UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2007

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

For the transition period from ______

Commission file number: 001-32723

CNX GAS CORPORATION

Delaware		20-3170639
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5 Penn Center West, Suite 401
Pittsburgh, PA 15276
(412) 200-6700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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

Large accelerated filer 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 number of shares of the registrant’s common stock outstanding as of March 31, 2007 is 150,867,825 shares.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION			3
Item 1. Condensed Financial Statements (unaudited)			3
Consolidated Statements of Income for the three months ended March 31, 2007 and 2006			3
Consolidated Balance Sheets at March 31, 2007 and December 31, 2006			4
Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2007			5
Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
Item 4. Controls and Procedures			21
PART II — OTHER INFORMATION			22
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3. Defaults Upon Senior Securities			22
Item 4. Submission of Matters to a Vote of Security Holders			22
Item 5. Other Information			22
Item 6. Exhibits			22
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I
FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

		For the Three Months Ended
		March 31,
		2007				2006
Revenue and Other Income:
Outside Sales		$	98,070			$	101,793
Related Party Sales			2,191				1,630
Royalty Interest Gas Sales			12,182				15,807
Purchased Gas Sales			1,159				22,352
Other Income			1,530				6,641
Total Revenue and Other Income			115,132				148,223
Costs and Expenses:
Lifting Costs			8,266				8,575
Gathering and Compression Costs			14,468				12,550
Royalty Interest Gas Costs			10,665				13,416
Purchased Gas Costs			1,019				22,765
Other			438				(236	)
General and Administrative			13,721				7,305
Depreciation, Depletion and Amortization			12,098				8,904
Interest Expense			1,219				7
Total Costs and Expenses			61,894				73,286
Earnings Before Income Taxes			53,238				74,937
Income Taxes			20,242				29,061
Net Income		$	32,996			$	45,876
Earnings Per Share:
Basic		$	0.22			$	0.30
Diluted		$	0.22			$	0.30
Weighted Average Number of Common Shares Outstanding:
Basic			150,864,825				150,833,334
Dilutive			151,068,089				150,931,545

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

CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		March 31,				December 31,
		2007				2006
ASSETS
Current Assets:
Cash and Cash Equivalents		$	121,327			$	107,173
Accounts Receivable:
Trade			44,953				46,062
Net Related Party			—				2,745
Other			2,400				2,291
Derivatives			—				10,548
Deferred Taxes			4,147				—
Other Current Assets			3,731				3,917
Total Current Assets			176,558				172,736
Property, Plant and Equipment, Net			961,959				918,162
Other Assets			10,290				11,820
Investments in Equity Affiliates			53,312				52,283
TOTAL ASSETS		$	1,202,119			$	1,155,001
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
Trade		$	27,358			$	27,872
Related Parties			162				—
Accrued Royalties Payable			11,911				11,960
Accrued Severance Taxes			2,791				2,576
Accrued Income Taxes			9,626				2,191
Derivatives			8,037				—
Deferred Taxes			—				3,091
Other Current Liabilities			7,436				9,222
Total Current Liabilities			67,321				56,912
Deferred Taxes			128,573				120,008
Capital Lease Obligation			63,222				63,897
Other Liabilities			20,282				15,977
Well Plugging Liabilities			9,604				9,214
Derivatives			8,479				6,465
Postretirement Benefits Other Than Pension			2,355				2,313
Total Liabilities			299,836				274,786
Stockholders’ Equity
Common Stock, $.01 par value; 200,000,000 Shares Authorized, 150,867,825 Issued and Outstanding at March 31, 2007 and 150,864,075 Issued and Outstanding at December 31, 2006			1,508				1,508
Capital in Excess of Par Value			782,796				781,960
Retained Earnings			127,280				94,337
Accumulated Other Comprehensive (Loss) Income			(9,301	)			2,410
Total Stockholders’ Equity			902,283				880,215
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,202,119			$	1,155,001

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

CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

														Accumulated
						Capital in								Other				Total
		Common				Excess of				Retained				Comprehensive				Stockholders’
		Stock				Par Value				Earnings				Income (Loss)				Equity
Balance at December 31, 2006		$	1,508			$	781,960			$	94,337			$	2,410			$	880,215
Net Income			—				—				32,996				—				32,996
Gas Cash Flow Hedge (Net of $8,027 tax)			—				—				—				(11,683	)			(11,683	)
Comprehensive Income (Loss) (a)			—				—				32,996				(11,683	)			21,313
FASB Interpretation No. 48 Adoption			—				—				(53	)			—				(53	)
Stock Options Exercised			—				67				—				—				67
Tax Benefit from Stock Based Compensation			—				5				—				—				5
Amortization of Restricted Stock Unit Grants			—				139				—				—				139
Amortization of Stock Based Compensation Awards			—				625				—				—				625
Actuarial Salary OPEB revaluation (net of $14 tax)			—				—				—				(24	)			(24	)
Actuarial Pension revaluation (net of $2 tax)			—				—				—				(4	)			(4	)
Balance at March 31, 2007		$	1,508			$	782,796			$	127,280			$	(9,301	)		$	902,283

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

CNX GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

		For the Three Months Ended
		March 31,
		2007				2006
Operating Activities:
Net Income		$	32,996			$	45,876
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization			12,098				8,904
Compensation from Restricted Stock Unit Grants			139				—
Compensation from Stock Option Grants			625				471
Deferred Income Taxes			12,527				13,856
Equity in (Earnings) of Affiliates			(207	)			(147	)
Changes in Operating Assets:
Accounts Receivable			1,000				5,266
Related Party Receivable			2,745				(1,598	)
Other Current Assets			186				(53	)
Changes in Other Assets			1,530				161
Changes in Operating Liabilities:
Accounts Payable			1,233				(688	)
Related Party Liability			162				—
Income Taxes			7,441				11,909
Other Current Liabilities			(1,601	)			89
Changes in Other Liabilities			2,026				1,046
Other			219				223
Net Cash Provided by Operating Activities			73,119				85,315
Investing Activities:
Capital Expenditures			(57,535	)			(40,177	)
Investment in Equity Affiliates			(822	)			225
Net Cash Used in Investing Activities			(58,357	)			(39,952	)
Financing Activities:
Capital Lease Payments			(675	)			—
Exercise of Stock Options			67				—
Net Cash Used in Financing Activities			(608	)			—
Net Increase in Cash and Cash Equivalents			14,154				45,363
Cash and Cash Equivalents at Beginning of Period			107,173				20,073
Cash and Cash Equivalents at End of Period		$	121,327			$	65,436

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

CNX GAS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Basis of Presentation:

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for future periods.

     Certain reclassifications of previously reported data have been made to conform to the three months ended March 31, 2007 classifications. With the exception of earnings per share data, we discuss dollars in thousands throughout this Form 10-Q. Unless otherwise noted, we discuss production, per unit revenue, and per unit costs net of any royalty owners’ interest. Unless noted otherwise, production figures are exclusive of production attributable to equity affiliates.

     Effective January 1, 2006, CNX Gas adopted Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” (EITF 04-13). EITF 04-13 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 Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions”. 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. In accordance with EITF 04-13, CNX Gas has applied this accounting to new or modified agreements after January 1, 2006. Previously, these transactions were recorded on a gross basis. The adoption of EITF 04-13 did not have an impact on net income or cash flows.

     Basic earnings per share are computed by dividing net income by the weighted average shares outstanding during the reporting period. 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 effect of dilutive potential common shares outstanding during the period as calculated in accordance with SFAS 123R. The number of additional shares is calculated by assuming that restricted stock units were converted and outstanding stock options were exercised and that the proceeds from such activity were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 479,065 and 12,100 shares of common stock were outstanding for the three month period ending March 31, 2007 and 2006, respectively, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.

     The computations for basic and diluted earnings per share are as follows:

		For the Three Months Ended
		March 31,
		2007				2006
Net Income		$	32,996			$	45,876
Weighted Average Number of Common Shares Outstanding:
Basic			150,864,825				150,833,334
Effect of stock based compensation			203,264				98,211
Dilutive			151,068,089				150,931,545
Earnings per share:
Basic		$	0.22			$	0.30
Diluted		$	0.22			$	0.30

Note 2—Pension and Other Postretirement Benefits:

     The components of net periodic benefit costs are as follows:

		For the Three Months Ended March 31,
		Pension								Other Benefits
		2007				2006				2007				2006
Components of Net Periodic Benefit Costs:
Service costs		$	65			$	70			$	31			$	23
Interest costs			3				1				35				25
Expected Return on Assets			—				(2	)			—				—
Amortization of prior service costs credit			—				—				(43	)			(43	)
Amortization of (gain) loss			(6	)			(3	)			5				—
Benefit costs		$	62			$	66			$	28			$	5

     As previously disclosed in the notes to its audited consolidated financial statements for the year ended December 31, 2006, CNX Gas does not expect to contribute to the other postretirement benefit plan in 2007. We intend to pay benefit claims as they become due. For the period ended March 31, 2007, there were $24 in payments made pursuant to the other postretirement benefit plan.

Note 3—Income Taxes:

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

		For the Three Months Ended March 31,
		2007								2006
		Dollars				Rate				Dollars				Rate
Statutory U.S. Federal Income Tax Rate		$	18,633				35.0	%		$	26,228				35.0	%
Net Effect of State Income Tax			2,097				3.9	%			3,320				4.4	%
Other			(488	)			(0.9	)%			(487	)			(0.6	)%
Income Tax Expense/Effective Rate		$	20,242				38.0	%		$	29,061				38.8	%

     CNX Gas adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of the implementation of FIN No. 48, CNX Gas recognized approximately a $53 net increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

     Included in the balance at March 31, 2007 are $3,116 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The effective tax rate for the three months ended March 31, 2007 and 2006 was calculated using the annual effective rate projection on recurring earnings.

     CNX Gas is included in the consolidated federal tax return of CONSOL Energy Inc. Income taxes are calculated as if CNX Gas files a tax return on a separate company basis. With few exceptions, CNX Gas is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (IRS) commenced an examination of CONSOL Energy’s U.S. income tax returns for 2004 and 2005 in 2006 that is anticipated to be completed by the end of 2008. As of March 31, 2007, the IRS has not proposed any significant adjustments relating to any tax position taken by CNX Gas as part of CONSOL Energy’s consolidated return.

     CNX Gas recognizes interest accrued related to unrecognized tax benefits in its interest expense. During the quarter ended March 31, 2007, CNX Gas recognized interest expense of approximately $19. Total FIN No. 48 accrued interest was $112 as of March 31, 2007.

     CNX Gas recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. No penalties have been accrued during the quarter ended March 31, 2007. CNX Gas has historically not paid penalties relating to unrecognized tax benefits.

Note 4—Property, Plant and Equipment:

		March 31,				December 31,
		2007				2006
Surface Lands		$	48,601			$	37,055
Mineral Interests			55,628				55,623
Wells and Related Equipment			127,424				112,009
Intangible Drilling			406,666				383,605
Gathering Assets			526,344				520,906
Gas Well Plugging			5,979				5,652
Capitalized Internal Software			6,536				6,433
Total Property, Plant and Equipment			1,177,178				1,121,283
Accumulated Depreciation, Depletion and Amortization			(215,219	)			(203,121	)
Property, Plant and Equipment, Net		$	961,959			$	918,162

Note 5—Commitments and Contingent Liabilities:

     CNX Gas Company LLC is a party to a case captioned Geomet Operating Company, Inc. and Pocahontas Mining Limited Liability Company v. CNX Gas Company LLC in the Circuit Court for Buchanan County, Virginia (Case No. 337-06). CNX Gas has a coalbed methane gas lease with Pocahontas Mining in southwest Virginia. With the agreement of Pocahontas Mining, GeoMet constructed a pipeline on the property. CNX Gas sought a judicial determination that under the terms of the lease, CNX Gas has the exclusive right to construct and operate pipelines on the property. On April 11, 2007, the Circuit Court granted CNX Gas’ motion for summary judgment against GeoMet, holding from the bench that CNX Gas has exclusive rights to construct and operate pipelines on the property and prohibiting GeoMet from owning, operating, or maintaining its pipeline on the property. The court granted a stay of its order, pending GeoMet’s appeal of the decision to the Virginia Supreme Court. The Circuit Court has not yet entered its formal order on the summary judgment motion. Pocahontas Mining recently amended its complaint to seek rescission or reformation of the lease. The ultimate outcome of this litigation cannot be predicted.

     On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against CNX Gas Company LLC and Island Creek Coal Company, a subsidiary of CONSOL Energy, in the Circuit Court for the County of Tazewell, Virginia. The lawsuit alleges that CNX Gas conspired with Island Creek and has violated the Virginia Antitrust Act and has tortiously interfered with GeoMet’s contractual relations, prospective contracts and business expectancies. GeoMet seeks injunctive relief, actual damages of $561,000, treble damages and punitive damages in the amount of $350. CNX Gas and Island Creek have filed motions to dismiss all counts. 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 a review of the 1998 through 2001 period. As of March 31, 2007, 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 March 31, 2007. 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 County has since filed and served two substantially similar cases for years 2003 and 2004. 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 County’s calculation. We believe that we have calculated the tax correctly and in accordance with the applicable rules and regulations of Buchanan County and intend to vigorously defend our position. CNX Gas management believes that the final resolution of this matter will not have a material effect on our financial position or results of operations.

     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 35 of our producing wells to date could be covered by their claim. We deny all of these allegations and we are vigorously contesting them. On November 14, 2005, we filed a complaint for declaratory judgment in the U.S. District Court for the Western District of Pennsylvania (C.A. No. 05-1574), seeking a judicial determination that we do not infringe any claim of any valid and enforceable CDX patent. CDX filed an answer and counterclaim denying our allegations of invalidity and alleging that we infringe certain claims of their patents. A hearing was held before a Court-appointed Special Master with regard to the scope of the asserted CDX patents and the Special Master’s report and recommendations was adopted by order of the Court on October 13, 2006. As a result of that order and subject to appellate review, certain of our wells may be found to infringe certain of the CDX claims of the patents in suit, if those patents are ultimately determined to be valid and enforceable. The report of CDX’s damages expert suggests that CDX will seek (i) reasonable royalty damages on production from allegedly infringing wells at a royalty rate of 10%, or approximately $1,900 based on projected production through June 2007, and (ii) “lost profits” damages of approximately $23,600 for allegedly infringing wells drilled 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 valid basis in the law as applied to the facts of this case for this “lost profits” theory. Further, if infringement were to be found of a valid, enforceable claim of a CDX patent, the report of CNX Gas’ damages expert indicates that any potential damages award would be

based on a royalty of 5%, or approximately $400. We continue to believe that we do not infringe any properly construed claim of any valid, enforceable patent. 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 CCC’s Buchanan Mine into nearby void spaces in the mine of one of CONSOL Energy’s 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 of CNX Gas.

     At March 31, 2007, 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.

		Total
		Amounts				Less Than												Beyond
		Committed				1 Year				1-3 Years				3-5 Years				5 years
Letters of Credit:
Gas		$	16,867			$	16,695			$	172			$	—			$	—
Total Letters of Credit		$	16,867			$	16,695			$	172			$	—			$	—
Surety Bonds:
Environmental		$	344			$	344			$	—			$	—			$	—
Other			20,876				20,876				—				—				—
Total Surety Bonds		$	21,220			$	21,220			$	—			$	—			$	—
Other:
Firm Transportation		$	54,066			$	7,387			$	14,585			$	11,767			$	20,327
Guarantees		$	20,600			$	20,600			$	—			$	—			$	—
Total Guarantees		$	74,666			$	27,987			$	14,585			$	11,767			$	20,327
Total Commitments		$	112,753			$	65,902			$	14,757			$	11,767			$	20,327

     As previously disclosed in the notes to our audited consolidated financial statements for the year ended December 31, 2006, 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 financial condition.

     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 lateral, which had an in-service date of October 2006. The amount of the letter of credit at March 31, 2007 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 $21,220. CNX Gas guarantees the performance of these obligations.

     Other Guarantees

     CNX Gas is the guarantor of the obligations of a CNX Gas contractor under a loan agreement with Huntington National Bank for $10,000 dated November 27, 2006, 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.

Note 6—Segment 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 2006, 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 three months ended March 31, 2007 are:

		Central				Northern				Total								Adjustments &
		Appalachia				Appalachia				Gas				Corporate				Eliminations				Consolidated
Sales—outside		$	91,836			$	6,234			$	98,070			$	—			$	—			$	98,070
Sales—related parties			2,178				13				2,191				—				—				2,191
Sales—royalty interest gas			12,148				34				12,182				—				—				12,182
Sales—purchased gas			1,159				—				1,159				—				—				1,159
Other revenue			94				—				94				1,436				—				1,530
Intersegment revenues			19,479				742				20,221				—				(20,221	)			—
Total Revenue and Other Income		$	126,894			$	7,023			$	133,917			$	1,436			$	(20,221	)		$	115,132
Earnings Before Income Taxes (A)		$	52,992			$	(853	)		$	52,139			$	1,099			$	—			$	53,238
Segment assets (B) (C)		$	956,931			$	99,197			$	1,056,128			$	145,991			$	—			$	1,202,119
Depreciation, depletion and amortization		$	10,637			$	1,461			$	12,098			$	—			$	—			$	12,098
Capital expenditures		$	38,295			$	19,240			$	57,535			$	—			$	—			$	57,535

     Reportable segment results for the three months ended March 31, 2006 are:

		Central				Northern				Total								Adjustments &
		Appalachia				Appalachia				Gas				Corporate				Eliminations				Consolidated
Sales—outside		$	95,220			$	6,573			$	101,793			$	—			$	—			$	101,793
Sales—related parties			1,594				36				1,630				—				—				1,630
Sales—royalty interest gas			15,744				63				15,807				—				—				15,807
Sales—purchased gas			22,352				—				22,352				—				—				22,352
Other revenue			6,260				11				6,271				370				—				6,641
Intersegment revenues			12,818				190				13,008				—				(13,008	)			—
Total Revenue and Other Income		$	153,988			$	6,873			$	160,861			$	370			$	(13,008	)		$	148,223
Earnings Before Income Taxes (D)		$	72,429			$	2,603			$	75,032			$	(95	)		$	—			$	74,937
Segment assets (E) (F)		$	788,402			$	47,227			$	835,629			$	90,402			$	—			$	926,031
Depreciation, depletion and amortization		$	8,331			$	573			$	8,904			$	—			$	—			$	8,904
Capital expenditures		$	33,061			$	7,116			$	40,177			$	—			$	—			$	40,177

Note 7—Recent Accounting Pronouncements:

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

     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. This Statement was adopted by CNX Gas on 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.

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

     The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This Current Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward Looking Statements.”

     Unless the context otherwise requires, “we,” “us,” “our,” “the company” and “CNX Gas” mean CNX Gas Corporation and its consolidated subsidiaries.

Overview

     We are a natural gas exploration, development, production and gathering company with operations in several states in the Appalachian Basin. We primarily are a coalbed methane (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 Inc. (CONSOL Energy). 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 us various subsidiaries and joint venture interests as well as all of CONSOL Energy’s 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.

     CONSOL Energy continues to beneficially own approximately 81.5% of our outstanding common stock, as such CNX Gas’ financial statements are consolidated into CONSOL Energy’s financial statements.

Operations & Outlook

     Relative to expectations, quarterly financial results were adversely affected by two items: production and administrative costs. Company production for the quarter, though setting another average daily record, was 0.6 Bcf below our expectations. The administrative costs were related to legal fees and the company’s ongoing software platform implementation.

     Mountaineer volumes were approximately 0.5 Bcf below expectations due to longer than expected de-watering times at new wells and extended outages at a portion of its Pine Bank processing plant. Pine Bank is currently being upgraded to more efficiently process additional volumes.

     Volumes at Virginia Operations were about 0.1 Bcf below expectations. Production from other areas was higher than expected, but more than offset by the temporary loss of 2 MMcf per day of gas from certain sealed mine areas. CONSOL Energy, in order to improve mine safety, is strengthening the seals at its Buchanan Mine. Construction is estimated to be completed around December 1, at which time CNX Gas will be able to resume production of this shut-in gas.

     During the first quarter, CNX Gas employees worked another quarter without incurring a lost time accident.

     Also during the quarter, CNX Gas drilled 58 wells in its Virginia Operations in Central Appalachia and 10 wells in its Mountaineer play in Northern Appalachia. These figures are exclusive of gob wells.

     In Nittany, CNX Gas’ exploratory coalbed methane play in central Pennsylvania, two vertical test wells have been drilled. The lower two zones in both wells has been fraced. The gas has been tested and found to be of pipeline quality, with a Btu content slightly in excess of 1,000 per cubic foot and a CO₂ content of less than 1.2%. Flow rates are confirming our expectations and drilling costs have been lower than we projected. Forty-two drill sites at Nittany have been acquired.

     CNX Gas has begun implementing the infrastructure construction plans for Nittany. CNX Gas will also be filing for the drilling permits for the remaining eight wells in our original 2007 program.

     In Cardinal, CNX Gas’ New Albany shale play in western Kentucky, three vertical wells are drilled to total depth of approximately 4,000 feet and fraced. CNX Gas has been taking sidewall core samples into the shale formation within the expected 300-foot pay zone. These samples are now being analyzed. CNX Gas expects to announce preliminary results from Cardinal at the end of the third quarter.

     CNX Gas is maintaining its 2007 production guidance at 64 Bcf, despite the company being 0.6 Bcf short of the first quarter internal production estimate. If existing conditions continue, total 2007 production could be as much as 2.5 Bcf below the current guidance. Recently, CNX Gas has seen improvement at its Pine Bank processing plant in Mountaineer, and with a scheduled upgrade in May, CNX Gas may see a further increase in availability. The company also believes that follow-on wells in these new areas of Mountaineer may not require abnormal de-watering times. There could also be other opportunities to make up any shortfall, including some possible production from Nittany.

     Production in 2008 could be positively impacted by the extended de-watering of wells in Mountaineer. Wells decline the longer they produce, therefore delayed wells will not be as far down their decline curves in 2008 as originally thought.

     In 2007, CNX Gas continues to expect to drill 278 wells in its Virginia Operations, 57 in Mountaineer, eight in Nittany, and three in Cardinal, for a total of 346 in its four major active areas. Another 55 wells are expected to be drilled in other areas, for an expected company total of 401.

     A portion of our gas production is associated with coal mining activities at CONSOL Energy’s 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 Energy’s Buchanan Mine are adversely affected as a result of these legal proceedings, our gas production relating to mining activities would be adversely affected.

Results of Operations

Three Months Ended March 31, 2007 compared with Three Months Ended March 31, 2006
(Amounts reported in thousands)

Net Income

     Net income changed primarily due to the following items:

										Dollar				Percentage
		2007				2006				Variance				Change
Revenue and Other Income:
Outside Sales		$	98,070			$	101,793			$	(3,723	)			(3.7	)%
Related Party Sales			2,191				1,630				561				34.4	%
Royalty Interest Gas Sales			12,182				15,807				(3,625	)			(22.9	)%
Purchased Gas Sales			1,159				22,352				(21,193	)			(94.8	)%
Other Income			1,530				6,641				(5,111	)			(77.0	)%
Total Revenue and Other Income			115,132				148,223				(33,091	)			(22.3	)%
Costs and Expenses:
Lifting Costs			8,266				8,575				(309	)			(3.6	)%
Gathering and Compression Costs			14,468				12,550				1,918				15.3	%
Royalty Interest Gas Costs			10,665				13,416				(2,751	)			(20.5	)%
Purchased Gas Costs			1,019				22,765				(21,746	)			(95.5	)%
Other			438				(236	)			674				285.6	%
General and Administrative			13,721				7,305				6,416				87.8	%
Depreciation, Depletion and Amortization			12,098				8,904				3,194				35.9	%
Interest Expense			1,219				7				1,212				17,314.3	%
Total Costs and Expenses			61,894				73,286				(11,392	)			(15.5	)%
Earnings Before Income Taxes			53,238				74,937				(21,699	)			(29.0	)%
Income Taxes			20,242				29,061				(8,819	)			(30.3	)%
Net Income		$	32,996			$	45,876			$	(12,880	)			(28.1	)%

     Net income for 2007 was lower primarily due to lower average sales prices and higher costs, despite higher production in the quarter.

Revenue and Other Income

     Revenue and other income decreased due to the following items:

										Dollar				Percentage
		2007				2006				Variance				Change
Revenue and Other Income:
Outside Sales		$	98,070			$	101,793			$	(3,723	)			(3.7	)%
Related Party Sales			2,191				1,630				561				34.4	%
Royalty Interest Gas Sales			12,182				15,807				(3,625	)			(22.9	)%
Purchased Gas Sales			1,159				22,352				(21,193	)			(94.8	)%
Other Income			1,530				6,641				(5,111	)			(77.0	)%
Total Revenue and Other Income		$	115,132			$	148,223			$	(33,091	)			(22.3	)%

     The decrease in total revenue and other income was primarily due to the accounting change related to purchased gas sales. Outside, related party, and royalty interest gas sales as a whole have decreased due to lower average sales price per thousand cubic feet in 2007 compared to 2006.

														Percentage
		2007				2006				Variance				Change
Sales Volumes (Bcf)			14.2				13.6				0.6				4.4	%
Average Sales Price (per Mcf)		$	7.04			$	7.62			$	(0.58	)			(7.6	)%

     The decrease in average sales price is the result of the majority of CNX Gas sales being exposed to market prices, which were lower in the current period as compared to the prior period. However, CNX Gas periodically enters into various gas swap transactions that qualify as financial cash flow hedges for terms varying in length. These gas swap transactions exist parallel to the underlying physical transactions. For the three months ended March 31, 2007, these financial hedges represented approximately 3.2 Bcf of gas sales volumes at an average price of $7.77 per Mcf, compared to approximately 3.7 Bcf at an average price of $6.88 per Mcf for the three months ended March 31, 2006. Sales volumes increased as a result of additional wells coming online from our on-going drilling program.

														Percentage
		2007				2006				Variance				Change
Royalty Interest Sales Volumes (Bcf)			1.8				1.8				0.0				0.0	%
Average Sales Price (per Mcf)		$	6.62			$	8.61			$	(1.99	)			(23.1	)%

     Included in royalty interest gas sales are the revenues related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The average sales price variance is a result of the majority of CNX Gas sales being exposed to market prices, which were lower in the current period as compared to the prior period.

														Percentage
		2007				2006				Variance				Change
Purchased Gas Sales Volumes (Bcf)			0.2				2.5				(2.3	)			(92.0	)%
Average Sales Price (per Mcf)		$	7.14			$	8.99			$	(1.85	)			(20.6	)%

     Purchase gas sales volumes in the current period represent volumes of gas we sell at market prices that were purchased from third party producers, less our gathering and marketing fees. In the 2006 period, purchased gas sales and volumes represented volumes of gas we simultaneously purchased from and sold to the same counterparties under contracts that were committed prior to January 1, 2006. Accordingly, Emerging Issues Task Force Issue No. 04-13 (EITF 04-13), which we adopted on January 1, 2006, did not apply to these transactions. As these contracts began to expire throughout 2006 they were reflected in transportation expense.

     Other income consists of the following items:

										Dollar				Percentage
		2007				2006				Variance				Change
Insurance Settlements		$	—			$	3,007			$	(3,007	)			(100.0	)%
Royalty Income			—				2,885				(2,885	)			(100.0	)%
Interest Income			1,436				370				1,066				288.1	%
Third Party Gathering Revenue			36				323				(287	)			(88.9	)%
Other Miscellaneous			58				56				2				3.6	%
Total Other Income		$	1,530			$	6,641			$	(5,111	)			(77.0	)%

     In the prior year, the insurance settlements component of other income consisted of business interruption insurance proceeds related to a CONSOL Energy mine incident in 2005 which negatively impacted our gas production in that year.

     Royalty income received from third parties, which is calculated as a percentage of the third parties’ sales price, is now classified in outside sales. In the prior period the volumes were not available nor were they considered in the prior period reserve report. In the current period these volumes are included in both sales production and reserves.

     Interest income increased in 2007, as a result of a $55,891 increase to the cash balance from the prior period.

Costs and Expenses

     Overall, costs and expenses decreased in 2007 primarily due to the accounting change related to purchased gas costs and are made up of the following components:

										Dollar				Percentage
		2007				2006				Variance				Change
Costs and Expenses:
Lifting Costs		$	8,266			$	8,575			$	(309	)			(3.6	)%
Gathering and Compression Costs			14,468				12,550				1,918				15.3	%
Royalty Interest Gas Costs			10,665				13,416				(2,751	)			(20.5	)%
Purchased Gas Costs			1,019				22,765				(21,746	)			(95.5	)%
Other			438				(236	)			674				285.6	%
General and Administrative			13,721				7,305				6,416				87.8	%
Depreciation, Depletion and Amortization			12,098				8,904				3,194				35.9	%
Interest Expense			1,219				7				1,212				17,314.3	%
Total Costs and Expenses		$	61,894			$	73,286			$	(11,392	)			(15.5	)%

														Percentage
		2007				2006				Variance				Change
Sales Volumes (Bcf)			14.2				13.6				0.6				4.4	%
Average Lifting Costs (per Mcf)		$	0.58			$	0.63			$	(0.05	)			(7.9	)%

     Lifting costs per unit sold decreased primarily due to reduced severance taxes as a result of lower market prices in the period to period comparison.

														Percentage
		2007				2006				Variance				Change
Sales Volumes (Bcf)			14.2				13.6				0.6				4.4	%
Average Gathering and Compression Costs (per Mcf)		$	1.02			$	0.92			$	0.10				10.9	%

     The increase in gathering and compression costs was attributable to additional maintenance and compressor costs, pipeline freeze up prevention costs, and additional power expenses related to increased megawatt hour rates charged by the power company. These increases were offset by lower firm transportation costs due to the in-service of the Jewell Ridge lateral in October 2006.

														Percentage
		2007				2006				Variance				Change
Royalty Interest Sales Volumes (Bcf)			1.8				1.8				0.0				0.0	%
Average Cost (per Mcf)		$	5.79			$	7.31			$	(1.52	)			(20.8	)%

     Included in royalty interest gas costs are the expenses related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The average sales price variance is a result of the majority of CNX Gas sales being exposed to market prices, which were lower in the current period as compared to the prior period.

														Percentage
		2007				2006				Variance				Change
Purchased Gas Sales Volumes (Bcf)			0.2				2.5				(2.3	)			(92.0	)%
Average Purchased Gas Costs (per Mcf)		$	6.28			$	9.16			$	(2.88	)			(31.4	)%

     Purchase gas sales volumes in the current period represent volumes of gas we sell at market prices that were purchased from third party producers, less our gathering and marketing fees. In the 2006 period, purchased gas sales and volumes represented volumes of gas we simultaneously purchased from and sold to the same counterparties under contracts that were committed prior to January 1, 2006. Accordingly, Emerging Issues Task Force Issue No. 04-13 (EITF 04-13), which we adopted on January 1, 2006, did not apply to these transactions. As these contracts began to expire throughout 2006 they were reflected in transportation expense.

     Other costs and expenses increased due to the following items:

										Dollar				Percentage
		2007				2006				Variance				Change
Exploration		$	462			$	332			$	130				39.2	%
Imbalance			183				(421	)			604				143.5	%
Equity in (Earnings) of Affiliates			(207	)			(147	)			(60	)			(40.8	)%
Total Other Costs and Expenses		$	438			$	(236	)		$	674				285.6	%

     Higher delay rentals have increased exploration costs period over period. However, other costs have increased primarily as a result of the shift in the value of the gas imbalance. The imbalance has shifted from an over-delivered position in 2006 to an under-delivered position in 2007, and therefore resulted in expense for 2007 compared to income in 2006. Because contracted quantities of gas delivered to the pipeline rarely equal physical deliveries to customers, CNX Gas is responsible for monitoring this imbalance and adjusting contracted volumes as circumstances warrant. This increase in imbalance cost was offset by a corresponding increase in gas sales revenue. Additionally, equity in (earnings) of affiliates improved by $60 in 2007 compared to 2006, primarily due to additional service revenue from our Knox Energy joint venture and a lower loss in the Buchanan Generation joint venture.

     General and administrative costs increased to $13,721 in 2007 from $7,305 in 2006 primarily due to additional litigation costs, consulting costs associated with our new integrated software implementation, and the continued increase in staffing 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
		2007				2006				Variance				Change
Production		$	7,568			$	5,812			$	1,756				30.2	%
Gathering			4,530				3,092				1,438				46.5	%
Total Depreciation, Depletion and Amortization		$	12,098			$	8,904			$	3,194				35.9	%

     The increase in production-related depreciation, depletion and amortization was primarily due to the increase in units of production rates period to period. These rates, which are recalculated annually, increased due to the higher proportion of capital assets placed in service versus the proportion of proved developed reserve additions. These rates are generally calculated using the net book value of assets at the end of the previous year divided by either proved or proved developed reserves. Gathering depreciation, depletion and amortization is recorded on the straight-line method and increased primarily as a result of the capital lease treatment of the Jewell Ridge lateral, which went into service in October of 2006.

Income Taxes

														Percentage
		2007				2006				Variance				Change
Earnings Before Income Taxes		$	53,238			$	74,937			$	(21,699	)			(29.0	)%
Tax Expense		$	20,242			$	29,061			$	(8,819	)			(30.3	)%
Effective Income Tax Rate			38.0	%			38.8	%			(0.8	)%

     CNX Gas’ effective tax rate decreased in 2007 primarily due to a slight decrease in the net effect of state income taxes and the impact of the manufacturer’s deduction.

Liquidity and Capital Resources

     We intend to satisfy our future working capital requirements and fund our capital expenditures with cash from operations and if necessary, our $200,000 credit facility. The 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. No borrowings are outstanding under our credit facility at March 31, 2007.

     CNX Gas and our subsidiaries guarantee CONSOL Energy’s 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 Energy’s 8.25% medium term notes due June 1, 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.

     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 for the foreseeable future. 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 liability of $16,516 at March 31, 2007. The ineffective portion of the changes in the fair value of these contracts was insignificant to earnings in the three months ended March 31, 2007.

Cash Flows

		Year to Date				Year to Date
		2007				2006				Change
Cash provided by operating activities		$	73,119			$	85,315			$	(12,196	)
Cash used in investing activities		$	(58,357	)		$	(39,952	)		$	(18,405	)
Cash used in financing activities		$	(608	)		$	—			$	(608	)

	•		Cash provided by operating activities decreased primarily as a result of lower average sales prices impacting net income as previously discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	•		Cash used in investing activities increased primarily due to our expanded capital program.
	•		Cash used in financing activities increased due to the Jewell Ridge capital lease payments.

Contractual Commitments

     The following is a summary of our significant contractual obligations at March 31, 2007. We estimate payments, net of any applicable reimbursements, related to these items at March 31, 2007 to be as follows:

						Within				1-3				3-5				More than
		Total				1 Year				Years				Years				5 Years
Long Term Debt Obligations		$	—			$	—			$	—			$	—			$	—
Capital (Finance) Lease Obligations (a)			65,844				2,622				5,857				6,783				50,582
Operating Lease Obligations			6,438				1,256				2,202				1,810				1,170
Other Long-Term Liabilities:
Gas Firm Transportation Obligation			54,066				7,387				14,585				11,767				20,327
Other Liabilities (b)			14,358				—				—				—				14,358
Well Plugging Liabilities			9,604				401				801				801				7,601
Pension			257				3				13				23				218
Postretirement Benefits Other than Pension			2,366				11				68				154				2,133
Total Contractual Obligations (c)		$	152,933			$	11,680			$	23,526			$	21,338			$	96,389

     Off-Balance Sheet Transactions

     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.

FORWARD-LOOKING STATEMENTS

     We are including the following cautionary statement in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q; 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:

	•		our business strategy;
	•		our financial position, cash flow, and liquidity;
	•		declines in the prices we receive for our gas affecting our operating results and cash flow;
	•		uncertainties in estimating our gas reserves and replacing our gas reserves;
	•		uncertainties in exploring for and producing gas;
	•		our inability to obtain additional financing necessary in order to fund our operations, capital expenditures and to meet our other obligations;
	•		disruptions to capacity constraints in or other limitations on the pipeline systems which deliver our gas;
	•		competition in the gas industry;
	•		the availability of personnel and equipment, including our inability to retain and attract key personnel;
	•		increased costs;
	•		the effects of government regulation and permitting and other legal requirements;
	•		legal uncertainties relating to the ownership of the coalbed methane state, and costs associated with perfecting title for gas rights in some of our properties;
	•		litigation concerning real property rights, intellectual property rights, and royalty calculations;
	•		our relationships and arrangements with CONSOL Energy; and
	•		other factors discussed under “Risk Factors” in the 10-K for the year ended December 31, 2006.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, does 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 our Annual Report on Form 10-K for the year ended December 31, 2006.

     Sensitivity analyses of the incremental effects on future pre-tax income of a hypothetical 10% and 25% increase in natural gas prices for open derivative instruments as of March 31, 2007 are provided in the following table:

		Incremental decrease in pre-tax income assuming a
		Hypothetical price increase of:
		10%				25%
		(In millions)
Natural Gas (1)		$	17.4			$	41.0

Hedging Volumes

     As of April 20, 2007, 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			3,247,423				4,690,722				4,742,268				4,742,268				17,422,681
Weighted Average Hedge Price/Mcf		$	7.77			$	8.00			$	8.00			$	8.00			$	7.96
2008 Fixed Price Volumes
Hedged Mcf			4,690,722				4,690,722				4,742,268				4,742,268				18,865,980
Weighted Average Hedge Price/Mcf		$	8.19			$	8.00			$	8.07			$	8.07			$	8.08
2009 Fixed Price Volumes
Hedged Mcf			2,783,505				—				—				—				2,783,505
Weighted Average Hedge Price/Mcf		$	8.72			$	—			$	—			$	—			$	8.72