporation Employee Retirement Plan (Pension
Plan), was created and sponsored by CNX Gas to provide a benefit for all defined benefit accruals
going forward. As of that date, the lump sum benefits formula was frozen for service and salaries
and prospectively the lump sum option will not be offered for any benefits earned after January 1,
2006. Also the amount of future benefit accruals was reduced and early retirement subsidies were
eliminated.
69
Effective January 1, 2007, employees hired by CNX Gas will not be eligible to participate in
the non-contributory defined benefit retirement plan. In lieu of participation in the
non-contributory defined benefit plan, these employees will begin receiving an additional 3%
company contribution into their defined contribution plan. CNX Gas employees who were hired prior
to December 31, 2005 or who were full time salaried employees of CONSOL Energy immediately prior to
their date of transfer were given a one time opportunity to elect to remain in the defined benefit
plan or to freeze their defined benefit accruals and participate in the additional 3% company
contribution into their defined contribution plan. All employees, regardless of the hire date or
plan election, will continue to receive up to a 6% company match of eligible pay contributed to the
defined contribution plan. In addition, any employees hired on or after January 1, 2006 had their
pension benefit frozen as of December 31, 2006 and are automatically enrolled into the additional
3% company contribution into their defined contribution effective January 1, 2007. The company
intends to freeze all defined benefit accruals after ten years for employees that elected to remain
in the defined benefit plan.
The CNX Gas Pension Plan uses a measurement period of October 1 through September 30 to
determine components of net periodic pension expense. Census data is gathered annually as of
January 1 and projected to September 30. The reconciliation of changes in the benefit obligation
and funded status of this plan at December 31, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at
beginning of the year |
|
$ |
88 |
|
|
$ |
|
|
Service cost |
|
|
282 |
|
|
|
207 |
|
Interest cost |
|
|
5 |
|
|
|
12 |
|
Actuarial gain |
|
|
(164 |
) |
|
|
(131 |
) |
Benefits paid |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of the year |
|
$ |
207 |
|
|
$ |
88 |
|
|
|
|
|
|
|
|
Fair Value of Plan assets |
|
$ |
18 |
|
|
$ |
|
|
Funded Status: |
|
|
|
|
|
|
|
|
Status of plan underfunded |
|
$ |
(189 |
) |
|
$ |
(88 |
) |
Unrecognized net actuarial gain |
|
|
(276 |
) |
|
|
(131 |
) |
|
|
|
|
|
|
|
Accrued benefit cost before the
adoption of SFAS 158 |
|
$ |
(465 |
) |
|
$ |
(219 |
) |
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated
Balance Sheets: |
|
|
|
|
|
|
|
|
Accrued benefit liability |
|
$ |
(465 |
) |
|
$ |
(219 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(465 |
) |
|
$ |
(219 |
) |
|
|
|
|
|
|
|
After the adoption of SFAS 158: |
|
|
|
|
|
|
|
|
Noncurrent liabilities |
|
$ |
(189 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(189 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated
other comprehensive income consist of: |
|
|
|
|
|
|
|
|
Net Gain |
|
$ |
(276 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Net amount recognized (before tax
effect) |
|
$ |
(276 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Prior to |
|
|
|
|
|
Balance After |
|
|
SFAS 158 |
|
SFAS 158 |
|
SFAS 158 |
|
|
Adjustments |
|
Adjustments |
|
Adjustments |
Change due to the adoption of SFAS
158 at December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension benefit liability |
|
$ |
(465 |
) |
|
$ |
276 |
|
|
$ |
(189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (before tax effects of $107) |
|
$ |
|
|
|
$ |
(276 |
) |
|
$ |
(276 |
) |
The accumulated benefit obligation for the Pension Plan at December 31, 2006 and 2005 was $160
and $74, respectively. We expect to recognize $23 of the net gain in
earnings in 2007.
The components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Components of Net Periodic Benefit Costs: |
|
|
|
|
|
|
|
|
Service costs |
|
$ |
282 |
|
|
$ |
219 |
|
Interest costs |
|
|
5 |
|
|
|
|
|
Expected return on plan assets |
|
|
(9 |
) |
|
|
|
|
Recognized net actuarial gain |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit costs |
|
$ |
266 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
The weighted-average assumptions used to determine benefit obligations are as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected long-term return on plan assets |
|
|
8.00 |
% |
|
|
|
|
Rate of compensation increase |
|
|
4.36 |
% |
|
|
4.11 |
% |
The company calculates net periodic pension cost for a given fiscal year based on the
assumptions developed at the end of the previous fiscal year. The weighted-average assumptions used
to determine net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
Discount rate |
|
|
5.75 |
% |
|
|
6.00 |
% |
Expected long-term return on plan assets |
|
|
8.00 |
% |
|
|
|
|
Rate of compensation increase |
|
|
4.11 |
% |
|
|
4.12 |
% |
71
The Pension Plan had no plan assets as of December 31, 2005. CNX Gas contributed $20 during
fiscal year 2006. The fair value of plan assets at December 31, 2006 was $18, all of which are in
cash and cash equivalents.
We expect to contribute $282 to the Pension Plan in 2007. Benefit payments reflecting future
service for the years 2007 through 2016 are expected to be approximately $254.
Postretirement Benefit Plans
CNX Gas also participates in certain CONSOL Energy sponsored benefit plans which provide
medical and life benefits to employees that retire with at least twenty years of service and have
attained age 55 or fifteen years of service and have attained age 62. Additionally, any salaried
employees that are hired or rehired effective August 1, 2004 or later will not become eligible for
retiree health benefits. In lieu of traditional retiree health coverage, if certain eligibility
requirements are met, these employees may be eligible to receive a retiree medical spending
allowance of $1,000 per year of service at retirement. In addition to the change in eligibility
requirements, other changes have been made to the medical plan which covers eligible salaried
employees and retirees. These changes include a cost sharing structure where essentially all
participants contribute 20% of plan costs. Annual cost increases in excess of 6% are paid entirely
by the Plan participants. CNX Gas does not expect to contribute to the other postretirement benefit
plan in 2007. CNX Gas expects to pay benefit claims as they become due. CNX Gas uses a September 30
measurement date for its other postretirement benefit plans.
72
The reconciliation of changes in the benefit obligation and funded status of these plans as of
December 31, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Other Benefits as of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at
beginning of period |
|
$ |
1,760 |
|
|
$ |
2,826 |
|
Service cost |
|
|
91 |
|
|
|
160 |
|
Interest cost |
|
|
101 |
|
|
|
170 |
|
Actuarial gain (loss) |
|
|
466 |
|
|
|
(765 |
) |
Plan amendments |
|
|
|
|
|
|
(631 |
) |
Benefits paid |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period |
|
$ |
2,325 |
|
|
$ |
1,760 |
|
|
|
|
|
|
|
|
Funded Status: |
|
|
|
|
|
|
|
|
Status of plan underfunded |
|
$ |
(2,325 |
) |
|
$ |
(1,760 |
) |
Unrecognized prior service cost |
|
|
(1,459 |
) |
|
|
(1,631 |
) |
Unrecognized net actuarial loss |
|
|
489 |
|
|
|
23 |
|
|
|
|
|
|
|
|
Accrued benefit cost before the
adoption of SFAS 158 |
|
$ |
(3,295 |
) |
|
$ |
(3,368 |
) |
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated
Balance Sheets before the adoption of SFAS
158 consist of: |
|
|
|
|
|
|
|
|
Accrued benefit liability |
|
|
(3,295 |
) |
|
|
(3,368 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(3,295 |
) |
|
$ |
(3,368 |
) |
|
|
|
|
|
|
|
After the adoption of SFAS 158: |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(12 |
) |
|
|
|
|
Noncurrent liabilities |
|
|
(2,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(2,325 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive income consist of: |
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
489 |
|
|
$ |
|
|
Prior Service Cost |
|
|
(1,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized (before tax
effect) |
|
$ |
(970 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Prior to |
|
|
|
|
|
Balance After |
|
|
SFAS 158 |
|
SFAS 158 |
|
SFAS 158 |
|
|
Adjustments |
|
Adjustments |
|
Adjustments |
Change due to
the adoption of
SFAS 158 at
December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
postretirement
benefit liability |
|
$ |
(3,295 |
) |
|
$ |
970 |
|
|
$ |
(2,325 |
) |
Accumulated other
comprehensive
income
postretirement
benefits (before
tax effects of $378) |
|
$ |
|
|
|
$ |
(970 |
) |
|
$ |
(970 |
) |
We expect to recognize a gain of $172 related to prior service costs,
and a loss of $20 related to the net actuarial loss in earnings in 2007.
The components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Components of Net Periodic Benefit Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
$ |
91 |
|
|
$ |
160 |
|
|
$ |
131 |
|
Interest costs |
|
|
101 |
|
|
|
170 |
|
|
|
163 |
|
Amortization of prior service costs credit |
|
|
(172 |
) |
|
|
(113 |
) |
|
|
(117 |
) |
Recognized net actuarial loss |
|
|
|
|
|
|
42 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
Benefit costs |
|
$ |
20 |
|
|
$ |
259 |
|
|
$ |
240 |
|
|
|
|
|
|
|
|
|
|
|
The company calculates net periodic benefit cost for a given fiscal year based on the
assumptions developed at the end of the previous fiscal year. The weighted-average assumptions used
to determine benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
The weighted-average assumptions used to determine net periodic benefit cost are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Discount rate |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
The assumed health care cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Healthcare cost trend rate for next year |
|
|
8.50 |
% |
|
|
9.25 |
% |
|
|
10.00 |
% |
Rate to which the cost trend rate is assumed to decline (ultimate
trend rate) |
|
|
5.00 |
% |
|
|
4.75 |
% |
|
|
4.75 |
% |
Year that the rate reaches ultimate trend rate |
|
|
2011 |
|
|
|
2011 |
|
|
|
2011 |
|
74
Assumed health care cost trend rates have a significant effect on the amounts reported for the
medical plans. A one-percentage-point change in assumed health care cost trend rates would have the
following effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage |
|
1-Percentage |
|
|
Point Increase |
|
Point Decrease |
Effect on total of service and interest costs components |
|
$ |
34 |
|
|
$ |
(31 |
) |
Effect on accumulated postretirement benefit obligation |
|
|
344 |
|
|
|
(296 |
) |
CNX Gas had no plan assets as of December 31, 2006 and December 31, 2005 for other
postretirement benefits. The company intends to pay benefit claims as they are due. The following
benefit payments reflecting future service are expected to be paid as follows:
|
|
|
|
|
|
|
Other Benefits |
|
|
Payments |
2007 |
|
$ |
12 |
|
2008 |
|
|
26 |
|
2009 |
|
|
42 |
|
2010 |
|
|
65 |
|
2011 |
|
|
89 |
|
Year 2012-2016 |
|
|
801 |
|
Note 11Stock-Based Compensation:
CNX Gas adopted the CNX Gas Equity Incentive Plan on June 30, 2005, and amended the plan on
August 1, 2005 and again on October 11, 2006. The August 1 amended plan was approved by the sole
stockholder of CNX Gas, CONSOL Energy, on August 4, 2005. The October 11, 2006 amendment was
approved by the Board. The plan is administered by our board of directors and the board of
directors may delegate administration of the plan to a committee of the board of directors. Our
directors and employees, and our affiliates (which include CONSOL Energy) directors and employees,
are eligible to receive awards under the plan. Some of our employees including our executive
officers and non-employee directors have participated in or have been eligible to participate in
and, will continue to be eligible to participate in, CNX Gas Equity Incentive Plan.
The CNX Gas Equity Incentive Plan consists of the following components: stock options, stock
appreciation rights, restricted stock units, performance awards, cash awards and other stock-based
awards. The total number of shares of CNX Gas common stock with respect to which awards may be
granted under CNX Gas plan is 2,500,000.
The total stock-based compensation expense was $3,733 and $205 for the years ended December
31, 2006 and 2005, and the related deferred tax benefit totaled $1,455 and $81 respectively. Prior
to January 1, 2006, CNX Gas accounted for stock-based compensation under the recognition and
measurement provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, as amended. Generally, no stock-based employee compensation cost for stock
options is reflected in net income, as all options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of the grant.
75
Prior to January 1, 2006, CNX Gas provided pro forma disclosure amounts in accordance with
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure an Amendment of SFAS No. 123 (SFAS 148), as if the SFAS 123 provisions
for income statement recognition had been applied to its stock-based compensation. The pro forma
table below reflects net earnings and basic and diluted earnings per share for the year ended
December 31, 2005, had CNX Gas applied the fair value recognition provisions of SFAS 123:
|
|
|
|
|
|
|
For the Twelve Months Ended |
|
|
|
December 31, 2005 |
|
Net Income as reported |
|
$ |
102,168 |
|
Add: Stock-based compensation expense
for restricted stock units |
|
|
205 |
|
Deduct: Total stock-based compensation
expense determined under Black-Scholes
option pricing model and stock-based
compensation expense for restricted
stock units, net of tax |
|
|
(423 |
) |
|
|
|
|
Pro forma net income |
|
$ |
101,950 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic as reported |
|
$ |
0.76 |
|
Basic pro forma |
|
$ |
0.76 |
|
Diluted as reported |
|
$ |
0.76 |
|
Diluted pro forma |
|
$ |
0.76 |
|
Effective January 1, 2006, CNX Gas adopted the fair value recognition provisions of SFAS 123R
using the modified prospective transition method, and therefore has not restated results for prior
periods. Under this transition method, stock-based compensation expense for the year ended December
31, 2006 includes compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123. CNX Gas recognizes compensation costs for
shares expected to vest on a straight-line basis over the requisite service period of the award,
which is generally the option vesting term.
As a result of adopting SFAS 123R, pretax income and net income for the year ended December
31, 2006 was $3,204 and $1,956 lower, respectively, than if we had continued to account for
stock-based compensation under APB 25. The impact on basic earnings per share and diluted earnings
per share for the year ended December 31, 2006 was $0.01 per share. Upon the adoption of SFAS
123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for
those options will be classified as financing cash flows when CNX Gas options are exercised in the
future. As of December 31, 2006, there were no options exercised.
As part of its SFAS 123R adoption, CNX Gas continues to use the Black-Scholes pricing model to
value its options. The risk free interest rate was determined for each vesting tranche of an award
based upon the calculated yield on U.S Treasury obligations for the expected term of the award.
The expected volatility and expected term of the awards were developed by examining the stock
option activity for a peer group of companies. The expected forfeiture rate is based upon
historical forfeiture activity of the peer group. The fair value of share based payment awards was
estimated using the Black-Scholes option pricing model with the following assumptions and weighted
average fair values:
76
|
|
|
|
|
|
|
|
|
|
|
For the year ended |
|
For the year ended |
|
|
December 31, 2006 |
|
December 31, 2005 |
Weighted Average Fair Value of Grants |
|
$ |
9.83 |
|
|
$ |
5.34 |
|
Risk Free Interest Rate |
|
|
4.65 |
% |
|
|
4.28 |
% |
Dividend Yield |
|
|
|
|
|
|
|
|
Expected Volatility |
|
|
32.39 |
% |
|
|
36.54 |
% |
Expected Forfeiture Rate |
|
|
2.0 |
% |
|
|
|
|
Expected Term |
|
4.5 years |
|
4.5 years |
Option activity under the CNX Gas Equity Incentive Plan during the year ended December 31,
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate Intrinsic |
|
|
|
|
|
|
Exercise |
|
Terms |
|
Value |
|
|
Shares |
|
Price |
|
(in years) |
|
(in thousands) |
Outstanding at December 31, 2005 |
|
|
1,040,576 |
|
|
$ |
16.05 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
486,678 |
|
|
$ |
28.43 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(29,935 |
) |
|
$ |
19.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,497,319 |
|
|
$ |
20.01 |
|
|
|
8.83 |
|
|
$ |
9,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at December 31, 2006 |
|
|
1,494,218 |
|
|
$ |
20.00 |
|
|
|
8.83 |
|
|
$ |
9,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 |
|
|
249,008 |
|
|
$ |
16.05 |
|
|
|
8.59 |
|
|
$ |
2,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These stock options will terminate ten years after the date on which they were granted. There
are 1,018,254 employee stock options that vest 25% per year, beginning one year after the grant
date and 454,076 employee stock options that vest 100%, three years after the grant date. There are
24,989 non-employee director stock options outstanding at December 31, 2006. Non-employee director
stock options vest 33% per year, beginning one year after the grant date. The vesting of the
options will accelerate in the event of death, disability or retirement and may accelerate upon a
change of control of CNX Gas.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the difference between CNX Gas closing stock price on the last trading day of the year ended
December 31, 2006 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on
December 31, 2006. This amount changes based on the fair market value of CNX Gas stock.
As of December 31, 2006, $6,380 of total unrecognized compensation cost related to unvested
options awards is expected to be recognized over a weighted-average period of 2.58 years.
Under the Equity Incentive Plan, CNX Gas granted certain employees and certain directors
restricted stock unit awards. These awards entitle the holder to receive shares of common stock as
the award vests. A total of 68,371 restricted stock units were outstanding at December 31, 2006.
Compensation expense will be recognized over the vesting period of the units. The total fair value
of restricted stock unit awards that vested during the year was $529. The following represents the
unvested restricted stock units and corresponding fair value (based upon the closing share price)
at the date of the grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value |
|
Non-vested at December 31, 2005 |
|
|
92,969 |
|
|
$ |
16.00 |
|
Granted |
|
|
6,143 |
|
|
|
28.50 |
|
Vested |
|
|
(30,741 |
) |
|
|
16.00 |
|
|
|
|
|
|
|
|
Non-vested at December 31, 2006 |
|
|
68,371 |
|
|
$ |
17.12 |
|
|
|
|
|
|
|
|
77
As of December 31, 2006, $925 of total unrecognized compensation cost related to unvested RSU
awards is expected to be recognized over a weighted-average period of 2.17 years.
Prior to the adoption of SFAS 123R on January 1, 2006, CNX Gas followed the nominal vesting
period approach under APB No. 25 for awards with retirement eligible provisions. Upon adoption of
SFAS 123R, CNX Gas changed to the non-substantive vesting period approach for awards with
retirement eligible provisions. If CNX Gas would have followed the non-substantive vesting period
approach for awards with retirement eligible provisions, we would have disclosed approximately $959
of additional expense, net of tax, for stock options for the year ended December 31, 2005.
Effective October 11, 2006, CNX Gas adopted a long-term incentive program. This program allows
for the award of performance share units (PSUs). A PSU represents a contingent right to receive a
cash payment, determined by reference to the value of one share of the companys common stock. The
total number of units earned, if any, by a participant will be based on the companys total
stockholder return relative to the stockholder return of a pre-determined peer group of companies.
The performance period is from October 11, 2006 to December 31, 2009. CNX Gas will recognize
compensation costs on a straight-line basis over the requisite service period. The basis of the
compensation costs will be re-valued quarterly. As of December 31, 2006, there are 249,933 PSUs
issued with a fair value of approximately $10,015. CNX Gas recognized approximately $770 in
compensation costs in the current year.
Note 12Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net Cash provided from operating activities included: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
870 |
|
|
$ |
14 |
|
|
$ |
|
|
Income Taxes paid |
|
$ |
37,241 |
|
|
$ |
12,233 |
|
|
$ |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Assets |
|
$ |
(66,919 |
) |
|
$ |
|
|
|
$ |
|
|
Change in Liabilities |
|
$ |
(66,919 |
) |
|
$ |
|
|
|
$ |
|
|
Tax basis step-up |
|
$ |
|
|
|
$ |
(165,041 |
) |
|
$ |
|
|
Assumed ownership of joint venture assets |
|
$ |
|
|
|
$ |
(4,769 |
) |
|
$ |
|
|
Purchase of Property, Plant and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Change in Assets |
|
$ |
(12,674 |
) |
|
$ |
|
|
|
$ |
|
|
Change in Liabilities |
|
$ |
(12,674 |
) |
|
$ |
|
|
|
$ |
|
|
Note 13Concentration of Credit Risk:
CNX Gas markets methane gas for sale primarily to gas wholesalers. Credit is extended based on
an evaluation of the customers financial condition, and generally collateral is not required.
Credit losses consistently have been minimal.
During the twelve months ended December 31, 2006, 2005 and 2004, CNX Gas made sales to four,
three, and three unrelated entities respectively, which individually comprised greater than 10% of
total revenues.
78
Note 14Derivative Instruments:
CNX Gas has entered into derivative financial instruments, for purposes other than trading, to
convert the market prices related to these anticipated sales of natural gas to fixed prices. These
instruments are designated as cash flow hedges and extend through 2008. The net fair values of the
outstanding instruments are an asset of $4,083 and a liability of $56,686 at December 31, 2006 and
2005, respectively.
CNX Gas entered into cash flow hedges for natural gas in 2006, 2005 and 2004. Gains or losses
related to these derivative instruments were recognized when the sale of the natural gas affected
earnings. The ineffective portion of the changes in the fair value of these contracts was
insignificant in 2006 and 2005. There was no ineffectiveness in 2004 related to this hedging
strategy.
For these cash flow hedge strategies, the fair values of the derivatives are recorded on the
balance sheet. The effective portions of the changes in fair values of the derivatives are recorded
in accumulated other comprehensive income and loss and are reclassified to sales in the period in
which earnings are impacted by the hedged items or in the period that the transaction no longer
qualifies as a cash flow hedge. There were no transactions that ceased to qualify as a cash flow
hedge in 2006, 2005, or 2004. CNX Gas consolidated balance sheet is reflected on a net
asset/(liability) basis for each counterparty.
Assuming market prices remain constant with prices at December 31, 2006, $6,438 of the net
$1,649 gain included in other comprehensive income is expected to be recognized in earnings over
the next 12 months. The remaining net loss is expected to be recognized in 2008.
CNX Gas did not have any derivatives designated as fair value hedges in 2006, 2005, or 2004.
Note 15Commitments and Contingent Liabilities:
CNX Gas has various purchase commitments for materials, supplies and items of permanent
investment incidental to the ordinary conduct of business. Such commitments are not at prices in
excess of current market value.
On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against
CNX Gas Company LLC and Island Creek Coal Company in the Circuit Court for the
County of Tazewell, Virginia. CNX Gas has not formally been served with this lawsuit.
The lawsuit alleges that CNX Gas conspired and has violated the Virginia Antitrust Act
and has tortiously interfered with GeoMets contractual relations, prospective
contracts and business expectancies. GeoMet seeks injunctive relief, actual damages of
$561,000, treble damages and punitive damages in the amount of $350. CNX Gas
believes this lawsuit to be without merit and intends to vigorously defend it.
CNX Gas is currently undergoing an audit by Buchanan County, Virginia local taxing authorities
for the tax years 1998 through 2004. To date, the County auditors have completed review of the 1998
through 2001 period; as of December 31, 2006, we continued to receive requests relating to the 2002
through 2004 period. For each of these years from 1998 through 2004, CNX Gas has filed appropriate
returns and has paid applicable license taxes based on wellhead price calculations. The audit is
ongoing with no resolution being proposed by Buchanan County as of December 31, 2006. Additionally,
on April 29, 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 us in the Circuit Court of the County of Buchanan (At Law No. CL05000149-00) for
the year 2002. The complaint alleges that we failed to properly calculate the amount of license
taxes we owed to Buchanan County related to our production and sale of CBM gas in Buchanan County.
Buchanan County is seeking a determination by the court that we have calculated, and continue to
calculate, the license tax in an improper manner. We have continued to pay Buchanan County taxes
based on our method of calculating the taxes. However, we have been accruing an additional
liability on our balance sheet in an amount based on the difference between our calculation of the
tax and Buchanan Countys 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. CNX Gas management believes that the final resolution of this matter will not
have a material effect on our financial position, results of operations, or cash flows.
79
In October 2005, CDX Gas, LLC (CDX) alleged that certain of our vertical to horizontal CBM
drilling methods infringe several patents which they own. CDX demanded that we enter into a
business arrangement with CDX to use its patented technology. Alternatively, CDX informally
demanded a royalty of nine to ten percent of the gross production from the wells we drill utilizing
the technology allegedly covered by their patents. We believe that approximately 31 of our
producing wells to date could be covered by their claim. We deny all of these allegations and we
are vigorously contesting them. On November 14, 2005, we filed a complaint for declaratory
judgment in the U.S. District Court for the Western District of Pennsylvania (C.A. No. 05-1574),
seeking a judicial determination that we do not infringe any claim of any valid and enforceable
CDX patent. CDX filed an answer and counterclaim denying our allegations of invalidity and
alleging that we infringe certain claims of their patents. A hearing was held before a
Court-appointed Special Master with regard to the scope of the asserted CDX patents and the Special
Masters report and recommendations was adopted by order of the Court on October 13, 2006. As a
result of that order and subject to appellate review, certain of our wells may be found to infringe
certain of the CDX claims of the patents in suit, if those patents are ultimately determined to be
valid and enforceable. The report of CDXs damages expert suggests that CDX will seek (i)
reasonable royalty damages on production from allegedly infringing wells at a royalty rate of 10%,
or $1.9 million, based on projected production through June 2007, and (ii) lost profits damages
of $23.6 million for allegedly infringing wells drilled though August 2006, which assumes that CNX
Gas would have no choice but to have entered into a joint operating arrangement with CDX. We
believe that there is no basis in the law for this lost profits theory. We continue to believe
that we do not infringe any properly construed claim of any valid, enforceable patent. We cannot
predict the ultimate outcome of this lawsuit; however, CNX Gas management believes that the final
resolution of this matter will not have a material effect on our
financial position,
results of operations or cash flows.
In 2004, Yukon Pocahontas Coal Company, Buchanan Coal Company, and Sayers-Pocahontas Coal
Company filed a complaint against Consolidation Coal Company (CCC), a subsidiary of CONSOL Energy
in the Circuit Court of Buchanan County, Virginia, seeking damages and injunctive relief in
connection with the deposit of untreated water from mining activities at CCCs Buchanan Mine into
nearby void spaces in the mine of one of CONSOL Energys other subsidiaries, Island Creek Coal
Company (ICCC). CCC believes that it had, and continues to have, the right to store water in
these void areas. On September 21, 2006, the plaintiffs filed an amended complaint in the Circuit
Court of Buchanan County, Virginia (Case No. CL04-91) which, among other things, added CONSOL
Energy, ICCC and CNX Gas Company LLC as additional defendants. The amended complaint alleges, among
other things, that CNX Gas Company LLC, as lessee and operator under certain coalbed methane gas
leases from plaintiffs, had a duty to prevent CCC from depositing water into the mine voids and
failed to do so. The proposed amended complaint seeks $150,000 in damages from the additional
defendants, plus costs, interest and attorneys fees. CNX Gas Company LLC denies that it has any
liability in this matter and intends to vigorously defend this action.
In 1999, CNX Gas was named in a suit brought by a group of royalty owners that lease 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, and subsequently paid in 2003, approximately $12,000
(including interest) to the group of royalty owners that brought the suit for the period from 1989
to 1999. A final payment was made to the plaintiffs in 2003 for approximately $5,600 to adjust all
royalties owed to the plaintiffs from the date of the court ruling in 1999 forward to 2003, which
effectively settled this case. CNX Gas has also recognized an estimated liability for other similar
plaintiffs yet to be determined outside of this lawsuit. This amount is included in other
liabilities on the balance sheet. To date, approximately $3,900 has been paid to various other
royalty owners as a result of this case. CNX Gas management believes that the final resolution of
this matter will not have a material effect on our financial position, results of operations or
cash flows.
In addition to the foregoing, CNX Gas is subject to various pending and threatened lawsuits
and claims arising in the ordinary course of its business. While the relief claimed in these
matters may be significant, we are unable to predict with certainty the ultimate outcome of such
lawsuits and claims. We have established reserves for pending litigation which we believe are
adequate, and after consultation with counsel and giving appropriate consideration to available
insurance, we believe that the ultimate outcome of any matter currently pending against CNX Gas
will not materially affect the financial position,
results of operations or cash flows of CNX Gas.
80
At December 31, 2006, CNX Gas has provided the following financial guarantees and letters of
credit to certain third parties. CNX Gas management believes that these guarantees will expire
without being funded, and therefore the commitments will not have a material adverse effect on
financial condition. The fair value of all liabilities associated with these guarantees have been
properly recorded and reported in the financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts |
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
Beyond |
|
Letters of Credit |
|
Committed |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Gas |
|
$ |
16,867 |
|
|
$ |
16,847 |
|
|
$ |
20 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Letters of Credit |
|
$ |
16,867 |
|
|
$ |
16,847 |
|
|
$ |
20 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surety Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental |
|
$ |
278 |
|
|
$ |
278 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Other |
|
|
802 |
|
|
|
802 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Surety Bonds |
|
$ |
1,080 |
|
|
$ |
1,080 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm Transportation |
|
$ |
56,422 |
|
|
$ |
7,897 |
|
|
$ |
14,642 |
|
|
$ |
12,430 |
|
|
$ |
21,453 |
|
Guarantees |
|
$ |
10,600 |
|
|
$ |
10,600 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other |
|
$ |
67,022 |
|
|
$ |
18,497 |
|
|
$ |
14,642 |
|
|
$ |
12,430 |
|
|
$ |
21,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments |
|
$ |
84,969 |
|
|
$ |
36,424 |
|
|
$ |
14,662 |
|
|
$ |
12,430 |
|
|
$ |
21,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
On December 28, 2006, CNX Gas obtained the issuance of a letter of credit to the Commonwealth
of Pennsylvania in the amount of $20 to serve as collateral for a one year period for a permit
issued by PENNDOT.
On May 4, 2005, CNX Gas amended the amount of the existing letter of credit to Columbia Gas
Transmission Corporation. The current amount issued as a letter of credit is $1,000. This letter of
credit is to serve as collateral for all natural gas transportation and services as agreed to by
the parties. This letter of credit will be called upon should CNX Gas fail to perform its
obligation.
CNX Gas obtained the issuance of a letter of credit to East Tennessee Natural Gas, LLC to
serve as collateral for a fifteen year firm transportation contract for approximately 197,500 Mcf
per day on the Jewell Ridge Pipeline, which had an in-service date of October 2006. The amount of
the letter of credit at December 31, 2006 is $15,695.
On April 15, 2005, CNX Gas has obtained the issuance of a letter of credit to Allegheny Energy
Supply Co. to serve as collateral for a period of two years to cover a potential tax liability of
$152.
Surety Bonds
CNX Gas has issued surety bonds totaling $1,080. CNX Gas guarantees the performance of these
obligations.
Other Guarantees
CNX Gas is the guarantor of an agreement with Saltville Gas Storage Company LLC for $3,600
dated October 26, 2006, an agreement with Constellation Energy Commodities Group, Inc. for $1,000
dated October 9, 2006, and an agreement with AEP for $6,000 dated July 31, 2006.
81
CONSOL Energy has also provided certain parental guarantees related to activity associated
with CNX Gas. CNX Gas anticipates that these parental guarantees will be transferred from CONSOL
Energy to CNX Gas over time. CNX Gas management believes these parental guarantees will also expire
without being funded, and therefore the commitments will not have a material adverse effect on
our financial condition.
Note 16Segment Information:
The principal activity of CNX Gas is to produce methane gas for sale primarily to gas
wholesalers. CNX Gas has two reportable segments: Central Appalachia and Northern Appalachia.
During the fourth quarter, management adjusted the manner in which results were internally reported
to the Chief Operating Decision Maker. As a result of this change, the current period and all
prior periods presented have been restated to reflect the way CNX Gas manages its operations and
makes business decisions.
Reportable segment results for the twelve months ended December 31, 2006 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
Northern |
|
|
|
|
|
|
|
|
|
|
Adjustments & |
|
|
|
|
|
|
Appalachia |
|
|
Appalachia |
|
|
Total |
|
|
Corporate |
|
|
Eliminations |
|
|
Consolidated |
|
Salesoutside |
|
$ |
364,025 |
|
|
$ |
21,031 |
|
|
$ |
385,056 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
385,056 |
|
Salesrelated parties |
|
|
8,392 |
|
|
|
98 |
|
|
|
8,490 |
|
|
|
|
|
|
|
|
|
|
|
8,490 |
|
Sales royalty interest gas |
|
|
50,878 |
|
|
|
176 |
|
|
|
51,054 |
|
|
|
|
|
|
|
|
|
|
|
51,054 |
|
Sales purchased gas |
|
|
43,973 |
|
|
|
|
|
|
|
43,973 |
|
|
|
|
|
|
|
|
|
|
|
43,973 |
|
Other revenue |
|
|
21,048 |
|
|
|
785 |
|
|
|
21,833 |
|
|
|
3,453 |
|
|
|
|
|
|
|
25,286 |
|
Intersegment revenues |
|
|
67,326 |
|
|
|
1,452 |
|
|
|
68,778 |
|
|
|
|
|
|
|
(68,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and Freight |
|
$ |
555,642 |
|
|
$ |
23,542 |
|
|
$ |
579,184 |
|
|
$ |
3,453 |
|
|
$ |
68,778 |
) |
|
$ |
513,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes (A) |
|
$ |
250,607 |
|
|
$ |
3,825 |
|
|
$ |
254,432 |
|
|
$ |
2,008 |
|
|
$ |
|
|
|
$ |
256,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets (B) (C) |
|
$ |
949,472 |
|
|
$ |
73,596 |
|
|
$ |
1,023,068 |
|
|
$ |
131,933 |
|
|
$ |
|
|
|
$ |
1,155,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
$ |
35,190 |
|
|
$ |
2,809 |
|
|
$ |
37,999 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
122,287 |
|
|
$ |
31,956 |
|
|
$ |
154,243 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
154,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes equity in earnings (loss) of unconsolidated affiliates of $1,405 and ($427) for Central Appalachia and Corporate segments, respectively. |
|
(B) |
|
Includes investments in unconsolidated equity affiliates of $27,523
and $24,760 for Central Appalachia and Corporate segments,
respectively. |
|
(C) |
|
Includes cash of $107,173 in the Corporate segment. |
Reportable segment results for the twelve months ended December 31, 2005 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
Northern |
|
|
|
|
|
|
|
|
|
|
Adjustments & |
|
|
|
|
|
|
Appalachia |
|
|
Appalachia |
|
|
Total |
|
|
Corporate |
|
|
Eliminations |
|
|
Consolidated |
|
Salesoutside |
|
$ |
256,967 |
|
|
$ |
20,064 |
|
|
$ |
277,031 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
277,031 |
|
Salesrelated parties |
|
|
5,969 |
|
|
|
83 |
|
|
|
6,052 |
|
|
|
|
|
|
|
|
|
|
|
6,052 |
|
Sales royalty interest gas |
|
|
45,128 |
|
|
|
223 |
|
|
|
45,351 |
|
|
|
|
|
|
|
|
|
|
|
45,351 |
|
Salespurchased gas |
|
|
275,148 |
|
|
|
|
|
|
|
275,148 |
|
|
|
|
|
|
|
|
|
|
|
275,148 |
|
Other revenue |
|
|
9,620 |
|
|
|
54 |
|
|
|
9,674 |
|
|
|
185 |
|
|
|
|
|
|
|
9,859 |
|
Intersegment revenues |
|
|
46,680 |
|
|
|
795 |
|
|
|
47,475 |
|
|
|
|
|
|
|
(47,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and Freight |
|
$ |
639,512 |
|
|
$ |
21,219 |
|
|
$ |
660,731 |
|
|
$ |
185 |
|
|
$ |
(47,475 |
) |
|
$ |
613,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Before Income Taxes (D) |
|
$ |
162,769 |
|
|
$ |
4,339 |
|
|
$ |
167,108 |
|
|
$ |
(390 |
) |
|
$ |
|
|
|
$ |
166,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets (E) (F) |
|
$ |
763,432 |
|
|
$ |
41,135 |
|
|
$ |
804,567 |
|
|
$ |
54,600 |
|
|
$ |
|
|
|
$ |
859,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
$ |
31,619 |
|
|
$ |
3,420 |
|
|
$ |
35,039 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
87,508 |
|
|
$ |
23,244 |
|
|
$ |
110,752 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
110,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
(D) |
|
Includes equity in earnings (loss) of unconsolidated affiliates of
$138 and ($287) for Central Appalachia and Corporate segments,
respectively. |
|
(E) |
|
Includes investments in unconsolidated equity affiliates of $24,340
and $25,188 for Central Appalachia and Corporate segments,
respectively. |
|
(F) |
|
Includes cash of $20,073 in the Corporate segment |
Reportable segment results for the twelve months ended December 31, 2004 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
Northern |
|
|
|
|
|
|
|
|
|
|
Adjustments & |
|
|
|
|
|
|
Appalachia |
|
|
Appalachia |
|
|
Total |
|
|
Corporate |
|
|
Eliminations |
|
|
Consolidated |
|
Salesoutside |
|
$ |
206,670 |
|
|
$ |
8,051 |
|
|
$ |
214,721 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
214,721 |
|
Salesrelated parties |
|
|
22,000 |
|
|
|
36 |
|
|
|
22,036 |
|
|
|
|
|
|
|
|
|
|
|
22,036 |
|
Sales royalty interest gas |
|
|
41,843 |
|
|
|
15 |
|
|
|
41,858 |
|
|
|
|
|
|
|
|
|
|
|
41,858 |
|
Salespurchased gas |
|
|
112,005 |
|
|
|
|
|
|
|
112,005 |
|
|
|
|
|
|
|
|
|
|
|
112,005 |
|
Other revenue |
|
|
6,738 |
|
|
|
58 |
|
|
|
6,796 |
|
|
|
120 |
|
|
|
|
|
|
|
6,916 |
|
Intersegment revenues |
|
|
48,523 |
|
|
|
177 |
|
|
|
48,700 |
|
|
|
|
|
|
|
(48,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
$ |
437,779 |
|
|
$ |
8,337 |
|
|
$ |
446,116 |
|
|
$ |
120 |
|
|
$ |
(48,700 |
) |
|
$ |
397,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes (G) |
|
$ |
131,682 |
|
|
$ |
884 |
|
|
$ |
132,566 |
|
|
$ |
120 |
|
|
$ |
|
|
|
$ |
132,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets (H) |
|
$ |
663,116 |
|
|
$ |
21,794 |
|
|
$ |
684,910 |
|
|
$ |
33,949 |
|
|
$ |
|
|
|
$ |
718,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
$ |
32,198 |
|
|
$ |
691 |
|
|
$ |
32,889 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
32,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
82,990 |
|
|
$ |
6,763 |
|
|
$ |
89,753 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
89,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(G) |
|
Includes equity in loss of unconsolidated affiliates of $1,508 and $915 for Central Appalachia and Corporate segments, respectively. |
|
(H) |
|
Includes investments in unconsolidated equity affiliates of $21,728
and $25,645 for Central Appalachia and Corporate segments,
respectively. |
83
Other Supplemental InformationSupplemental Gas Data (unaudited) ($ in thousands):
The following information was prepared in accordance with Statement of Financial Accounting
Standards No. 69, Disclosures About Oil and Gas Producing Activities and related accounting
rules:
Capitalized Costs:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Surface Lands |
|
$ |
37,055 |
|
|
$ |
26,573 |
|
Mineral Interests |
|
|
55,623 |
|
|
|
55,621 |
|
Wells and Related Equipment |
|
|
112,009 |
|
|
|
83,633 |
|
Intangible Drilling |
|
|
383,605 |
|
|
|
312,467 |
|
Gathering Assets |
|
|
520,906 |
|
|
|
402,681 |
|
Gas Well
Plugging |
|
|
5,652 |
|
|
|
7,680 |
|
Capitalized Internal Software |
|
|
6,433 |
|
|
|
36 |
|
|
|
|
|
|
|
|
Total Property, Plant and Equipment |
|
|
1,121,283 |
|
|
|
888,691 |
|
Accumulated
Depreciation, Depletion and Amortization |
|
|
(203,121 |
) |
|
|
(165,144 |
) |
|
|
|
|
|
|
|
Net Capitalized Costs |
|
$ |
918,162 |
|
|
$ |
723,547 |
|
|
|
|
|
|
|
|
Proportionate Share of Gas
Producing Net Property, Plant and
Equipment of Unconsolidated Equity
Affiliates |
|
$ |
22,139 |
|
|
$ |
20,365 |
|
|
|
|
|
|
|
|
Substantially all, or at least 98%, of our capitalized costs are related to proved properties.
Costs incurred for Property Acquisition, Exploration and Development (*):
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended December 31, |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Consolidated |
|
|
Equity |
|
|
Consolidated |
|
|
Equity |
|
|
Consolidated |
|
|
Equity |
|
|
|
Operations |
|
|
Affiliates |
|
|
Operations |
|
|
Affiliates |
|
|
Operations |
|
|
Affiliates |
|
Property acquisitions |
|
$ |
9,562 |
|
|
$ |
|
|
|
$ |
8,333 |
|
|
$ |
20 |
|
|
$ |
4,190 |
|
|
$ |
111 |
|
Development |
|
|
151,774 |
|
|
|
|
|
|
|
86,273 |
|
|
|
|
|
|
|
77,478 |
|
|
|
|
|
Exploration |
|
|
832 |
|
|
|
2,334 |
|
|
|
19,370 |
|
|
|
412 |
|
|
|
5,596 |
|
|
|
2,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162,168 |
|
|
$ |
2,334 |
|
|
$ |
113,976 |
|
|
$ |
432 |
|
|
$ |
87,264 |
|
|
$ |
3,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Includes costs incurred whether capitalized or expensed |
At least 92%, of our acquisition costs are related to proved properties.
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended December 31, |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Consolidated |
|
|
Equity |
|
|
Consolidated |
|
|
Equity |
|
|
Consolidated |
|
|
Equity |
|
|
|
Operations |
|
|
Affiliates |
|
|
Operations |
|
|
Affiliates |
|
|
Operations |
|
|
Affiliates |
|
Production Revenue |
|
$ |
393,649 |
|
|
$ |
1,913 |
|
|
$ |
283,137 |
|
|
$ |
2,406 |
|
|
$ |
236,811 |
|
|
$ |
1,341 |
|
Royalty Interest Gas Revenue |
|
|
51,054 |
|
|
|
446 |
|
|
|
45,351 |
|
|
|
408 |
|
|
|
41,858 |
|
|
|
246 |
|
Purchased Gas Revenue |
|
|
43,973 |
|
|
|
356 |
|
|
|
275,148 |
|
|
|
2,561 |
|
|
|
112,005 |
|
|
|
1,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
488,676 |
|
|
|
2,715 |
|
|
|
603,636 |
|
|
|
5,375 |
|
|
|
390,674 |
|
|
|
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
|
31,096 |
|
|
|
480 |
|
|
|
26,794 |
|
|
|
623 |
|
|
|
23,939 |
|
|
|
474 |
|
Gathering Costs |
|
|
55,091 |
|
|
|
359 |
|
|
|
40,623 |
|
|
|
168 |
|
|
|
37,021 |
|
|
|
172 |
|
Royalty Expense |
|
|
41,998 |
|
|
|
446 |
|
|
|
36,641 |
|
|
|
408 |
|
|
|
32,914 |
|
|
|
246 |
|
Other Production Costs |
|
|
18,148 |
|
|
|
541 |
|
|
|
17,224 |
|
|
|
915 |
|
|
|
16,274 |
|
|
|
1,153 |
|
Purchased Gas Costs |
|
|
44,843 |
|
|
|
299 |
|
|
|
278,720 |
|
|
|
2,434 |
|
|
|
113,063 |
|
|
|
1,044 |
|
DD&A |
|
|
37,999 |
|
|
|
512 |
|
|
|
35,039 |
|
|
|
870 |
|
|
|
32,889 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs |
|
|
229,175 |
|
|
|
2,637 |
|
|
|
435,041 |
|
|
|
5,418 |
|
|
|
256,100 |
|
|
|
4,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Operating Income |
|
|
259,501 |
|
|
|
78 |
|
|
|
168,595 |
|
|
|
(43 |
) |
|
|
134,574 |
|
|
|
(1,300 |
) |
Income Taxes |
|
|
97,728 |
|
|
|
29 |
|
|
|
65,280 |
|
|
|
(17 |
) |
|
|
52,618 |
|
|
|
(508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations excluding Corporate and
Interest Costs |
|
$ |
161,773 |
|
|
$ |
49 |
|
|
$ |
103,315 |
|
|
$ |
(26 |
) |
|
$ |
81,956 |
|
|
$ |
(792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserve Quantity (Mcfe)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Reserves |
|
|
1,127,724 |
|
|
|
2,672 |
|
|
|
1,042,403 |
|
|
|
2,385 |
|
|
|
1,002,800 |
|
|
|
1,581 |
|
Revisions |
|
|
109,116 |
|
|
|
(584 |
) |
|
|
57,575 |
|
|
|
521 |
|
|
|
33,539 |
|
|
|
|
|
Extensions and Discoveries |
|
|
82,363 |
|
|
|
337 |
|
|
|
77,917 |
|
|
|
|
|
|
|
53,870 |
|
|
|
1,006 |
|
Production |
|
|
(55,910 |
) |
|
|
(225 |
) |
|
|
(50,171 |
) |
|
|
(234 |
) |
|
|
(49,674 |
) |
|
|
(202 |
) |
Purchases of Reserves In-Place |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,868 |
|
|
|
|
|
Sales of Reserves In-Place |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Reserves |
|
|
1,263,293 |
|
|
|
2,200 |
|
|
|
1,127,724 |
|
|
|
2,672 |
|
|
|
1,042,403 |
|
|
|
2,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of Period |
|
|
549,574 |
|
|
|
2,672 |
|
|
|
395,152 |
|
|
|
2,385 |
|
|
|
352,935 |
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period |
|
|
609,700 |
|
|
|
2,200 |
|
|
|
549,574 |
|
|
|
2,672 |
|
|
|
395,152 |
|
|
|
2,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Proved developed and proved undeveloped gas reserves are defined by the Securities and Exchange Commission Rule 4.10(a) of Regulation S-X. Generally, these reserves would be commercially recovered under current economic conditions, operating methods and government regulations. |
CNX Gas proved gas reserves are located in the states of Virginia (97%), West Virginia (1%)
and Pennsylvania (2%). CNX Gas proportionate interest in equity affiliates proved gas reserves is
located in Tennessee (100%).
85
CNX Gas cautions that there are many inherent uncertainties in estimating proved reserve
quantities, projecting future production rates, and timing of development expenditures.
Accordingly, these estimates are likely to change as future information becomes available. Proved
oil and gas reserves are estimated quantities of natural gas and CBM gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed reserves are those
reserves expected to be recovered through existing wells, with existing equipment and operating
methods.
Standardized Measure of Discounted Future Net Cash Flows:
The following information has been prepared in accordance with the provisions of Statement of
Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities. This
statement requires the standardized measure of discounted future net cash flows to be based on
year-end sales prices, costs and statutory income tax rates and a 10 percent annual discount rate.
Because prices used in the calculation are as of the end of the period, the standardized measure
could vary significantly from year to year based on the market conditions at that specific date.
The projections should not be viewed as realistic estimates of future cash flows, nor should
the standardized measure be interpreted as representing current value to CNX Gas. Material
revisions to estimates of proved reserves may occur in the future; development and production of
the reserves may not occur in the periods assumed; actual prices realized are expected to vary
significantly from those used; and actual costs may vary. CNX Gas investment and operating
decisions are not based on the information presented, but on a wide range of reserve estimates that
include probable as well as proved reserves, and on different price and cost assumptions.
The standardized measure is intended to provide a better means for comparing the value of CNX
Gas proved reserves at a given time with those of other gas producing companies than is provided
by a comparison of raw proved reserve quantities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Future Cash Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
7,105,265 |
|
|
$ |
11,675,551 |
|
|
$ |
6,337,257 |
|
Production costs |
|
|
(2,568,731 |
) |
|
|
(2,852,033 |
) |
|
|
(1,453,364 |
) |
Development costs |
|
|
(552,114 |
) |
|
|
(422,315 |
) |
|
|
(265,540 |
) |
Income tax expense |
|
|
(1,500,533 |
) |
|
|
(3,251,265 |
) |
|
|
(1,745,782 |
) |
|
|
|
|
|
|
|
|
|
|
Future Net Cash Flows |
|
|
2,483,887 |
|
|
|
5,149,938 |
|
|
|
2,872,571 |
|
Discounted to present value at a 10% annual rate |
|
|
(1,548,996 |
) |
|
|
(3,279,144 |
) |
|
|
(1,843,033 |
) |
|
|
|
|
|
|
|
|
|
|
Total standardized measure of discounted net cash flows |
|
$ |
934,891 |
|
|
$ |
1,870,794 |
|
|
$ |
1,029,538 |
|
|
|
|
|
|
|
|
|
|
|
The following are the principal sources of change in the standardized measure of discounted
future net cash flows during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance at Beginning of Period |
|
$ |
1,870,794 |
|
|
$ |
1,029,538 |
|
|
$ |
1,011,186 |
|
Net changes in sales prices and production costs |
|
|
(5,341,525 |
) |
|
|
3,539,448 |
|
|
|
262,723 |
|
Sales net of production costs |
|
|
(438,174 |
) |
|
|
(234,526 |
) |
|
|
(219,937 |
) |
Net change due to revisions in quantity estimates |
|
|
1,492,654 |
|
|
|
632,547 |
|
|
|
364,456 |
|
Development costs incurred, previously estimated |
|
|
169,169 |
|
|
|
110,916 |
|
|
|
87,274 |
|
Changes in estimated future development costs |
|
|
(298,968 |
) |
|
|
(267,691 |
) |
|
|
(45,739 |
) |
Net change in future income taxes |
|
|
1,750,732 |
|
|
|
(1,505,484 |
) |
|
|
(283,997 |
) |
Accretion of discount and other |
|
|
1,730,209 |
|
|
|
(1,433,954 |
) |
|
|
(146,428 |
) |
|
|
|
|
|
|
|
|
|
|
Total Discounted Cash Flow at End of Period |
|
$ |
934,891 |
|
|
$ |
1,870,794 |
|
|
$ |
1,029,538 |
|
|
|
|
|
|
|
|
|
|
|
86
Other Supplemental InformationSelected Quarterly Data (unaudited)($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
Total Revenue and Other Income |
|
$ |
148,223 |
|
|
$ |
122,852 |
|
|
$ |
123,567 |
|
|
$ |
119,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expense |
|
$ |
73,286 |
|
|
$ |
60,532 |
|
|
$ |
61,770 |
|
|
$ |
61,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings Before Income Tax |
|
$ |
74,937 |
|
|
$ |
62,320 |
|
|
$ |
61,797 |
|
|
$ |
57,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
45,876 |
|
|
$ |
38,153 |
|
|
$ |
37,593 |
|
|
$ |
38,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.30 |
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
150,833,334 |
|
|
|
150,833,334 |
|
|
|
150,850,930 |
|
|
|
150,864,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive |
|
|
150,931,545 |
|
|
|
151,060,061 |
|
|
|
151,029,192 |
|
|
|
151,062,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
Total Revenue and Other Income |
|
$ |
106,050 |
|
|
$ |
111,072 |
|
|
$ |
176,312 |
|
|
$ |
220,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expense |
|
$ |
62,919 |
|
|
$ |
83,442 |
|
|
$ |
133,497 |
|
|
$ |
166,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings Before Income Tax |
|
$ |
43,131 |
|
|
$ |
27,630 |
|
|
$ |
42,815 |
|
|
$ |
53,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
26,526 |
|
|
$ |
16,992 |
|
|
$ |
26,070 |
|
|
$ |
32,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
122,896,667 |
|
|
|
122,896,667 |
|
|
|
139,294,276 |
|
|
|
150,833,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive |
|
|
122,988,359 |
|
|
|
122,988,359 |
|
|
|
139,416,414 |
|
|
|
151,003,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Disclosure controls and procedures.
CNX Gas, under the supervision and with the participation of its management, including the
Companys principal executive officer and principal financial officer, evaluated the effectiveness
of its disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the
Securities Act of 1934, as amended (the Exchange Act), as of the end of the period covered by
this annual report on Form 10-K. Based on that evaluation, our principal executive officer and
principal financial officer have concluded that CNX Gas disclosure controls and procedures are
effective to ensure that information required to be disclosed by CNX Gas in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Managements Report on Internal Control Over Financial Reporting.
CNX Gas management is responsible for establishing and maintaining adequate internal control
over financial reporting. CNX Gas internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
87
CNX Gas internal control over financial reporting included policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of assets; (2) provide reasonable assurances that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures are being made only in
accordance with authorizations of management and the directors of CNX Gas; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of CNX Gas assets that could have a material effect on our financial statements.
Because of its inherent limitation, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of CNX Gas internal control over financial reporting as
of December 31, 2006. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on its assessment and those criteria, management has concluded
that CNX Gas maintained effective internal control over financial reporting as of December 31,
2006.
CNX Gas independent registered public accounting firm has audited and issued their report on
managements assessment of CNX Gas internal control over financial reporting, and the report is
set forth in the Report of Independent Registered Public Accounting Firm in Part II, Item 8 of this
Annual Report on Form 10-K.
Changes in Internal Controls Over Financial Reporting.
During the fourth quarter CNX Gas completed implementation of a new information management
software platform. This project has resulted in certain changes to internal controls over financial
reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the information
under the captions Proposal #1Nominations for Election of Directors, General InformationThe
Board of Directors and Its CommitteesThe Board of Directors, General InformationThe Board of
Directors and Its CommitteesMembership and Meetings of the Board of Directors and Its Committees
and Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement for the annual
meeting of shareholders to be held on April 23, 2007 (the Proxy Statement).
Executive Officers of CNX Gas Corporation
The following is a list of CNX Gas executive officers, their ages as of February 15, 2007 and
their positions and offices held with CNX Gas.
|
|
|
|
|
Name |
|
Age |
|
Position |
Nicholas J. DeIuliis |
|
38 |
|
President and Chief Executive Officer and Director |
Ronald E. Smith |
|
58 |
|
Executive Vice President and Chief Operating Officer |
Gary J. Bench |
|
48 |
|
Senior Vice President and Chief Financial Officer |
Stephen W. Johnson |
|
48 |
|
Senior Vice President, Secretary and General Counsel |
Nicholas J. DeIuliis, 38, has been President and Chief Executive Officer and a Director of CNX
Gas since its formation on June 30, 2005. Prior to that, Mr. DeIuliis was Senior Vice
PresidentStrategic Planning of CONSOL Energy from November 1, 2004 until August 8, 2005. Prior to
that time, Mr. DeIuliis served as Vice President Strategic Planning from April 1, 2002 until
November 1, 2004, DirectorCorporate Strategy from October 1, 2001 to April 1, 2002,
ManagerStrategic Planning from January 1, 2001 to October 1, 2001 and SupervisorProcess
Engineering from April 1, 1999 to January 1, 2001, all of which positions he held at CONSOL Energy.
Mr. DeIuliis is also a member of the Board of Directors of the Independent Petroleum Association of
America and the Carnegie Science Center. Mr. DeIuliis is also a registered engineer in the
Commonwealth of Pennsylvania and a member of the Pennsylvania Bar. He received a bachelors degree
in chemical engineering from Pennsylvania State University and a masters of business
administration and juris doctorate from Duquesne University.
88
Ronald E. Smith, 58, has been CNX Gas Chief Operating Officer since June 30, 2005 and an
Executive Vice President since December 5, 2005. Prior to that, Mr. Smith served as Executive Vice
PresidentGas Operations, Land Resources and Engineering Services of CONSOL Energy from April 1,
1992 to August 8, 2005. Mr. Smith joined CONSOL Energy in 1972. Mr. Smith has held numerous
operating and management positions in various coal segments since he joined CONSOL Energy. Mr.
Smith received a bachelors degree in Mining Engineering from Virginia Polytechnical Institute and
State University and received that universitys distinguished alumnus award in 1998.
Gary J. Bench, 48, has been CNX Gas Chief Financial Officer since June 30, 2005 and became a
Senior Vice President on December 5, 2005. Prior to that, Mr. Bench served as Vice PresidentTax of
CONSOL Energy from April 11, 2005 to August 8, 2005. Prior to that time, Mr. Bench was
ControllerTax from June 1, 2002 to April 11, 2005 and General ManagerTax from July 1, 1999 to
June 1, 2002, all of which positions he held at CONSOL Energy. Mr. Bench joined CONSOL Energy in
1985. Mr. Bench is also a member of the American Institute of Certified Public Accountants, the
Pennsylvania Institute of Certified Public Accountants and the Tax Executive Institute. Mr. Bench
received his bachelors degree in accounting from Indiana University of Pennsylvania and a masters
in taxation from Robert Morris University.
Stephen W. Johnson, 48, has been General Counsel of CNX Gas since September 1, 2005. He was
named Senior Vice President as of December 5, 2005. Prior to joining CNX Gas, he was a partner
since 2001 in the Business and Regulatory Group at Reed Smith LLP, an international law firm with
about 1,000 lawyers. From 1984 to 2001, Mr. Johnson was with the law firm of Buchanan Ingersoll
Professional Corporation. Mr. Johnson has served as corporate, securities and mergers and
acquisitions counsel to both public and privately held companies for his entire professional
career. Mr. Johnson is Vice Chairman of NEED, a non-profit organization that provides college
scholarships to minority students, and a director of Concordia Lutheran Ministries, a non-profit
continuing care retirement community serving thousands of elderly persons each year. Mr. Johnson
received a bachelors degree in history from the University of Virginia and a juris doctor degree
from the University of Pittsburgh School of Law.
CNX Gas has adopted a written Code of Employee Business Conduct and Ethics that applies to CNX
Gas Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal
Financial Officer), principal accounting officer or controller and persons performing similar
functions. The Code of Employee Business Conduct and Ethics is publicly available on CNX Gas
website at www.cnxgas.com. If CNX Gas makes any amendments to the code other than technical,
administrative, or other non-substantive amendments, or grants any waivers, including implicit
waivers, from a provision of the code applicable to its principal executive officer, principal
financial officer, principal accounting officer or controller or persons performing similar
functions, CNX Gas will disclose the nature of the amendment or waiver, its effective date and to
whom it applies on its website or in a report on Form 8-K filed with the Securities and Exchange
Commission.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the information under
the captions General InformationCompensation of
Directors, General Information Understanding our
Director Compensation, Executive Compensation and Stock
Option InformationCompensation Discussion and Analysis, Executive Compensation and Stock Option
InformationExecutive Compensation, Executive Compensation and Stock Option
InformationCompensation Committee Report, General
InformationThe Board of Directors and its CommitteesCompensation Committee Interlocks
and Insider Participation, and Potential Payments Upon Termination or Change-In-Control, in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information requested by this Item is incorporated by reference to the information under
the captions Equity Compensation Plan Information, and
General InformationBeneficial Ownership of Securities in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this Item is incorporated by reference to the information under
the captions Certain Relationships and Related Transactions and General
InformationThe Board of Directors and its Committees in the Proxy Statement.
89
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference to the information in the
table found in the section captioned Accountants and Audit Committee and the information under
the caption Accountants and Audit CommitteeAudit Committee Pre-Approval of Audit and Permissible
Non-audit Services in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
|
|
(a)(1)
|
|
Financial Statements: |
|
|
|
|
|
The financial statements included in Part II, Item 8 above are filed as part of this annual report. |
|
|
|
(a)(2)
|
|
Financial Statement Schedules: |
|
|
|
|
|
No schedules are required to be presented by CNX Gas. |
|
|
|
(a)(3) and (b)
|
|
Exhibits: |
|
|
|
|
|
The exhibits listed on the Exhibit Index which follows the Signatures hereto are filed as part of this annual report. |
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, as of the 19th day of February, 2007.
|
|
|
|
|
|
CNX Gas Corporation
|
|
|
By: |
/s/ Nicholas J. DeIuliis
|
|
|
|
Nicholas J. DeIuliis |
|
|
|
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed as of the 19th day of February, 2007, by the following persons on behalf of the Registrant
in the capacities indicated:
|
|
|
|
|
Signature |
|
|
|
Title |
/s/ Philip W. Baxter
Philip W. Baxter
|
|
|
|
Chairman of the Board |
|
|
|
|
|
/s/ Nicholas J. D eIuliis
Nicholas J. DeIuliis
|
|
|
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
|
|
|
|
|
/s/ Gary J. Bench
Gary J. Bench
|
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
|
|
|
|
|
/s/ J. Brett Harvey
J. Brett Harvey
|
|
|
|
Director |
|
|
|
|
|
/s/ James E. Altmeyer, Sr.
James E. Altmeyer, Sr.
|
|
|
|
Director |
|
|
|
|
|
/s/ Raj K. Gupta
Raj K. Gupta
|
|
|
|
Director |
|
|
|
|
|
/s/ John R. Pipski
John R. Pipski
|
|
|
|
Director |
|
|
|
|
|
/s/ William J. Lyons
William J. Lyons
|
|
|
|
Director |
|
|
|
|
|
|
|
|
|
Director |
Joseph T. Williams |
|
|
|
|
91
EXHIBIT INDEX
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of CNX Gas Corporation(1) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of CNX Gas Corporation(1) |
|
|
|
4.1
|
|
Registration Rights Agreement dated August 8, 2005 by and among CNX Gas Corporation, CONSOL Energy Inc. and Friedman, Billings, Ramsey & Co., Inc.(1) |
|
|
|
4.2
|
|
Form of stock certificate(1) |
|
|
|
10.1
|
|
Summary of Employment Terms for Nicholas J. DeIuliis(2)* |
|
|
|
10.2
|
|
Offer letter for Ronald Smith(2)* |
|
|
|
10.3
|
|
Offer letter for Gary J. Bench(1)* |
|
|
|
10.4
|
|
Offer letter for Stephen W. Johnson(1)* |
|
|
|
10.5
|
|
CNX Gas Corporation Equity Incentive Plan and form of award agreements thereunder(1)* |
|
|
|
10.6.1
|
|
Form of Change in Control Agreement for executive officers DeIuliis and Bench(1)* |
|
|
|
10.6.2
|
|
Form of Change in Control Agreement for executive officers Smith and Johnson(1)* |
|
|
|
10.7
|
|
Master Separation Agreement dated as of August 1, 2005 by and among CONSOL Energy Inc. and each of the its subsidiaries (other than CNX Gas Corporation
and its subsidiaries) and CNX Gas Corporation and its subsidiaries(3) |
|
|
|
10.8
|
|
Master Cooperation and Safety Agreement dated as of August 1, 2005 by and among CONSOL Energy Inc. and each CEI Subsidiary (as defined therein) and CNX
Gas Corporation and each CNX Subsidiary (as defined therein)(3) |
|
|
|
10.9
|
|
Tax Sharing Agreement dated August 1, 2005 between CONSOL Energy Inc. and CNX Gas Corporation(3) |
|
|
|
10.10
|
|
Services Agreement dated August 1, 2005 by and among CONSOL Energy Inc., CNX Land Resources Inc. and CNX Gas Corporation and its subsidiaries that become
a party to the agreement(3) |
|
|
|
10.11
|
|
Intercompany Revolving Credit Agreement between CONSOL Energy Inc. and CNX Gas Corporation(3) |
|
|
|
10.12
|
|
Master Lease dated August 1, 2005 by and between CONSOL Energy Inc. and each of its subsidiaries made a party thereto and CNX Gas Company, LLC(3) |
|
|
|
10.13
|
|
Summary sheet regarding director compensation(1) |
|
|
|
10.14
|
|
Purchase/Placement Agreement dated August 1, 2005 by and between CNX Gas Corporation, CONSOL Energy Inc. and Friedman, Billings, Ramsey & Co., Inc.(1) |
|
|
|
10.15
|
|
Credit Agreement dated October 7, 2005 between CNX Gas Corporation, certain of its subsidiaries, and the Lender parties thereto.(4) |
|
|
|
10.16
|
|
Indenture, dated March 7, 2002, among CONSOL Energy Inc., certain subsidiaries of CONSOL Energy Inc. and The Bank of Nova Scotia Trust Company of New
York, as trustee(5) |
|
|
|
10.17
|
|
Supplemental Indenture No. 1, dated March 7, 2002, among CONSOL Energy Inc., certain subsidiaries of CONSOL Energy Inc. and The Bank of Nova Scotia Trust
Company of New York, as trustee(6) |
|
|
|
10.18
|
|
Supplemental Indenture No. 2, dated as of September 30, 2003, among CONSOL Energy Inc., certain subsidiaries of CONSOL Energy Inc. and The Bank of Nova
Scotia Trust Company of New York, as trustee(7) |
|
|
|
10.19
|
|
Supplemental Indenture No. 3, dated as of April 15, 2005, among CONSOL Energy Inc., certain subsidiaries of CONSOL Energy Inc. and The Bank of Nova Scotia
Trust Company of New York, as trustee(8) |
|
|
|
10.20
|
|
Supplemental Indenture No. 4, dated as of August 8, 2005, among CONSOL Energy Inc., certain
subsidiaries of CONSOL Energy Inc. and The Bank of Nova Scotia Trust Company of New York, as
trustee(3) |
|
|
|
10.21
|
|
Supplemental Indenture No. 5, dated as of October 21, 2005, among CONSOL Energy Inc., certain
subsidiaries of CONSOL Energy Inc. and The Bank of Nova Scotia Trust Company of New York, as
trustee(9) |
92
|
|
|
10.22
|
|
Precedent Agreement dated July 29, 2005 by and between East Tennessee Natural Gas, LLC and CNX
Gas Company, LLC.(10) |
|
|
|
10.23
|
|
Description of the CNX Gas Corporation 2006 Short-Term Incentive Compensation Program(11)* |
|
|
|
10.24
|
|
Firm Transportation Agreement, dated as of April 27th , 2006, between CNX Gas
Company, LLC, a wholly-owned subsidiary of CNX Gas, and East Tennessee Natural Gas, LLC. (12) |
|
|
|
10.25
|
|
Firm Lateral Transportation Agreement, dated as of April 27th , 2006, between CNX
Gas Company, LLC, a wholly-owned subsidiary of CNX Gas, and East Tennessee Natural Gas, LLC. (13) |
|
|
|
10.26
|
|
The summary description of the base compensation and short-term incentive opportunities for the
executive officers of CNX Gas Corporation for 2006.* (14) |
|
|
|
10.27
|
|
The initial election grant of options to purchase common stock of CNX Gas Corporation to Joseph T.
Williams, upon his election to the Board of Directors on July 10, 2006.* (15) |
|
|
|
10.28
|
|
CNX Gas Corporation Long-Term Incentive Program for the performance period from October 11, 2006 to
December 31, 2009 and form of award agreement thereunder.* (16) |
|
|
|
10.29
|
|
First Amendment to the CNX Gas Corporation Equity Incentive Plan, as amended.* (16) |
|
|
|
10.30
|
|
Summary of Non-Employee Director Compensation effective as of November 1, 2006.* (16) |
|
|
|
10.31
|
|
Summary of the awards to CNX Gas Corporations executive officers under the CNX Gas Corporation
Long-Term Incentive Program for the performance period from October 11, 2006 to December 31, 2009.*
(16) |
|
|
|
21
|
|
Subsidiaries of CNX Gas Corporation(1) |
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP |
|
|
|
23.2
|
|
Consent of Ralph E. Davis Associates, Inc. |
|
|
|
23.3
|
|
Consent of Schlumberger Data and Consulting Services |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(1) |
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Incorporated by reference from the Amendment No. 1 to the Registration Statement on Form S-1 (file no.
333-127483) filed on September 29, 2005 |
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(2) |
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Incorporated by reference from the Current Report on Form 8-K filed by CONSOL Energy Inc. on August 19, 2005
(SEC File No. 001-14901) |
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(3) |
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Incorporated by reference from the Current Report on Form 8-K filed by CONSOL Energy Inc. on August 12, 2005
(SEC File No. 001-14901) |
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(4) |
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Incorporated by reference from the Current Report on Form 8-K filed by CONSOL Energy Inc. on October 13, 2005 |
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(5) |
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Incorporated by reference from Exhibit 4.1 to Form 10-K filed by CONSOL Energy Inc. on March 29, 2002 |
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(6) |
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Incorporated by reference from Exhibit 4.2 to Form 10-K filed by CONSOL Energy Inc. on March 29, 2002 |
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(7) |
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Incorporated by reference from Exhibit 4.2 to Form 10-Q filed by CONSOL Energy Inc. on November 19, 2003 |
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(8) |
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Incorporated by reference from Exhibit 4.2 to Form 10-Q filed by CONSOL Energy Inc. on August 3, 2005 |
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(9) |
|
Incorporated by reference from the Amendment No. 2 to the Registration Statement on Form S-1 (file no.
333-127483) filed on October 27, 2005 |
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(10) |
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Incorporated by reference from the Amendment No. 4 to the Registration Statement on Form S-1 (file no.
333-127483) filed on December 17, 2005 |
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(11) |
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Incorporated by reference from the second paragraph of Item 1.01 of the Current Report on Form 8-K filed by
CNX Gas |
93
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Corporation on February 10, 2006 |
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(12) |
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Incorporated by reference from Exhibit 10.1 to Form 10-Q filed by CNX Gas Corporation on August 2, 2006 |
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(13) |
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Incorporated by reference from Exhibit 10.2 to Form 10-Q filed by CNX Gas Corporation on August 2, 2006 |
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(14) |
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Incorporated by reference from Item 1.01 of the Current Report on Form 8-K filed by the CNX Gas Corporation
on May 1, 2006 (SEC File No. 001-32723) |
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(15) |
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Incorporated by reference from Item 1.01 of the Current Report on Form 8-K filed by CNX Gas Corporation on
July 11, 2006 (SEC File No. 001-32723) |
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(16) |
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Incorporated by reference from the Current Report on Form 8-K filed by CNX Gas Corporation on October 17,
2006 (SEC File No. 001-32723) |
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In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and
not filed. |
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* |
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Management compensatory contract or arrangement. |
94