Certain portions of CONSOL Energy Inc.'s 2008 Form 10-K

EX-99.1 4 dex991.htm CERTAIN PORTIONS OF CONSOL ENERGY INC.'S 2008 FORM 10-K Certain portions of CONSOL Energy Inc.'s 2008 Form 10-K

Exhibit 99.1

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 years ended December 31, 2008, 2007, 2006, 2005 and 2004 are derived from our audited consolidated financial statements. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included in this report.

STATEMENT OF INCOME DATA

(In thousands except per share data)


	Year Ended December 31,
	2008			2007			2006			2005			2004
Revenue and Other Income:
Sales—Outside and Related Party	$	4,181,569		$	3,324,346		$	3,286,522		$	2,935,682		$	2,425,206
Sales—Purchased Gas		8,464			7,628			43,973			275,148			112,005
Sales—Gas Royalty Interests		79,302			46,586			51,054			45,351			41,858
Freight—Outside and Related Party(A)		216,968			186,909			162,761			119,811			110,175
Other Income		166,142			196,728			170,861			107,131			87,505
Gain on Sale of 18.5% interest in CNX Gas		—			—			—			327,326			—

Total Revenue and Other Income		4,652,445			3,762,197			3,715,171			3,810,449			2,776,749
Costs:
Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)		2,843,203			2,352,000			2,249,776			2,122,259			1,855,033
Purchased Gas Costs		8,175			7,162			44,843			278,720			113,063
Gas Royalty Interests Costs		73,962			39,921			41,879			36,501			32,914
Freight Expense		216,968			186,909			162,761			119,811			110,175
Selling, General and Administrative Expense		124,543			108,664			91,150			80,700			72,870
Depreciation, Depletion and Amortization		389,621			324,715			296,237			261,851			280,397
Interest Expense		36,183			30,851			25,066			27,317			31,429
Taxes Other Than Income		289,990			258,926			252,539			228,606			198,305
Black Lung Excise Tax Refunds		(55,795	)		24,092			—			—			—

Total Costs		3,926,850			3,333,240			3,164,251			3,155,765			2,694,186

Earnings Before Income Taxes, Noncontrolling Interest, Cumulative Effect of Change in Accounting Principle		725,595			428,957			550,920			654,684			82,563
Income Taxes (Benefits)		239,934			136,137			112,430			64,339			(32,646	)

Net Income		485,661			292,820			438,490			590,345			115,209
Less: Net Income Attributable to Noncontrolling Interest		(43,191	)		(25,038	)		(29,608	)		(9,484	)		—
Cumulative Effect of Change in Accounting for Workers’ Compensation Liability, Net of Income Taxes of $53,080		—			—			—			—			83,373

Net Income Attributable to CONSOL Energy Inc. Shareholders	$	442,470		$	267,782		$	408,882		$	580,861		$	198,582

Earnings Per Share Attributable to CONSOL Energy Inc. Shareholders before Cumulative Effect of Change in Accounting:
Basic	$	2.43		$	1.47		$	2.23		$	3.17		$	0.64

Dilutive	$	2.40		$	1.45		$	2.20		$	3.13		$	0.63

Earnings Per Share From Net Income Attributable to CONSOL Energy Inc. Shareholders:
Basic(B)	$	2.43		$	1.47		$	2.23		$	3.17		$	1.10

Dilutive(B)	$	2.40		$	1.45		$	2.20		$	3.13		$	1.09

Weighted Average Number of Common Shares Outstanding:
Basic(C)		182,386,011			182,050,627			183,354,732			183,489,908			180,461,386

Dilutive(C)		184,679,592			184,149,751			185,638,106			185,534,980			182,399,890

Dividend Per Share	$	0.40		$	0.31		$	0.28		$	0.28		$	0.28

BALANCE SHEET DATA

(In thousands)


	Year Ended December 31,
	2008			2007			2006		2005		2004
Working (deficiency) capital	$	(527,926	)	$	(333,242	)	$	174,372	$	194,578	$	(243,275	)
Total assets		7,370,458			6,208,090			5,663,332		5,071,963		4,195,611
Short-term debt		557,700			247,500			—		—		5,060
Long-term debt (including current portion)		490,752			507,208			552,263		442,996		429,645
Total deferred credits and other liabilities		3,716,021			3,325,231			3,228,653		2,726,563		2,582,318
Total CONSOL Energy Inc. Shareholders’ Equity		1,462,187			1,214,419			1,066,151		1,025,356		469,021

OTHER OPERATING DATA

(Unaudited)


	Year Ended December 31,
	2008		2007		2006		2005		2004
Coal:
Tons sold (in thousands)(D)(E)		66,236		65,462		68,920		70,401		69,537
Tons produced (in thousands)(E)		65,077		64,617		67,432		69,126		67,745
Productivity (tons per manday)(E)		36.80		41.29		38.41		37.95		40.51
Average production cost ($ per ton produced)(E)	$	41.08	$	33.68	$	32.53	$	30.06	$	27.54
Average sales price of tons produced ($ per ton produced)(E)	$	48.77	$	40.60	$	38.99	$	35.61	$	30.06
Recoverable coal reserves (tons in millions)(E)(F)		4,543		4,526		4,272		4,546		4,509
Number of active mining complexes (at period end)		17		15		14		17		16
Gas:
Net sales volume produced (in billion cubic feet)(E)		76.56		58.25		56.14		48.39		48.56
Average sale price ($ per mcf)(E)(G)	$	8.99	$	7.20	$	7.04	$	5.90	$	4.90
Average cost ($ per mcf)(E)	$	3.67	$	3.33	$	2.88	$	2.69	$	2.45
Proved reserves (in billion cubic feet)(E)(H)		1,422		1,343		1,265		1,130		1,045

CASH FLOW STATEMENT DATA

(In thousands)


	Year Ended December 31,
	2008			2007			2006			2005			2004
Net cash provided by operating activities	$	1,029,464		$	684,033		$	664,547		$	409,086		$	358,091
Net cash used in investing activities		(1,098,856	)		(972,104	)		(661,546	)		(74,413	)		(400,542	)
Net cash provided by (used in) financing activities		166,253			105,839			(119,758	)		(455	)		42,360

OTHER FINANCIAL DATA (Unaudited) (In thousands)

Capital expenditures	$	1,061,669		$	1,039,838		$	690,546		$	532,796		$	420,965
EBIT(I)		685,574			421,978			531,009			664,451			108,616
EBITDA(I)		1,075,195			746,693			827,246			926,302			389,013
Ratio of earnings to fixed charges(J)		10.67			7.48			11.36			15.95			2.76

(A)	See Note 26 of Notes to the Audited Consolidated Financial Statements for sales and freight by operating segment.

(B)

Basic earnings per share are computed using weighted average shares outstanding. Differences in the weighted average number of shares outstanding for purposes of computing dilutive earnings per share are due to the inclusion of the weighted average dilutive effect of employee and non-employee director stock options granted, totaling 2,293,581 shares, 2,099,124 shares, 2,283,374 shares, 2,045,072 shares and 1,938,504 shares for the year ended December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

(C)

On May 4, 2006, CONSOL Energy’s Board of Directors declared a two-for-one stock split of the common stock. The stock split resulted in the issuance of approximately 92.5 million additional shares of common stock. Shares and earnings per share for all periods presented are reflected on a post-split basis.

(D)

Includes sales of coal produced by CONSOL Energy and purchased from third parties. Of the tons sold, CONSOL Energy purchased the following amount from third parties: 1.7 million tons in the year ended December 31, 2008, 0.5 million tons in the year ended December 31, 2007, 1.3 million tons in the year ended December 31, 2006, 1.5 million tons in year ended December 31, 2005 and 2.1 million tons in the year ended December 31, 2004. Also, includes 1.2 million, 0.8 million and 1.1 million sales tons for the year ended December 31, 2008, 2007 and 2006, respectively, which is 100% of tons sold by our fully consolidated, 49% owned variable interest entity. The remaining 51% interest, which CONSOL Energy did not previously own, was purchased on December 3, 2008. Sales of coal produced by equity affiliates were 0.2 million tons in the year ended December 31, 2008, 0.1 million ton in the year ended December 31, 2007, no tons in the year ended December 31, 2006, insignificant in the year ended December 31, 2005 and 0.1 million tons in the year ended December 31, 2004.

(E)

Amounts include intersegment transactions. For entities that are not wholly owned but in which CONSOL Energy owns at least 50% equity interest, includes a percentage of their net production, sales or reserves equal to CONSOL Energy’s percentage equity ownership. For coal, amounts include 100% of our fully consolidated, 49% owned variable interest entity. The remaining 51% interest, which CONSOL Energy did not previously own, was purchased on December 3, 2008. Also for coal, Glennies Creek Mine is reported as an equity affiliate through February 2004. For gas, amounts include 100% of CNX Gas’ basis; they exclude the minority interest reduction. Also for gas, Knox Energy makes up the equity earnings data in 2007, 2006, 2005, and 2004. The remaining interest in Knox that CNX Gas did not previously own was purchased on June 18, 2008. Our proportionate share of proved reserves for gas equity affiliates is 3.6 bcf, 2.2 bcf, 2.7 bcf, and 2.4 bcf at December 31, 2007, 2006, 2005 and 2004, respectively. Sales of gas produced by equity affiliates were 0.32 bcf in the year ended December 31, 2007; 0.22 bcf in the year ended December 31, 2006; 0.23 bcf in the year ended December 31, 2005; and 0.20 bcf in the year ended December 31, 2004.

(F)	Represents proven and probable coal reserves at period end.

(G)	Represents average net sales price before the effect of derivative transactions.

(H)	Represents proved developed and undeveloped gas reserves at period end.

(I)

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. For 2004 we have excluded the impacts of cumulative effects of accounting changes in the computation of EBIT and EBITDA. Although EBIT and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles, management believes that they are useful to an investor in evaluating CONSOL Energy because they are widely used in the coal industry as measures to evaluate a company’s operating performance before debt expense and cash flow. Financial covenants in our credit facility include ratios based on EBITDA. EBIT and EBITDA do not purport to represent cash generated by operating activities and should not be considered in isolation or as a substitute for measures of performance in accordance with generally accepted accounting principles. 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. Management’s 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 reconcilement of EBIT and EBITDA to financial net income is as follows:

(Unaudited))

(In thousands)


	Year Ended December 31,
	2008			2007			2006			2005			2004
Net Income Attributable to CONSOL Energy Shareholders	$	442,470		$	267,782		$	408,882		$	580,861		$	198,582
Add: Interest expense		36,183			30,851			25,066			27,317			31,429
Less: Interest income		(2,363	)		(12,792	)		(15,369	)		(8,066	)		(5,376	)
Less: Interest income included in black lung excise tax refund		(30,650	)		—			—			—			—
Less: Cumulative Effect of Changes in Accounting for Workers’ Compensation Liability, net of Income Taxes of $53,080		—			—			—			—			(83,373	)
Add: Income Tax Expense (Benefit)		239,934			136,137			112,430			64,339			(32,646	)

Earnings before interest and taxes (EBIT)		685,574			421,978			531,009			664,451			108,616
Add: Depreciation, depletion and amortization		389,621			324,715			296,237			261,851			280,397

Earnings before interest, taxes and depreciation, depletion and amortization (EBITDA)	$	1,075,195		$	746,693		$	827,246		$	926,302		$	389,013

(J)

For purposes of computing the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges include (a) interest on indebtedness (whether expensed or capitalized), (b) amortization of debt discounts and premiums and capitalized expenses related to indebtedness and (c) the portion of rent expense we believe to be representative of interest.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Although current forecasts regarding world wide demand for coal and natural gas are less robust than estimates a year ago because of the high degree of uncertainty regarding global economic growth, the company believes that the long-term fundamentals of population growth, a desire for improved living standards, and the need to build or repair critical infrastructure in many countries will be the primary drivers for energy over the next several decades. In the short term, economic stimulus spending by the United States and other countries should result in improvements in demand for coal and gas as infrastructure projects are initiated and economic activity increases.

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

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

•

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

•

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

•

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

•

The company’s relatively low debt and strong liquidity position allows the company to maintain its reputation as a disciplined producer and to make adjustments to production should market conditions require it, in addition the company has no principal debt payments due in 2009 and the company’s revolving line of credit is in place through 2012; and

•

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

During the second and third quarters of 2008, a number of factors impacted coal production, but no single factor dominated. Factors included: events such as roof falls on main line belt haulage; regulatory issues, particularly related to safety that impacted productivity and costs; technological issues, particularly the challenge of completing development of new longwall coal panels as rapidly as required; and geologic issues such as roof conditions and intrusion of rock into coal seams. We have made a number of important changes that positively impacted productivity and production in the fourth quarter, resulting in a reduction in costs.

We have taken various steps with respect to the development issue because it is key to maximizing efficiency from our longwall equipped mines. The company has added crews and changed work schedules to increase longwall panel development; has worked with equipment manufacturers to develop better haulage systems for continuous mining machines to increase rates of advance in development sections of the mine; and is modifying mine plans in a number of longwall-equipped mines to increase the ratio of coal produced by the longwall equipment compared to that produced by the continuous miners.

Some of the changes we have made, such as adding additional crews, have given us immediate benefits. Other activities, such as mine plan modifications, may take several quarters to fully execute. However, over the next year, we expect the aggregate result of these actions will positively impact productivity.

Regulatory impacts on production are more difficult to manage. Most producers in the eastern U.S. are being impacted by government regulations and enforcement to a much greater extent than a few years ago. The

pace with which government issues permits needed for on-going operations to continue mining has negatively impacted expected production, especially in Central Appalachia. Environmental groups in Southern West Virginia and Kentucky have challenged state and U.S. Army Corps of Engineers permits for mountaintop mining on various grounds. The most recent challenges have focused on the adequacy of the Corps of Engineers analysis of impacts to streams and the adequacy of mitigation plans to compensate for stream impacts. In 2007, the U.S. District Court of the Southern District of West Virginia found other operators’ permits for mining in these areas to be deficient. The ruling is currently in appeals. The legal issues around these previously issued permits have delayed or prevented the issuance of new permits by the Corps of Engineers. Currently, CONSOL Energy’s surface operations in these areas have been impacted to a limited extent, but the delay or denial of additional permits could impact some or all of the surface operations within the next twelve to twenty-four months.

In addition, over the past few years, the length of time needed to bring a new mine into production has increased by several years because of the increased time required to obtain necessary permits. New safety laws and regulations have impacted productivity at underground mines, although the company has not yet been able to ascertain the exact amount of the impact.

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

CONSOL Energy filed timely claims for refunds under the EESA Act of the BLET with the Internal Revenue Service in the amount of approximately $27 million. In addition, the estimated interest related to the BLET refunds expected to be received is approximately $32 million. In relation to this receivable, CONSOL Energy also recognized approximately $3 million of expense that will be owed to third parties upon collection of the refunds. CONSOL Energy believes that it will receive refunds of BLET erroneously paid on export sales in the amounts requested in its filing with the Internal Revenue Service plus interest as required by the Act prior to December 31, 2009.

Our 83.3% subsidiary, CNX Gas completed the independent verification process for several Chicago Climate Exchange (CCX) approved projects relating to the capture of coalbed methane. Approximately 8.4 million metric tons of emissions offsets were verified and registered on the CCX in the year ended December 31, 2008. CCX is a rules-based Greenhouse Gas (GhG) allowance trading system. CCX emitting members make a voluntary but legally binding commitment to meet annual GhG emission reduction targets. Those emitting members who exceed their targets have surplus allowances to sell or bank; those who fall short of their targets comply by purchasing offset which are called CCX Carbon Financial Instruments (CFI) contracts. As a CCX offset provider, CNX Gas is not bound to any emission reduction targets. An offset provider is an owner of an offset project that registers and sells offsets on its own behalf. Sales of these emission offsets will be reflected in income as they occur.

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

Results of Operations

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Net Income Attributable to CONSOL Energy Shareholders

Net income attributable to CONSOL Energy Shareholders changed primarily due to the following items (table in millions):


	2008 Period			2007 Period		Dollar Variance			Percentage Change
Sales Outside	$	4,182		$	3,324	$	858		25.8	%
Sales Purchased Gas		8			8		—		—
Sales Gas Royalty Interest		79			47		32		68.1	%
Freight—Outside		217			187		30		16.0	%
Other Income		166			196		(30	)	(15.3	)%

Total Revenue and Other Income		4,652			3,762		890		23.7	%
Coal Cost of Goods Sold and Other and Purchased Charges		2,843			2,351		492		20.9	%
Purchased Gas Costs		8			7		1		14.3	%
Gas Royalty Interest Costs		74			40		34		85.0	%

Total Cost of Goods Sold		2,925			2,398		527		22.0	%
Freight Expense		217			187		30		16.0	%
Selling, General and Administrative Expense		125			109		16		14.7	%
Depreciation, Depletion and Amortizaton		390			325		65		20.0	%
Interest Expense		36			31		5		16.1	%
Black Lung Excise Tax Refund		(56	)		24		(80	)	(333.3	)%
Taxes Other Than Income		290			259		31		12.0	%

Total Costs		3,927			3,333		594		17.8	%

Earnings Before Income Taxes and Noncontrolling Interest		725			429		296		69.0	%
Income Tax Expense		240			136		104		76.5	%

Net Income		485			293		192		65.5	%
Noncontrolling Interest		43			25		18		72.0	%

Net Income Attributable to CONSOL Energy Shareholders	$	442		$	268	$	174		64.9	%

CONSOL Energy had net income attributable to CONSOL Energy Shareholders of $442 million for the year ended December 31, 2008 compared to $268 million in the year ended December 31, 2007. Net income attributable to CONSOL Energy Shareholders for 2008 increased in comparison to 2007 due to:

•

higher average prices received for both coal and gas;

•

higher volumes of gas sold;

•

2007 included a total of approximately $94 million of pre-tax expenses, net of insurance recoveries, related to the Buchanan Mine incident that occurred in July 2007 which idled the mine through March 2008; the 2008 period includes approximately $28.6 million of pre-tax income related to this incident;

•

Black Lung excise tax refund receivable recognized for taxes paid in 1991-1993 due to legislation passed in October 2008; and

•

Receivable write off of $24 million in 2007 related to the Supreme Court decision which rendered the Black Lung Excise Tax receivable for 1991-1993 uncollectible.

These increases in net income attributable to CONSOL Energy Shareholders were offset, in part, by:

•

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

•

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

See below for a more detailed description of variances noted. The cost per unit below is not necessarily indicative of unit costs in the future.

Revenue

Revenue and other income increased due to the following items:


	2008		2007		Dollar Variance			Percentage Change
Sales:
Produced Coal	$	3,067	$	2,640	$	427		16.2	%
Purchased Coal		118		38		80		210.5	%
Produced Gas		681		410		271		66.1	%
Industrial Supplies		196		147		49		33.3	%
Other		120		89		31		34.8	%

Total Sales—Outside		4,182		3,324		858		25.8	%
Gas Royalty Interest		79		47		32		68.1	%
Purchased Gas		8		8		—		—
Freight Revenue		217		187		30		16.0	%
Other Income		166		196		(30	)	(15.3	)%

Total Revenue and Other Income	$	4,652	$	3,762	$	890		23.7	%

The increase in company produced coal sales revenue during 2008 was due to higher average prices, offset, in part, by slightly lower volumes of produced coal sold.


	2008		2007		Variance			Percentage Change
Produced Tons Sold (in millions)		64.3		64.8		(0.5	)	(0.8	)%
Average Sales Price Per Ton	$	47.66	$	40.74	$	6.92		17.0	%

The increase year-to-year in the average sales prices of coal was the result of global coal fundamentals being more favorable in the current year. Concerns regarding the adequacy of global supplies of coal have strengthened both the international and domestic coal prices and have increased the opportunity for U.S. producers to increase exports of coal. Sales tons were slightly lower in the year-to-year comparison.

Purchased coal sales consist of revenues from processing third-party coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased from third-parties and sold directly to our customers and revenues from processing third-party coal in our preparation plants. The increase of $80 million in company-purchased coal sales revenue was primarily due to an increase in volumes of purchased coal sold in the year-to-year comparison.

The increase in produced gas sales revenue in 2008 compared to 2007 was primarily due to higher average sales prices and higher volumes of gas sold.


	2008		2007		Variance		Percentage Change
Produced Gas Sales Volumes (in billion cubic feet)		75.7		57.1		18.6	32.6	%
Average Sales Price Per thousand cubic feet	$	9.00	$	7.18	$	1.82	25.3	%

The increase in average sales price is the result of CNX Gas, an 83.3% subsidiary at December 31, 2008, realizing general market price increases in the year-to-year comparison. CNX Gas periodically enters 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 hedges represented approximately 43.4 Bcf of our produced gas sales volumes for the year ended December 31, 2008 at an average price of $9.25 per Mcf. In the prior year, these financial hedges represented approximately 18.4 Bcf at an average price of $8.01 per Mcf. Sales volumes increased as a result of additional wells coming online from our on-going drilling program. Also, prior year sales volumes were impacted by the deferral of production at the Buchanan Mine.

The $49 million increase in revenues from the sale of industrial supplies was primarily due to the July 2007 acquisition of Piping & Equipment, Inc. in addition to an overall increase in sales volumes and higher sales prices.

The $30 million increase in other sales was attributable to increased revenues from barge towing and terminal services. The increase was primarily related to revenue generated from the barge towing operations having higher average rates for services rendered compared to the prior year. The barge towing operations have also increased thru-put tons and delivered tons in 2008. Increases in other sales revenues were also attributable to higher terminal services as a result of additional thru-put tons in 2008. The higher terminal revenues were offset, in part, due to services being suspended for approximately one month due to maintenance needed on a pier in Baltimore.


	2008		2007		Variance		Percentage Change
Gas Royalty Interest Sales Volumes (in billion cubic feet)		8.5		7.2		1.3	18.1	%
Average Sales Price Per thousand cubic feet	$	9.32	$	6.44	$	2.88	44.7	%

Included in gas royalty interest sales volumes are the revenues related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The increase in market prices, contractual differences among leases and the mix of average and index prices used in calculating royalties contributed to the year-to-year change.


	2008		2007		Variance			Percentage Change
Purchased Sales Volumes (in billion cubic feet)		1.0		1.1		(0.1	)	(9.1	)%
Average Sales Price Per thousand cubic feet	$	8.76	$	7.19	$	1.57		21.8	%

Purchased gas sales volumes represent volumes of gas that were sold at market prices that were purchased from third-party producers, less gathering fees.

Freight revenue is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to which CONSOL Energy contractually provides transportation services. Freight revenue is the amount billed to customers for transportation costs incurred. Freight revenue has increased $30 million in 2008 due primarily to freight associated with AMVEST, which was acquired on July 31, 2007. Freight revenue has also increased due to higher freight rates being charged for exported tons. These increases in freight revenue were offset, in part, by lower export tons shipped in 2008 compared to 2007. There were 7.0 million tons and 7.6 million tons of coal exported by CONSOL Energy in 2008 and 2007, respectively.

Other income consists of interest income, gain or loss on the disposition of assets, equity in earnings of affiliates, service income, royalty income, derivative gains and losses, rental income and miscellaneous income.


	2008		2007		Dollar Variance			Percentage Change
Gain on sale of assets	$	23	$	112	$	(89	)	(79.5	)%
Interest income		2		13		(11	)	(84.6	)%
Litigation settlement		1		5		(4	)	(80.0	)%
Equity in earnings of affiliates		11		7		4		57.1	%
Railroad spur income		4		1		3		300.0	%
Proceeds from relinquishment of mining rights		6		—		6		100.0	%
Royalty income		21		14		7		50.0	%
Contract towing		11		3		8		266.7	%
Business interruption proceeds		50		10		40		400.0	%
Other miscellaneous		37		31		6		19.4	%

Total other income	$	166	$	196	$	(30	)	(15.3	)%

Gain on sale of assets decreased $89 million in the year-to-year comparison primarily due to two transactions that occurred in 2007. In June 2007, CONSOL Energy, through our 83.3% owned subsidiary, CNX Gas, exchanged certain coal assets in Northern Appalachia to Peabody Energy for coalbed methane and gas rights, which resulted in a pretax gain of $50 million. Also, in June 2007, CONSOL Energy, through a subsidiary, sold the rights to certain western Kentucky coal in the Illinois Basin to Alliance Resource Partners, L.P. for $53 million. This transaction also resulted in a pretax gain of approximately $50 million. The 2008 period reflects a sale of an idled facility which included the transfer of the mine closing liabilities to the buyer. This transaction resulted in a pretax gain of approximately $8 million. There was also a $3 million increase in the year-to-year comparison due to various transactions that occurred throughout both periods, none of which were individually material.

Interest income decreased $11 million in the year-to-year comparison due to lower cash balances throughout 2008 compared to 2007. Lower cash balances were primarily the result of the purchase price paid for the June 2008 acquisition of the remaining interest in Knox Energy, LLC, the July acquisition of several leases and gas wells from KIS Oil & Gas, Inc., the July 31, 2007 acquisition of AMVEST, the June 2007 purchase of certain coalbed methane and gas rights from Peabody Energy and the July 2007 Buchanan Mine incident.

A litigation settlement with a coal customer in 2007 resulted in $5 million of income. A litigation settlement with a royalty holder resulted in $1 million of income in 2008.

Equity in earnings of affiliates increased $4 million related to our interest in a specialty contracting company, our interest in a real estate development company and our interest in a coal mining company. These increases were offset, in part, by the June 2008 acquisition of our remaining interest in Knox Energy, LLC.

Income related to a railroad spur acquired with the July 2007 acquisition of AMVEST increased $3 million. This income was due to reimbursements from the rail carrier for maintenance completed on the spur during the year. The income is offset in its entirety with the related expenses reflected in cost of goods sold and other charges.

In 2008, approximately $6 million was received from a third party in order for CONSOL Energy to relinquish the mining of certain in-place coal reserves.

Royalty income increased $7 million in the year-to-year comparison due to production of CONSOL Energy coal by a third-party commencing in August 2007. Royalties have also increased due to the higher sales price of coal sold throughout 2008 compared to 2007.

The $8 million increase in contract towing services represents river towing services for third-parties which CONSOL Energy now provides. These services were minimal in 2007.

In 2008, CONSOL Energy received $50 million as final settlement of the insurance claim related to the July 2007 Buchanan Mine incident, which idled the mine from July 2007 to mid-March 2008. The $50 million represents business interruption coverage which was recognized in other income; the coal segment recognized $42 million and the gas segment recognized $8 million. CONSOL Energy had received $10 million of business interruption proceeds related to this incident in 2007; the coal segment recognized $8 million and the gas segment recognized $2 million. In 2007, $15 million was also received from the insurance carrier for reimbursement of fire brigade costs. This was recognized as a reduction of cost of goods sold and other charges as discussed below. The final settlement brought the total amount recovered from insurance carriers to $75 million, the maximum allowed per covered event. No additional amounts related to the Buchanan roof caving event will be recovered. All proceeds from this insurance claim have been received.

Other miscellaneous income increased $6 million in the year-to-year comparison due to various miscellaneous transactions that occurred throughout both years, none of which were individually material.

Costs

Cost of goods sold and other charges increased due to the following:


	2008		2007		Dollar Variance			Percentage Change
Cost of Goods Sold and Other Charges
Produced Coal	$	2,031	$	1,685	$	346		20.5	%
Purchased Coal		124		52		72		138.5	%
Produced Gas		189		129		60		46.5	%
Industrial Supplies		186		141		45		31.9	%
Closed and Idle Mines		78		105		(27	)	(25.7	)%
Other		235		239		(4	)	(1.7	)%

Total Sales—Outside		2,843		2,351		492		20.9	%
Gas Royalty Interest		74		40		34		85.0	%
Purchased Gas		8		7		1		14.3	%

Total Cost of Goods Sold	$	2,925	$	2,398	$	527		22.0	%

Increased cost of goods sold and other charges for company-produced coal was due mainly to a higher average unit cost per ton sold, offset slightly by lower sales volumes.


	2008		2007		Variance		Percentage Change
Produced Tons Sold (in millions)		64.3		64.8	(0.5	)	(0.8	)%
Average Cost of Goods Sold and Other Charges Per Ton	$	31.57	$	25.99	5.58		21.5	%

Average cost of goods sold and other charges increased in the year-to-year comparison primarily due to an increase in average unit costs related to the following items.

•

Supply and maintenance costs have increased $2.77 per ton sold due to the following items:

•

The increase in supply and maintenance costs reflects the change in the mix of sales tons in 2008 compared to 2007. Production tons from the Northern Appalachian underground mines decreased, while production from the Central Appalachian mines increased. This was primarily due to the July 31, 2007 acquisition of AMVEST and to the Buchanan Mine being idled for half of 2007.

•

The installation of higher grade seals and a higher number of seals being built in 2008 contributed to the increase in supply cost. The Mine Health and Safety Administration now requires higher strength seals to be constructed in order to isolate old, abandoned areas or previously sealed areas of the mine. At several locations, the installed seals are also required to be stronger. The increase in strength of seals was required to better protect the active sections of the underground mines from explosions, fires, or other situations that may occur within the sealed areas. The installation of higher strength seals and a higher number of seals being completed contributed to the increase in supply costs.

•

Higher roof control costs are attributable to higher usage of products used in the mining process due to mining conditions and additional development work. Development work by continuous mining machines requires more roof support products than are used in the area of the mine where extraction is done using a longwall mining system. Roof control costs have also increased due to higher usage of “pumpable cribs” which are more expensive per unit than the standard wooden crib support. The “pumpable crib” is a canvas cylinder hung from the roof and extending to the floor into which concrete is pumped. Because the “pumpable crib” allows concrete to be pumped to the roof level, it eliminates the need to use wood shims to tighten the concrete to the roof. The “pumpable crib” is quicker to install, enhances safety due to the customized fit and minimizes the use of combustible products at underground locations. Also, roof control costs have increased due to approximately a 9% inflation rate related to roof control products.

•

Gas well plugging/drilling costs related to the mining process have increased in 2008 compared to 2007. Gas well plugging expenses are related to plugging abandoned gas wells which CONSOL Energy does not own that are in front of the underground mining process. These wells have to be plugged in accordance with current safety regulations in order to mine through. CONSOL Energy has plugged more wells in 2008 than in 2007, which has contributed to increased supply costs. Gas well drilling ahead of mining, vents the gas from the coal seam which then allows for the longwall process to extract coal from a ventilated seam. CONSOL Energy drilled more wells ahead of mining in 2008 than in 2007 primarily due to Buchanan Mine being idled for half of 2007, as previously discussed.

•

Higher fuel and explosive costs are due to the general increase of these commodities in the year-to-year comparison. The AMVEST surface locations were acquired on July 31, 2007. These surface locations are a large consumer of these products.

•

Higher equipment maintenance costs are also attributable to the acquisition of AMVEST on July 31, 2007.

•

These increases in supply costs were offset, in part, by expenses for self contained self rescuers which were purchased in 2007 in compliance with the Miner Act. There were fewer self-contained self rescuers purchased in 2008.

•

Labor costs have increased $1.14 per ton sold due to the effects of wage increases at the union and non-union mines from labor contracts which began in 2007. These contracts call for specified hourly wage increases in each year of the contract. Labor also increased due to a higher number of employees in 2008 compared to 2007. This was somewhat due to the utilization of new work schedules requiring more manpower and operations trainees.

•

Other post employment benefit costs have increased $0.49 per ton sold primarily due to a change in the discount rate used to calculate the net periodic benefit costs. The weighted average discount rate for 2008 was 6.63% and was 6.00% in 2007.

•

Combined Fund costs have increased $0.33 per ton sold due to the 2007 settlement with the Fund. In March 2007, CONSOL Energy entered into a settlement agreement with the Combined Fund that resolved all previous issues relating to the calculation of the payments. The total income, including interest, as a result of this settlement was approximately $33.4 million, of which approximately $28.1 million impacted cost of goods sold and other charges for produced coal.

•

Health & Retirement costs have increased $0.25 per ton sold due to additional contributions required to be made into employee benefit funds in 2008 compared to 2007 as a result of the five-year labor agreement with the United Mine Workers of America (UMWA) that commenced January 1, 2007. The contribution increase over 2007 was $1.27 per UMWA hour worked.

•

In-transit costs have increased $0.25 per ton sold. In-transit costs are costs to move coal from the point of extraction to the preparation plant in order for the coal to be processed for sale. These costs have increased due primarily to increased trucking expenses related to higher fuel costs as well as several locations operating in the current year that did not operate in 2007.

•

Various other costs have increased $0.35 per ton sold due to various items that have occurred throughout both periods, none of which individually increased or decreased costs per ton sold.

Purchased coal cost of goods sold consists of costs from processing purchased coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased and sold directly to customers and costs for processing third-party coal in our preparation plants. The increase of $72 million in purchased coal cost of goods sold and other charges in 2008 was primarily due to higher volumes purchased.

Gas cost of goods sold and other charges increased due primarily to a 32.6% increase in volumes of produced gas sold and an 11.1% increase in unit costs of goods sold and other charges.


	2008		2007		Variance	Percentage Change
Produced Gas Sales Volumes (in billion cubic feet)		75.7		57.1	18.6	32.6	%
Average Cost Per thousand cubic feet	$	2.50	$	2.25	0.25	11.1	%

Average cost of goods sold and other charges per unit sold increased in the current year as a result of the following items:

•

Fuel and power increased $0.08 per thousand cubic feet for both lifting and gathering combined. This increase was primarily due to additional compressors being placed in service along the existing gathering systems in order to flow gas more efficiently.

•

Well closing costs were impaired $0.05 per thousand cubic feet in the year-to-year comparison. Well closing liabilities were adjusted in 2007 to reflect longer well lives than were previously estimated. This adjustment resulted in a reduction to expense. The adjustments to well closing liabilities were insignificant in 2008.

•

Water disposal costs have increased $0.05 per thousand cubic feet due to additional volumes of water produced by CNX Gas wells in 2008 compared to 2007.

•

Repairs and maintenance costs have increased $0.02 per thousand cubic feet due to higher material costs and higher contract labor costs.

•

Compression expenses increased $0.03 per thousand cubic feet due to the additional compressors discussed above.

•

Various other costs have also increased by $0.03 per thousand cubic feet for various items which occurred throughout both years, none of which were individually material.

Industrial supplies cost of goods sold increased $45 million primarily due to the July 2007 acquisition of Piping & Equipment, Inc. The increase was also related to additional volumes of goods sold and higher costs of good sold throughout 2008.

Closed and idle mine cost of goods sold decreased approximately $27 million in 2008 compared to 2007. The decrease was primarily due to $16 million of lower cost of goods sold and other charges at Shoemaker Mine.

Shoemaker resumed longwall production in May 2008, but was idled throughout all of 2007. The decrease was also related to updated engineering surveys related to mine closing, perpetual care water treatment and reclamation liabilities for closed and idled locations resulting in $23 million of expense in 2008 compared to $33 million of expense in 2007. The higher 2007 survey adjustments related primarily to perpetual water treatment changes in estimates of water flows and increased hydrated lime costs. Closed and idle mine cost of goods sold and other charges also increased $1 million due to various other charges which occurred throughout both periods, none of which were individually significant.

Other cost of goods sold decreased due to the following items:


	2008		2007		Dollar Variance			Percentage Change
Buchanan roof collapse	$	17	$	95	$	(78	)	(82.1	)%
Contract settlement		—		6		(6	)	(100.0	)%
Incentive compensation		33		35		(2	)	(5.7	)%
Ward superfund site		7		5		2		40.0	%
Accounts receivable securitization		6		3		3		100.0	%
Railroad spur expenses		4		1		3		300.0	%
Asset impairment		6		—		6		100.0	%
Stock-based compensation		34		24		10		41.7	%
Profit splits		15		—		15		100.0	%
Sales contract buy-outs		19		—		19		100.0	%
Terminal/River operations		81		58		23		39.7	%
Miscellaneous		13		12		1		8.3	%

Total of the Cost of Goods Sold and Other Charges	$	235	$	239	$	(4	)	(1.7	)%

In July 2007, production at the Buchanan Mine was suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine. In 2008, we have incurred approximately $17 million of cost of goods sold and other charges related to the Buchanan Mine event compared to $95 million in the prior year. The 2007 expense figure is net of $15 million related to insurance proceeds received as reimbursement for costs incurred under the policy. The mine resumed longwall production on March 17, 2008.

In 2007, CONSOL Energy agreed to a $6 million settlement for a contract violation with a customer.

The incentive compensation program is designed to increase compensation to eligible employees when CONSOL Energy reaches predetermined earnings targets and the employees reach predetermined performance targets. Incentive compensation expense decreased $2 million due to the level of earnings in comparison to the predetermined performance target in the year-to-year comparison.

The year ended December 31, 2008 includes expense of $7 million related to the Ward Transformer superfund site. In 2008, revised estimates of total costs related to this site were received. The revised estimates indicate an increase in costs to remediate the site. The year ended December 31, 2007 includes $5 million of expense related to this site. See “Note 25—Commitments and Contingencies” of Item 8, of the Consolidated Financial Statements for more details.

Accounts receivable securitization fees increased $3 million in the year-to-year comparison. Higher amounts have been drawn under this program throughout 2008 compared to 2007.

Expenses increased $3 million in 2008 related to a railroad spur acquired with the July 2007 AMVEST. The increase was related to maintenance completed on the spur during the year. These expenses are offset with the related income reflected in other income.

Asset impairment expenses of $6 million were recognized in 2008 primarily related to loans made to, and options to purchase shares of common stock, with a start up company whose efforts are to commercialize technology to burn waste coal with near zero emissions to generate power. Due mainly to the downturn in the economy, it is not probable that the company can repay these loans, or that the company will complete a public offering. Therefore, the asset values have been written down.

Stock-based compensation expense increased $10 million primarily as a result of additional awards granted to CONSOL Energy and CNX Gas employees in 2008. In additional, stock-based compensation expense increased due to changes in expected value of the cash payout related to the performance share units of CNX Gas.

Cost of goods sold and other charges includes $15 million in 2008 related to contracts with certain customers which were unable to take delivery of previously contracted coal tonnage. These customers have agreed to allow CONSOL Energy to sell the released tonnage, but require CONSOL Energy to split the incremental sales price over the original contract sales price evenly with them. The $15 million represents the additional sales price received for the tonnage sold that is owed to the original customer.

In 2008, CONSOL Energy agreed to buy-out sales contracts with several customers in order to release tons committed under lower priced contracts for sale to other customers at higher prices which resulted in $19 million of expense. No such agreements were made in 2007.

Terminal/River operation charges have increased $23 million in the year-to-year comparison due to increased fuel charges resulting from higher fuel prices and increased operating hours. Costs also have increased due to the acquisition of Tri-River Fleeting on October 3, 2007, as well as higher thru-put volumes in 2008.

Miscellaneous cost of goods sold and other charges increased $1 million due to various transactions throughout both periods, none of which were individually material.


	2008		2007		Variance		Percentage Change
Gas Royalty Interest Sales Volumes (in billion cubic feet)		8.5		7.2		1.3	18.1	%
Average Cost Per thousand cubic feet	$	8.69	$	5.52	$	3.17	57.4	%

Included in gas royalty interest costs are the expenses related to the portion of production belonging to royalty interest owners sold by CNX Gas on their behalf. The increase in volumes and price relates to the volatility and contractual differences among leases, as well as the mix of average and index prices used in calculating royalties.


	2008		2007		Variance			Change
Purchased Sales Volumes (in billion cubic feet)		1.0		1.1		(0.1	)	(9.1	)%
Average Cost Per thousand cubic feet	$	8.13	$	6.66	$	1.47		22.1	%

Purchased gas costs represent volumes of gas purchased from third-party producers, less our gathering and marketing fees, that we sell at market prices. Purchased gas volumes also include the impact of pipeline imbalances. The increase in cost of goods sold and other charges related to purchased gas represents overall price increases and contractual differences among customers in the year-to-year comparison.

Freight expense is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to which CONSOL Energy contractually provides transportation services. Freight expense is the amount billed to customers for transportation costs incurred. Freight expense has increased in 2008 due primarily to freight associated with AMVEST, which was acquired on July 31, 2007. Freight expense has also increased due to higher freight rates being charged for exported tons.

These increases in freight expense were offset, in part, by lower export tons shipped in 2008 compared to 2007. There were 7.0 million tons and 7.6 million tons of coal exported by CONSOL Energy in 2008 and 2007, respectively.


	2008		2007		Dollar Variance		Percentage Change
Freight expense	$	217	$	187	$	30	16.0	%

Selling, general and administrative costs have increased due to the following items:


	2008		2007		Dollar Variance			Percentage Change
Wages, salaries and related benefits	$	61	$	52	$	9		17.3	%
Association/charitable contributions		12		6		6		100.0	%
Advertising and promotion		6		4		2		50.0	%
Professional, consulting and other purchased services		27		29		(2	)	(6.9	)%
Other		19		18		1		5.6	%

Total Selling, General and Administrative	$	125	$	109	$	16		14.7	%

Wages, salaries and related benefits increased $9 million in the year-to-year comparison due to additional staffing at our CNX Gas subsidiary, additional administrative staffing acquired in the July 2007 Piping & Equipment acquisition and various other increases in support staff throughout CONSOL Energy.

Association assessments have increased $6 million in the year-to-year comparison due primarily to CONSOL Energy’s participation in an industry organization which has launched a program related to the promotion of coal as an energy solution. CONSOL Energy did not participate in this organization in 2007. Also, CONSOL Energy participates in various associations and contributes to various charities in an effort to support the professions and the communities in which we do business. The level of funding made to these organizations varies from year-to-year.

Advertising and promotion expenses increased $2 million in 2008 due to various additional advertising and promotion agreements entered into throughout the current year.

Costs of professional, consulting and other purchased services decreased $2 million due to various administrative projects throughout both years, none of which are individually material.

Other selling, general and administrative costs increased $1 million due to various transactions that have occurred throughout both years, none of which are individually material.

Depreciation, depletion and amortization increased due to the following items:


	2008		2007		Dollar Variance		Percentage Change
Coal	$	299	$	258	$	41	15.9	%
Gas:
Production		50		31		19	61.3	%
Gathering		20		18		2	11.1	%

Total Gas		70		49		21	42.9	%
Other		21		18		3	16.7	%

Total Depreciation, Depletion and Amortization	$	390	$	325	$	65	20.0	%

The increase in coal depreciation, depletion and amortization was primarily attributable to additional expense related to the assets purchased in the July 2007 acquisition of AMVEST. The increase was also attributable to assets placed in service after December 31, 2007.

The increase in gas production related depreciation, depletion and amortization was primarily due to higher volumes combined with an increase in the units of production rates in the year-to-year comparison. These rates 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 using the straight-line method and increased due to additional assets placed in service after December 31, 2007.

Other depreciation increased $3 million due to various items placed in service after December 31, 2007, none of which were individually material.

Interest expense increased in 2008 compared to 2007 due to the following items:


	2008			2007			Dollar Variance			Percentage Change
Revolver	$	11		$	5		$	6		120.0	%
Interest on unrecognized tax benefits		2			3			(1	)	(33.3	)%
Capitalized lease		6			7			(1	)	(14.3	)%
Long-term secured notes		27			28			(1	)	(3.6	)%
Other		(10	)		(12	)		2		(16.7	)%

Total Interest Expense	$	36		$	31		$	5		16.1	%

Revolver interest expense increased $6 million due to the amounts drawn by CONSOL Energy and CNX Gas on the credit facility throughout 2008. There were no amounts drawn until August 2007 on this facility by CONSOL Energy. CNX Gas had no amounts drawn throughout all of 2007. These increases were offset, in part, by lower interest rates in the year-to-year comparison.

Interest on uncertain tax benefits decreased $1 million due primarily to the settlement of various uncertain tax positions due to receipt of the audit report related to the years 2004-2005.

Interest on capital leases decreased $1 million due to the planned payments made on these leases after December 31, 2007.

Interest on long-term secured notes decreased $1 million due to the planned June 2007 principal payment on our $45 million secured note.

Other interest increased $2 million due primarily to lower amounts of interest capitalized in 2008 compared to 2007. Capitalized interest was lower in 2008 because capital expenditures which qualify for interest capitalization were lower. These lower expenditures were primarily related to the Robinson Run overland belt which was placed in service in September 30, 2007.

applicable to overpayments. CONSOL Energy filed timely claims for refunds under the EESA Act of the BLET with the Internal Revenue Service in the amount of approximately $27 million. In addition, the estimated interest related to the BLET refunds expected to be received is approximately $32 million. In relation to this receivable, CONSOL Energy also recognized approximately $3 million of expense will be owed to third parties upon collection of the refunds. CONSOL Energy believes that it will receive refunds of BLET erroneously paid on export sales in the amounts requested in its filing with the Internal Revenue Service plus interest as required by the Act prior to December 31, 2009. The year ended December 31, 2007 included a $24 million charge related to the reversal of the receivable that had been recognized in previous quarters related to the BLET refund. The Federal Circuit court had ruled that the damage claim for BLET paid for the period 1991-1993 be repaid. The Government appealed a similar case to the U.S. Supreme Court. On December 3, 2007 the United States Supreme Court granted the Government’s appeal to hear the case. The Supreme Court’s appeal of the petition made collection of the refund no longer highly probable because of the adverse ruling by the Supreme Court during 2007 under the statute on which our claim for this period was based. Accordingly, CONSOL Energy reversed the BLET receivable it had previously recognized.

Taxes other than income increased primarily due to the following items:


	2008		2007		Dollar Variance			Percentage Change
Production taxes:
Coal	$	168	$	150	$	18		12.0	%
Gas		20		13		7		53.8	%

Total Production Taxes		188		163		25		15.3	%
Other taxes:
Coal		84		79		5		6.3	%
Gas		7		5		2		40.0	%
Other		11		12		(1	)	(8.3	)%

Total Other Taxes		102		96		6		6.3	%

Total Taxes Other Than Income	$	290	$	259	$	31		12.0	%

Coal production taxes increased $18 million due to higher severance taxes and reclamation fee taxes attributable to the increase in average sales price for produced coal. Coal production taxes also increased due to higher tons produced in 2008 than 2007.

Gas production taxes increased $7 million due to higher severance taxes attributable to higher average sales prices for gas and higher gas sales volumes.

The $5 million increase in other coal taxes is primarily due to higher payroll related taxes and higher property taxes. Higher payroll related taxes were the result of additional employees in 2008 and higher wages paid as discussed in the cost of goods sold and other cost section. Higher property taxes were related to additional properties acquired in the July 31, 2007 AMVEST acquisition, as previously disclosed.

Other gas taxes have increased $2 million primarily related to payroll taxes and capital stock & franchise taxes due to the on-going growth of the company.

Other taxes decreased $1 million due to various transactions that occurred throughout both years, none of which were individually material.

Income Taxes


	2008			2007			Variance			Change
Earnings Before Income Taxes	$	725		$	429		$	296		$	69.0	%
Tax Expense	$	240		$	136		$	104		$	76.5	%
Effective Income Tax Rate		33.1	%		31.7	%		1.4	%

CONSOL Energy’s effective tax rate is sensitive to changes in the relationship between pre-tax earnings and percentage depletion. The proportion of coal pre-tax earnings and gas pre-tax earnings also impacts the benefit of percentage depletion on the effective tax rate. See “Note 6—Income Taxes” in Item 8, Consolidated Financial Statements of this Form 10-K.

Noncontrolling Interest

Noncontrolling interest represents 18.3% of CNX Gas net income associated with shares of common stock which CONSOL Energy did not own through September 30, 2008, 18.0% for October 2008, 16.9% for November 2008 and 16.7% for December 2008. The minority interest in CNX Gas has been changing due to the share repurchase program that was approved by the CEI Board of Directors on October 21, 2008.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

Net Income Attributable to CONSOL Energy Shareholders

Net income attributable to CONSOL Energy Shareholders changed primarily due to the following items (table in millions):


	2007		2006		Dollar Variance			Percentage Change
Coal Sales-Produced and Purchased	$	2,678	$	2,694	$	(16	)	(0.6	)%
Produced Gas Sales		410		389		21		5.4	%
Purchased Gas Sales		8		44		(36	)	(81.8	)%
Other Sales and Other Income		666		588		78		13.3	%

Total Revenue and Other Income		3,762		3,715		47		1.3	%
Coal Cost of Goods Sold—Produced and Purchased		1,737		1,785		(48	)	(2.7	)%
Produced Gas Cost of Goods Sold		129		107		22		20.6	%
Purchased Gas Cost of Goods Sold		7		45		(38	)	(84.4	)%
Other Cost of Goods Sold		526		399		127		31.8	%

Total Cost of Goods Sold		2,399		2,336		63		2.7	%
Depreciation, Depletion and Amortization		325		296		29		9.8	%
Other		585		532		53		10.0	%
Export Excise Tax Adjustment		24		—		24		100.0	%

Total Costs		3,333		3,164		169		5.3	%

Earnings Before Income Taxes and Noncontrolling Interest		429		551		(122	)	(22.1	)%
Income Tax Expense		136		112		24		21.4	%

Net Income		293		439		(146	)	(33.3	)%
Less: Noncontrolling Interest		25		30		(5	)	(16.7	)%

Net Income attributable to CONSOL Energy Inc. Shareholders	$	268	$	409	$	(141	)	(34.5	)%

Net income attributable to CONSOL Energy Inc. Shareholders was $268 million for the year ended December 31, 2007 compared to $409 million for the year ended December 31, 2006. Net income attributable to CONSOL Energy Shareholders for 2007 decreased in comparison to 2006 primarily due to several roof falls which suspended production at the Buchanan Mine in early July 2007. Production was

suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine. We drilled bore holes and injected nitrogen in order to stabilize and evaluate the mine atmosphere. In the year ended December 31, 2007, we incurred expenses of $119 million, primarily classified as cost of goods sold and depreciation, depletion and amortization, in relation to these activities. These costs were offset, in part, by a $15 million advance under CONSOL Energy insurance policies. We have also received notice from our insurance carriers that an advance of $10 million would be paid related to business interruption coverage; $8 million related to the coal segment and $2 million related to the gas segment. Net income was also adversely affected by reduced sales of coal from the Buchanan Mine. Customers who purchase coal from the mine were notified that a force majeure condition exists and deliveries under their sales agreements for coal from the mine were reduced during the year ended December 31, 2007. CNX Gas production was also adversely impacted by the idling of the Buchanan Mine. Also, 2006 included proceeds from the insurance company of $79 million; the coal segment recognized $69 million and the gas segment recognized $10 million, related to the 2005 fire and skip hoist incidents at the Buchanan Mine.

Net income attributable to CONSOL Energy Shareholders was also impacted by $24 million of expense related to the previously recognized Export Excise Tax receivable being reversed in 2007. The Federal Circuit court had ruled that the damage claim for export excise taxes paid for the period 1991-1993 be repaid. The Government appealed a similar case to the U.S. Supreme Court. On December 3, 2007 the United States Supreme Court granted the Government’s new petition to hear that case. The Supreme Court’s granting of the appeal makes collection of the refund and interest by CONSOL Energy no longer highly probable because of adverse rulings by the Supreme Court during 2007 under the statute of which our claim for this period is based. Accordingly, CONSOL Energy reversed the export excise tax receivable until the Supreme Court decides the appeal. Net income in 2007 was also impacted by a lower volume of produced coal sales, and higher cost per ton sold. Net income was also lower due to higher depreciation, depletion and amortization related to the additional assets received in the July 31, 2007 acquisition of AMVEST. Income tax expense also adversely impacted the period-to-period comparison. In 2006, income tax expense was reduced by the release of certain valuation allowances related to state income taxes in Pennsylvania and West Virginia.

Reductions to net income attributable to CONSOL Energy Shareholders were offset, in part, by two transactions which occurred in 2007; an asset exchange and an asset sale that resulted in pretax income of approximately $100 million and net income attributable to CONSOL Energy Shareholders of approximately $59 million. Net income reductions were also offset, in part, by the March 2007 settlement agreement with the Combined Fund that resolved all previous issues relating to the calculation of payments to the Combined Fund. Total pre-tax income, including interest, recognized related to the Combined Fund settlement was approximately $33 million. Reductions to net income were also offset, in part, by lower salary pension costs. Our defined benefit pension plan for salaried employees allows such employees to receive a lump-sum distribution in lieu of annual payments when they retire from CONSOL Energy and its subsidiaries. Statement of Financial Accounting Standards (SFAS) No. 88, “Employers’ Accounting for Settlement & Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” requires that when the lump-sum distributions made for a plan year, which for CONSOL Energy was October 1 to September 30, exceed the total of the service cost and interest cost for the plan year, an adjustment equaling the unrecognized actuarial gain or loss resulting from each individual who received a lump sum in that year be recognized. The total 2007 accelerated actuarial amortization was approximately $3 million of expense. The total 2006 accelerated actuarial amortization was approximately $18 million of expense.

Revenue

Revenue and other income increased due to the following items:


	2007		2006		Dollar Variance			Percentage Change
Sales
Produced Coal	$	2,640	$	2,620	$	20		0.8	%
Purchased Coal		38		74		(36	)	(48.6	)%
Produced Gas		410		389		21		5.4	%
Industrial Supplies		147		120		27		22.5	%
Other		89		84		5		6.0	%

Total Sales—Outside		3,324		3,287		37		1.1	%
Gas Royalty Interest		47		51		(4	)	(7.8	)%
Purchased Gas		8		44		(36	)	(81.8	)%
Freight Revenue		187		163		24		14.7	%
Other Income		196		170		26		15.3	%

Total Revenue and Other Income	$	3,762	$	3,715	$	47		1.3	%

The increase in company-produced coal sales revenue during 2007 was due to an increase in the average sales price per ton, partially offset by a decrease in sales volumes.


	2007		2006		Variance			Percentage Change
Produced Tons Sold (in millions)		64.8		67.6		(2.8	)	(4.1	)%
Average Sales Price Per Ton	$	40.74	$	38.77	$	1.97		5.1	%

Sales of company produced coal decreased in the period-to-period comparison due to the idling of the Buchanan Mine as previously discussed, lower production at the McElroy Mine due to poor geological conditions and the idling of certain Central Appalachian mines due to market conditions. Lower sales tons were offset, in part, by coal sales from the AMVEST mines that were acquired on July 31, 2007. Company coal production, excluding equity affiliates, was 64.5 million tons in 2007 compared to 67.4 million tons in 2006. The increase in average sales price primarily reflects stronger term prices negotiated in 2006 and early 2007 resulting from an overall improvement in prices in the eastern coal market for domestic and foreign power generators and steel producers. There was also a surge in spot market prices in 2007.

Purchased coal sales consist of revenues from processing third party coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased from a third party and sold directly to our customers and revenues from processing third party coal in our preparation plants. The decrease of $36 million in company-purchased coal sales revenue was primarily due to lower sales volumes.

The increase in produced gas sales revenue in 2007 compared to 2006 was primarily due to higher average sales price per thousand cubic feet sold and higher sales volumes.


	2007		2006		Variance		Percentage Change
Produced Gas Sales Volumes (in billion cubic feet)		57.1		55.3		1.8	3.3	%
Average Sales Price Per Thousand Cubic Feet	$	7.18	$	7.04	$	0.14	2.0	%

The increase in average sales price is the result of realizing general price increases on higher hedging gains in the current year. We periodically enter 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 hedges

represented approximately 18.4 billion cubic feet of our produced gas sales volume for the year ended December 31, 2007 at an average price of $8.01 per thousand cubic feet. In the prior year, these hedges represented approximately 17.0 billion cubic feet at an average price of $7.42 per thousand cubic feet. Sales volumes increased as a result of additional wells coming online from our on-going drilling program, offset, in part, by decreased active and sealed gob production as a result of the idled Buchanan Mine. Also included within 2007 are the non-operating net revenue interest volumes and revenues associated with royalty and working interests. These volumes were not available in 2006. The associated revenues were included in other income in the prior period.

The $27 million increase in revenues from the sale of industrial supplies was primarily due to increased sales volumes. Sales volumes have increased primarily due to the July acquisition of Piping & Equipment, Inc. See Note 2 in Item 8, Notes to the Audited Financial Statements in this Form 10-K.

The $5 million increase in other sales was due to various transactions that occurred throughout both years, none of which were individually material.


	2007		2006		Variance			Percentage Change
Gas Royalty Interest Sales Volumes (in billion cubic feet)		7.2		7.6		(0.4	)	(5.3	)%
Average Sales Price Per Thousand Cubic Feet	$	6.44	$	6.76	$	(0.32	)	(4.7	)%

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 decreased average sales price relates primarily to reductions in a provision for royalty settlements. The volatility in the monthly volumes, contractual differences among leases, as well as the mix of average and index prices used in calculating royalties also contributed to the variance.


	2007		2006		Variance			Percentage Change
Purchased Gas Sales Volumes (in billion cubic feet)		1.1		6.1		(5.0	)	(82.0	)%
Average Sales Price Per Thousand Cubic Feet	$	7.19	$	7.20	$	(0.01	)	(0.1	)%

Purchased gas sales volumes in the current year represent volumes of gas we sell at market prices that were purchased from third party producers, less our gathering and marketing fees. In 2006, 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. All contracts entered into prior to January 1, 2006 expired in 2006, while all activity related to 2007 is reflected in transportation expense on a net basis.


	2007		2006		Dollar Variance			Percentage Change
Gain on Sales of Assets	$	112	$	10	$	102		1,020.0	%
Equity in Earnings of Affiliates		7		1		6		600.0	%
Litigation Settlement		5		—		5		100.0	%
Business Interruption Insurance		10		79		(69	)	(87.3	)%
Royalty Income		14		28		(14	)	(50.0	)%
Interest Income		13		15		(2	)	(13.3	)%
Other miscellaneous		35		37		(2	)	(5.4	)%

Total Other Income	$	196	$	170	$	26		15.3	%

Gain on sales of assets increased $102 million primarily due to two transactions that occurred in 2007. In June 2007, CONSOL Energy, through a subsidiary, exchanged certain coal assets in Northern Appalachia to Peabody Energy in exchange for coalbed methane and gas rights. This transaction was accounted for as a non-monetary exchange under Statement of Financial Accounting Standards No. 153 resulting in a pre-tax gain of $50 million. Also, in June 2007, CONSOL Energy, through a subsidiary, sold the rights to certain western Kentucky coal in the Illinois Basin to Alliance Resource Partners, L.P. for $53 million. This transaction resulted in a pre-tax gain of approximately $50 million. Gain on sales of assets also increased $2 million in the period-to-period comparison due to various miscellaneous transactions that occurred throughout both years, none of which were individually material.

Equity in Earnings of Affiliates increased $6 million in the year-to-year comparison due to various activities of our joint ventures, none of which were individually material.

A litigation settlement with a coal customer resulted in an additional $5 million of income in 2007.

In 2007, CONSOL Energy received notice from its insurance carriers that $25 million would be advanced toward the insurance claim related to several roof falls which suspended production at the Buchanan Mine in early July. The $25 million represents $10 million of business interruption reimbursement which was recognized in other income; the coal segment recognized $8 million and the gas segment recognized $2 million. The remaining $15 million of the reimbursement relates to cost recovery for activities at the Mine since production was suspended. These activities included the cost of drilling bore holes to monitor the mine atmosphere, the cost of injecting nitrogen in order to stabilize the mine atmosphere as well as various other costs incurred related to these activities. In February 2005, Buchanan Mine experienced a fire that developed in the mine after a large rock fall behind the longwall mining section. The mine was temporarily sealed in order to extinguish the fire. Coal production resumed on June 16, 2005. During 2006, CONSOL Energy received proceeds from the insurance companies of $38 million. The $38 million was recognized as other income; the coal segment recognized $29 million and the gas segment recognized $9 million. Buchanan Mine also experienced a problem with the mine’s skip hoist mechanism on September 16, 2005 which caused the mine to be idled. Repairs to the skip hoist shaft and structures were completed and the mine resumed production on December 13, 2005. During 2006, CONSOL Energy recognized proceeds from the insurance companies of $41 million. The $41 million was recognized as other income; the coal segment recognized $40 million and the gas segment recognized $1 million.

Royalty income decreased $14 million primarily due to royalties received from third party gas sales now being classified in outside gas sales versus royalty income. In the prior period, the volumes were not available nor were they considered in the prior period reserve report.

Interest income decreased $2 million in the year-to-year comparison due to lower cash balances throughout 2007 compared to 2006. Lower cash balances were primarily the result of the purchase price paid for the July 31, 2007 acquisition of AMVEST and the June 2007 purchase of certain coalbed methane and gas reserves from Peabody Energy.

Other miscellaneous income decreased $2 million due to various transactions that occurred throughout both years, none of which were individually material.

Costs


	2007		2006		Dollar Variance			Percentage Change
Cost of Goods Sold and Other Charges
Produced Coal	$	1,685	$	1,705	$	(20	)	(1.2	)%
Purchased Coal		52		80		(28	)	(35.0	)%
Produced Gas		129		107		22		20.6	%
Industrial Supplies		141		119		22		18.5	%
Closed and Idle Mines		105		109		(4	)	(3.7	)%
Other		240		129		111		86.0	%

Total Cost of Goods Sold and Other Charges		2,352		2,249		103		4.6	%
Royalty Interest Gas		40		42		(2	)	(4.8	)%
Purchased Gas		7		45		(38	)	(84.4	)%

Total Cost of Goods Sold	$	2,399	$	2,336	$	63		2.7	%

Decreased cost of goods sold and other charges for company-produced coal was due mainly to lower sales volumes, offset, in part by an increase in the average unit cost per ton sold.


	2007		2006		Variance			Percentage Change
Produced Tons Sold (in million)		64.8		67.6		(2.8	)	(4.1	)%
Average Cost of Goods Sold and Other Charges Per Ton	$	25.99	$	25.22	$	0.77		3.1	%

Cost of goods sold and other charges for produced coal decreased $20 million mainly due to lower volumes of company-produced coal. Average cost of goods sold and other charges per ton increased in the year-to-year comparison primarily due to higher health and retirement costs, higher labor costs, higher supply costs and the lower volume impact on fixed unit costs. Higher health and retirement costs were attributable to additional contributions required to be made into employee benefit funds as a result of the five-year labor agreement with the United Mine Workers of America (UMWA) that commenced January 1, 2007. The contribution increase over 2006 was $3.50 per UMWA hour worked. Higher labor costs were due to the effects of wage increases at the union and non-union mines due to new labor contracts. Higher labor unit costs were also due to additional costs incurred to comply with health and safety standards. Supply costs increased due to additional costs incurred to comply with new federal and state safety regulations. These regulations require additional supplies of self- contained self rescuer devices and other safety items as previously discussed. Supply cost increases were also the result of higher costs for products and chemicals, such as roof control products and magnetite, used in the mining and coal preparation process. These increases were offset, in part, by income recorded as a result of the Combined Fund settlement. In March 2007, CONSOL Energy entered into a settlement agreement with the Combined Fund that resolved all previous issues relating to the calculation of the payments. The total income, including interest, as a result of this settlement was approximately $33.4 million, of which approximately $28.1 million impacted cost of goods sold and other charges for produced coal. Decreased costs also reflect the prior year adjustment which accelerated previously unrecognized actuarial losses related to our salary pension plan. Our defined benefit pension plan for salaried employees allows such employees to receive a lump sum

distribution in lieu of annual payments when they retire from CONSOL Energy and its subsidiaries. Statement of Financial Accounting Standard (SFAS) No. 88, “Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” requires that when the lump-sum distributions made for a plan year, which for CONSOL Energy is October 1 to September 30, exceeds the total of the service costs and interest costs for the plan year, an adjustment equaling the unrecognized actuarial gain or loss resulting from each individual who received a lump sum in that year be recognized. The total 2007 accelerated actuarial amortization was $2.7 million of expenses, of which $2.1 million impacted cost of goods sold and other charges for produced coal. The total prior year accelerated actuarial amortization was $17.8 million, of which $13.8 million impacted cost of goods sold and other charges for produced coal. Increased costs were also offset, in part, by lower contract mining fees due to the idling of certain Central Appalachia contract mine locations. Royalty expenses were also lower in 2007 compared to 2006 due to a larger proportion of coal production coming from owned reserves versus leased reserves.

Purchased coal cost of goods sold consists of costs from processing purchased coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased and sold directly to the customer and costs for processing third party coal in our preparation plants. The decrease of $28 million in purchased coal cost of goods sold and other charges in 2007 was primarily due to lower volumes purchased.

Produced gas cost of goods sold and other charges increased due primarily to a 16.6% increase in unit cost of goods sold and other charges and a 3.3% increase in volumes of produced gas sold.


	2007		2006		Variance		Percentage Change
Produced Gas Sales Volumes (in billion cubic feet)		57.1		55.3		1.8	3.3	%
Average Cost Per Thousand Cubic Feet	$	2.25	$	1.93	$	0.32	16.6	%

The increase in average cost per thousand cubic feet of gas sold was primarily attributable to increased salary labor and related employee costs, increased gas well maintenance costs, increased compressor rental costs, increased power costs and the deferral of gob gas production related to the idling of Buchanan Mine. Salary labor and related employee costs increased due to the hiring of additional employees in 2007. Gas well maintenance costs increased due to the increased number of wells in-service compared to the prior year. Compressor rental costs increased due to more rentals in the current year. Power costs per unit were higher due to increased megawatt hour rates charged by the power companies in 2007, offset, in part, by credits received from the power company in 2007. These increases in unit costs were offset, in part, by lower firm transportation costs per unit and lower gas well closing costs. The firm transportation improvement was due to the in-service of the Jewell-Ridge Pipeline in October 2006. Also, gas well closing costs decreased due to a change in the lives for the wells to coincide with the reserve reports.

Industrial supplies cost of goods sold increased $22 million primarily due to the July acquisition of Piping & Equipment, Inc. See Note 2 in Item 8, Notes to Audited Consolidated Financial Statements in this Form 10-K.

Closed and idle mine cost of goods sold and other charges decreased approximately $4 million in 2007 compared to 2006. Closed and idle mine cost of goods sold and other charges were improved $6 million due to additional expenses in the 2006 period related to reclamation liability adjustments and associated accretion expenses that were the result of updated engineering surveys. Closed and idle mine cost of goods sold and other charges also decreased $3 million due to various transactions that occurred throughout both years, none of which were individually material. This improvement was offset, in part, by $5 million of additional expenses due to Shoemaker being idled throughout all of 2007 and only a portion of 2006.

Other cost of goods sold and other charges increased due to the following items:


	2007		2006		Dollar Variance			Percentage Change
Buchanan roof collapse	$	95	$	—	$	95		100.0	%
Incentive compensation		35		24		11		45.8	%
Contract settlement		6		—		6		100.0	%
Accounts Receivable Securitization		3		—		3		100.0	%
Stock-based compensation		24		23		1		4.3	%
Miscellaneous transactions		77		82		(5	)	(6.1	)%

Total Miscellaneous Cost of Goods Sold and Other Charges	$	240	$	129	$	111		86.0	%

In July 2007, production at the Buchanan Mine was suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine. We drilled bore holes and injected nitrogen in order to stabilize and evaluate the mine atmosphere. In 2007, we have incurred cost of goods sold expenses of approximately $110 million in relation to these activities. Also, $15 million advance was paid to recover a portion of the cost incurred to date for this incident. Insurance coverage, after certain deductibles have been reached including a 90 day waiting period, includes property damage and cost recoveries as well as business interruption recoveries.

Incentive compensation expense increased $11 million due to higher projected amounts expected to be paid to employees for 2007 compared to the projected amounts expected for 2006. The increase also relates to an actualization of the 2006 accrual which resulted in approximately $2 million of additional expense in 2007. The incentive compensation program is designed to increase compensation to eligible employees when CONSOL Energy reaches predetermined earnings targets and the employees reach predetermined performance targets.

During 2007, CONSOL Energy agreed to a settlement for a contract violation with a customer. The amount owed to the customer has been accrued as of December 31, 2007.

Accounts receivable securitization fees increased in the year-to-year comparison. Amounts have been drawn under this program since July 2007. No amounts were drawn under this program in 2006.

Stock-based compensation expense increased $1 million primarily as a result of additional awards granted in the 2007 period.

Miscellaneous cost of goods sold and other charges decreased $5 million due to various transactions that occurred throughout both periods, none of which were individually material.


	2007		2006		Variance			Percentage Change
Gas Royalty Interest Sales Volumes (in billion cubic feet)		7.2		7.6		(0.4	)	(5.3	)%
Average Cost Per Thousand Cubic Feet	$	5.52	$	5.54	$	(0.02	)	(0.4	)%

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 decrease in volumes and costs relate to the volatility and contractual differences among leases, as well as the mix of average and index prices used in calculating royalties.


	2007		2006		Variance			Percentage Change
Purchased Gas Sales Volumes (in billion gross cubic feet)		1.1		6.1		(5.0	)	(82.0	)%
Average Cost Per Thousand Cubic Feet	$	6.66	$	7.34	$	(0.68	)	(9.3	)%

Purchased gas sales volumes in the current year represent volumes of gas we sell at market prices that were purchased from third party producers, less our gathering and marketing fees. In 2006, purchased gas costs 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. All contracts entered into prior to January 1, 2006 expired in 2006, while all activity related to 2007 is reflected in transportation expense on a net basis.

Freight expense is based on weight of coal shipped, negotiated freight rates and method of transportation (i.e., rail, barge, truck, etc.) used for the customers to whom CONSOL Energy contractually provides transportation. Freight expense is billed to customers and the revenue from such billing equals the transportation expense.


	2007		2006		Variance		Percentage Change
Freight Expense	$	187	$	163	$	24	14.7	%

Selling, general and administrative costs have increased due to the following items:


	2007		2006		Dollar Variance			Percentage Change
Wages and salaries	$	40	$	35	$	5		14.3	%
Professional, consulting and other purchased services		29		23		6		26.1	%
Advertising and promotion		4		1		3		300.0	%
Rentals		4		2		2		100.0	%
Insurance		4		2		2		100.0	%
Employee benefits		8		11		(3	)	(27.3	)%
Other		20		17		3		17.6	%

Total Selling, General and Administrative	$	109	$	91	$	18		19.8	%

Wages and salaries have increased $5 million due to additional employees as a result of several acquisitions throughout 2007 and additional employees being hired after the 2006 period.

Costs of professional, consulting and other purchased services were higher in 2007 compared to 2006 primarily due to $4 million of additional costs incurred by CNX Gas related to a new computer system and legal fees associated with outstanding legal cases. The remaining $2 million increase is due to various transactions that occurred throughout both periods, none of which are individually material.

Advertising and promotion expenses were $3 million higher in 2007 compared to 2006 due to an advertising campaign launched in 2007 to raise corporate awareness and recruit the next generation of employees.

Rentals of equipment, primarily computers, have increased $2 million in the year-to-year comparison due to additional employees that have been added related to growth of CNX Gas as well as several acquisitions that occurred throughout 2007.

Insurance expense increase of $2 million was primarily related to increased premium costs for property, business interruption and excess general liability insurance.

Employee benefits decreased due mainly to an acceleration in 2006 of previously unrecognized actuarial losses related to our salary pension plan. Our defined benefit pension plan for salaried employees allows such employees to receive a lump-sum distribution in lieu of annual payments when they retire from CONSOL

Energy. Statement of Financial Accounting Standards (SFAS) No. 88, “Employers’ Accounting for Settlement & Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” requires that when the lump-sum distributions made for a plan year, which for CONSOL Energy is October 1 to September 30, exceed the total of the service cost and interest cost for the plan year, an adjustment equaling the unrecognized actuarial gain or loss resulting from each individual who received a lump-sum in that year be recognized. The total accelerated actuarial amortization recognized in 2007 was $2.7 million, of which $0.2 million impacted selling, general and administrative expense. The total accelerated actuarial amortization recognized in 2006 was $17.8 million, of which $2.1 million impacted selling, general and administrative expense.

Other selling, general and administrative costs increased $3 million due to miscellaneous costs related to various transactions that occurred throughout both years, none of which were individually material.

Depreciation, depletion and amortization increased due to the following items:


	2007		2006		Dollar Variance		Percentage Change
Coal	$	258	$	241	$	17	7.1	%
Gas:
Production		31		25		6	24.0	%
Gathering		18		13		5	38.5	%

Total Gas		49		38		11	28.9	%
Other		18		17		1	5.9	%

Total Depreciation, Depletion and Amortization	$	325	$	296	$	29	9.8	%

The increase in coal depreciation, depletion and amortization was primarily due to additional expense related to the assets received in the acquisition of AMVEST. The increase was also attributable to assets placed in service after December 31, 2006. Assets placed in service after December 31, 2006 include various airshafts, longwall assets, haulage assets and other projects completed at our mines. These increases were offset, in part, by a reduction in depletion expense due to depletion of economic reserves at VP#8 Mine and decreased amortization due to decreased production in 2007 compared to 2006.

The increase in gas production related depreciation, depletion and amortization was primarily due to an increase in units of production rates and increased production volumes year-to-year. 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. Rates are generally calculated using the net book value of assets at the end of the 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 realizing a full year of the capital lease treatment of the Jewell-Ridge lateral, which went into service in October 2006.

Other depreciation, depletion and amortization increased $1 million primarily related to capitalized computer software being placed in service after December 31, 2006.

Interest expense increased in 2007 compared to 2006 due to the following items:


	2007			2006			Dollar Variance			Percentage Change
Capitalized lease	$	7		$	2		$	5		250.0	%
Revolver		5			—			5		100.0	%
Interest on unrecognized tax benefits		3			—			3		100.0	%
Long-term secured notes		28			30			(2	)	(6.7	)%
Other		(12	)		(7	)		(5	)	71.4	%

Total Interest Expense	$	31		$	25		$	6		24.0	%

In conjunction with the completion of the Jewell-Ridge lateral pipeline in October 2006, CNX Gas entered into a 15-year firm transportation agreement with ETNG, a subsidiary of Duke Energy. Also, in April 2006, CONSOL Energy entered into an agreement for the acquisition of longwall equipment. These agreements were required to be treated as capital leases under Statement of Financial Accounting Standards No. 13, “Accounting for Leases” and accordingly incur interest expense each period.

Revolver interest expense increased $5 million due to amounts being drawn on our revolving credit facility in 2007. The facility had $248 million outstanding at December 31, 2007. No amounts were drawn on the facility in 2006.

CONSOL Energy began recording interest on unrecognized tax benefits as a result of the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109” (FIN 48) in 2007. See Note 6 in Item 8, Notes to the Audited Financial Statements Data of this Form 10-K.

Interest on long-term debt decreased $2 million due to the planned June 2007 principal payment on our $45 million secured note.

Other reductions in interest expense were related to higher amounts of interest capitalized in 2007 compared to 2006. Higher capitalized interest was attributable to the higher level of capital projects funded from operating cash flow in 2007 compared to 2006.

Taxes other than income increased primarily due to the following items:


	2007		2006		Dollar Variance		Percentage Change
Production taxes:
Coal	$	175	$	157	$	18	11.5	%
Gas		13		12		1	8.3	%

Total Production Taxes		188		169		19	11.2	%
Other taxes:
Coal		79		71		8	11.3	%
Gas		5		4		1	25.0	%
Other		12		9		3	33.3	%

Other		96		84		12	14.3	%

Total Taxes Other Than Income	$	284	$	253	$	31	12.3	%

Increased coal production taxes are primarily due to $24 million of expense related to the Export Excise Tax receivable being reversed in the 2007 period. The Federal Circuit court had ruled that the damage claim for export excise taxes paid for the period 1991-1993 be repaid. The Government appealed a similar case to the U.S. Supreme Court. On December 3, 2007 the United States Supreme Court granted the Government’s appeal to hear that case. The Supreme Court’s appeal of the petition makes collection of the refund and interest by CONSOL Energy no longer highly probable because of adverse rulings by the Supreme Court during 2007 under the statute on which our claim for this period is based. Accordingly, CONSOL Energy reversed the export excise tax receivable until the Supreme Court decides the appeal. Coal production taxes also include a $6 million improvement related to lower coal production in 2007 compared to 2006. Lower production reduces severance taxes, reclamation fee taxes and black lung excise taxes, although these reductions were somewhat offset by higher average sales prices. Gas production taxes increased $1 million due to higher severance taxes attributable to higher average sales prices for gas and higher gas sales volumes.

Other coal taxes have increased in 2007 due to property taxes which are based on current assessment values which have increased over the prior year primarily related to the acquisition of AMVEST, as previously

discussed. Other coal taxes are also higher due to lower Virginia employment enhancement tax credits. Virginia provides a tax credit based on employment figures attributable to operations in that state. Due to the previously discussed Buchanan Mine situation, our employment figures have been temporarily reduced. The employment figure reduction has correspondingly reduced the tax credit that we earn.

Other gas taxes have increased in 2007 due to various transactions that occurred throughout both years, none of which were individually material.

Other taxes have increased $3 million due to various transactions that occurred throughout both periods, none of which were individually material.


	2007			2006			Variance			Percentage Change
Earnings Before Income Taxes	$	429		$	551		$	(122	)	(22.1	)%
Tax Expense	$	136		$	112		$	24		21.4	%
Effective Income Tax Rate		31.7	%		20.4	%		11.3	%

CONSOL Energy’s effective tax rate is sensitive to changes to the relationship between pre-tax earnings and percentage depletion. See Note 6 in Item 8, Notes to the Audited Financial Statements of this Form 10-K. CONSOL Energy’s 2006 effective income tax rate includes the impact of state income tax benefits resulting from a change in a state tax statute.

Noncontrolling Interest

Noncontrolling interest represents 18.3% of CNX Gas net income for the five month period ended December 31, 2007 associated with shares of common stock which CONSOL Energy did not own. It also represents 18.5% of Gas’s net income for the seven month period ended July 31, 2007 associated with shares of common stock which CONSOL Energy did not own. During the period ended December 31, 2007, CONSOL Energy purchased $10 million of CNX Gas shares on the open market. The purchase of the additional shares changed CONSOL Energy’s ownership percentage in CNX Gas from 81.5% to 81.7%.

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, revenues and expenses, and related disclosure of contingent assets and liabilities in the consolidated financial statements and at the date of the financial statements. Note 1 of the Notes to the Audited Consolidated Financial Statements in this Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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.

Other Post Employment Benefits

years of company service and attained age 55. Effective August 1, 2003, the base eligibility was changed to age 55 with 20 years of service for salaried employees. In addition, effective January 1, 2004, a medical plan cost sharing arrangement with all salaried employees and retirees was adopted. These participants will now contribute a minimum of 20% of medical plan operating costs. Contributions may be higher, dependent on either years of service or a combination of age and years of service at retirement. Prospective annual cost increases of up to 6% will be shared 80% by CONSOL Energy and 20% by the participants. Annual cost increases in excess of 6% will be the sole responsibility of the participant. Also, any salaried or non-represented hourly employees that were hired or rehired effective January 1, 2007 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 for each year of service at retirement. Newly employed inexperienced employees represented by the UMWA, hired after January 1, 2007, will not be eligible to receive retiree benefits. In lieu of these benefits, these employees will receive a defined contribution benefit of $1 per each hour worked.

After our review, various actuarial assumptions, including discount rate, expected trend in health care costs, average remaining service period, average remaining life expectancy, per capita costs and participation level in each future year are used by our independent actuary to estimate the cost and benefit obligations for our retiree health plans. Most assumptions used in 2008 have not differed materially from the prior year actual experience. Expected trend in health care cost assumptions have been changed since the prior year. The initial expected trend in health care costs at this year’s measurement date, which was December 31, 2008, was 9.6% compared to a prior year expected 2008 trend in health care cost of 8.0%. In addition, the year the ultimate trend rate is reached was extended from 2013 to 2015. A 1.0% decrease in the health care trend rate would decrease interest and service cost for 2008 by approximately $17.3 million. A 1.0% increase in the health care trend rate would increase the interest and service cost by approximately $20.7 million. The discount rate is also determined each year at the measurement date. The discount rate is estimated by utilizing a corporate yield curve model developed from corporate bond data using only bonds rated Aa by Moody’s as of the measurement date. All future post employment benefit expected payments were discounted using a spot rate yield curve as of December 31, 2008. The appropriate discount rate was then selected from resulting discounted cash flows. For the years ended December 31, 2008 and 2007, the discount rate used to calculate the period end liability and the following year’s expense was 6.20% and 6.63%, respectively. A 0.25% increase in the discount rate would have decreased 2008 net periodic postretirement benefit costs by approximately $4.0 million. A 0.25% decrease in the discount rate would have increased 2008 net periodic postretirement benefit costs by approximately $4.1 million. Deferred gains and losses are primarily due to historical changes in the discount rate and medical cost inflation differing from expectations in prior years. Changes to interest rates for the rates of returns on instruments that could be used to settle the actuarially determined plan obligations introduce substantial volatility to our costs. Accumulated actuarial gains or losses in excess of a pre-established corridor are amortized on a straight-line basis over the expected future service of active salary employees to their assumed retirement age. At December 31, 2008 the average remaining service period for our salaried plans is approximately 10 years. Accumulated actuarial gains or losses in excess of a pre-established corridor are amortized on a straight-line basis over the expected remaining life of our retired United Mine Workers of America (UMWA) population. The average remaining service period of this population is not used for amortization purposes because the majority of the UMWA population of our plan is retired. At December 31, 2008, the average remaining life expectancy of our retired UMWA population used to calculate the following year’s expense is approximately 13 years.

Per capita costs on a per annum basis for Other Postretirement Benefits were assumed to be $5,783 at December 31, 2008. This was approximately a 4.8% decrease from the per capita cost on a per annum basis at December 31, 2007. The decrease was due to more favorable experience than expected, healthcare cost trends and was within the range expected by our assumptions. If the actual change in per capita cost of medical services or other postretirement benefits are significantly greater or less than the projected trend rates, the per capita cost assumption would need to be adjusted, which could have a significant effect on the costs and liabilities recognized in the financial statements.

Significant increases in health and prescription drug costs for represented hourly retirees could have a material adverse effect on CONSOL Energy’s operating cash flow. However, the effect on CONSOL Energy’s cash flow from operations for salaried employees has been limited to approximately 6% of the previous year’s medical cost for salaried employees due to the cost sharing provision in the benefit plan.

On September 29, 2006, Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158) was issued. SFAS 158 required, among other things, the recognition of the funded status of each defined pension benefit plan and other postretirement benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. Additionally, SFAS 158 requires an employer to measure the funded status of its plans as of the date of its year-end statement of financial position. This provision became effective for CONSOL Energy for the year ended December 31, 2008 and required a change in the measurement date from September 30 to December 31. As a result of the adoption, the company recognized an increase of $42.6 million in the other postretirement liability. This increase was accounted for as a reduction in the January 1, 2008 balance of retained earnings.

The estimated liability recognized in the December 31, 2008 financial statements was $2.6 billion. For the year ended December 31, 2008, we paid approximately $143.0 million for Other Postretirement Benefits, all of which were paid from operating cash flow. Our obligations with respect to these liabilities are unfunded at December 31, 2008. CONSOL Energy does not expect to contribute to the other postretirement plan in 2009. We intend to pay benefit claims as they are due.

Salaried Pensions

CONSOL Energy has non-contributory defined benefit retirement plans covering substantially all employees not covered by multi–employer plans. The benefits for these plans are based primarily on years of service and employee’s pay near retirement. Effective January 1, 2006, employees hired between August 1, 2004 and December 31, 2005 that were not previously eligible to participate in the plans began accruing service. The CONSOL Energy salaried plan allows for lump-sum distributions of benefits earned up until December 31, 2005, at the employees’ election. The Restoration Plan was frozen effective December 31, 2006 and was replaced prospectively with the CONSOL Energy Supplemental Retirement Plan. In addition, the CONSOL Energy’s Restoration Plan allows only for lump-sum distributions earned up until December 31, 2006.

Effective January 1, 2007, employees hired by CNX Gas, an 83.3% owned subsidiary, will not be eligible to participate in CNX Gas’ non-contributory defined benefit retirement plan. In lieu of participation in the non-contributory defined benefit plan, these employees began 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 employees of CONSOL Energy prior to this date were given a one-time opportunity to elect to remain in the defined benefit plan or opt to freeze their service accruals and participate in the additional 3% company contribution into their defined contribution plan. All employees hired on or after January 1, 2006, but on or before December 31, 2006 had their current non-contributory defined benefit frozen and began receiving the additional 3% company contribution into their defined contribution plan, effective January 1, 2007. CNX Gas intends to freeze all defined benefit accruals as of December 31, 2016 for CNX Gas employees that elected to remain in the defined benefit plan.

Our independent actuaries calculate the actuarial present value of the estimated retirement obligation based on assumptions including rates of compensation, mortality rates, retirement age and interest rates. For the year ended December 31, 2008, compensation increases are assumed to range from 3% to 8% depending on age and job classification. The discount rate is determined each year at the measurement date. The discount rate is estimated by utilizing a corporate yield curve model developed from corporate bond data using only bonds rated Aa by Moody’s as of the measurement date. All expected benefit payments from the CONSOL Energy retirement plan were discounted using a spot rate yield curve as of December 31, 2008. The appropriate equivalent discount

rate was then selected for the resulting discounted pension cash flows. For the years ended December 31, 2008 and 2007, the discount rate used to calculate the period end liability and the following year’s expense was 6.28% and 6.57%, respectively. A 0.25% increase in the discount rate would have decreased the 2008 net periodic pension cost by $1.0 million. A 0.25% decrease in the discount rate would have increased the 2008 net periodic pension cost by $1.0 million. Deferred gains and losses are primarily due to historical changes in the discount rate and earnings on assets differing from expectations in prior years. At December 31, 2008 the average remaining service period is approximately 10 years. Changes to any of these assumptions introduce substantial volatility to our costs.

On September 29, 2006, Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158) was issued. SFAS 158 required, among other things, the recognition of the funded status of each defined pension benefit plan and other postretirement benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. Additionally, SFAS 158 requires an employer to measure the funded status of its plans as of the date of its year-end statement of financial position. This provision became effective for CONSOL Energy for the year ended December 31, 2008 and required a change in the measurement date from September 30 to December 31. As a result of this adoption, the company recognized an increase of $2.3 million in the liability for salaried pension. This increase was accounted for as a reduction in the January 1, 2008 balance of retained earnings.

The market related asset value is derived by taking the cost value of assets as of December 31, 2008 and multiplying it by the average 36-month ratio of the market value of assets to the cost value of assets. CONSOL Energy’s pension plan weighted average asset allocations at December 31, 2008 consisted of 63% equity securities and 37% debt securities. The current volatile economic environment and rapid deterioration in the equity markets have caused investment income and the value of investment assets held in our pension trust to decline and lose value. As a result, we may be required to increase the amount of cash contributions we make into the pension trust.

According to Statement of Financial Accounting Standards No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” plans that pay lump-sum distributions need to monitor the distributions for a plan year. If total payments, exceed the total of the service cost and interest cost for the plan year, settlement accounting is required. Lump-sum payments exceeded this threshold in the Restoration Plan during 2007. CONSOL Energy recognized an additional expense of $2.7 million in 2007’s results of operations. The adjustment equaled the previously unrecognized actuarial loss resulting from each individual who received a lump sum in that year. CONSOL regularly monitors this situation. If settlement accounting is triggered again in the future, the adjustment could materially impact operating results.

The estimated liability recognized in the December 31, 2008 financial statements was $196.5 million. For the year ended December 31, 2008, we contributed approximately $42.1 million for defined benefit retirement plans other than multi-employer plans. Our obligations with respect to these liabilities are partially funded at December 31, 2008. CONSOL Energy does expect to contribute to the defined benefit retirement plans during 2009. We intend to contribute an amount that will avoid benefit restrictions for the following plan year.

Workers’ Compensation and Coal Workers’ Pneumoconiosis

Workers’ compensation is a system by which individuals who sustain employment related physical injuries or some type of occupational diseases are compensated for their disabilities, medical costs, and on some occasions, for the costs of their rehabilitation. Workers’ compensation will also compensate the survivors of workers who suffer employment related deaths. The workers’ compensation laws are administered by state agencies with each state having its own set of rules and regulations regarding compensation that is owed to an employee that is injured in the course of employment. CONSOL Energy records an actuarially calculated liability, which is determined using various assumptions, including discount rate, future healthcare cost trends,

benefit duration and recurrence of injuries. The discount rate is determined each year at the measurement date. The discount rate is estimated by utilizing a corporate yield curve model developed from corporate bond data using only bonds rated Aa by Moody’s as of the measurement date. All future workers compensation expected benefit payments were discounted using a spot rate yield curve as of December 31, 2008. The appropriate equivalent discount rate was then selected from the resulting discounted workers’ compensation cash flows. For the years ended December 31, 2008 and 2007, the discount rate used to calculate the period end liability and the following year’s expense was 5.90% and 5.94%, respectively. A 0.25% increase or decrease in the discount rate would not have materially decreased or increased the 2008 workers’ compensation expense. Deferred gains and losses are primarily due to historical changes in the discount rates, several years of favorable claims experience, various favorable claims experience, various favorable state legislation changes and an over all lower incident rate than our assumptions. Accumulated actuarial gains or losses are amortized on a straight-line basis over the expected future benefit duration of current claimants. At December 31, 2008, the average expected benefit duration for this group is approximately 9 years. The estimated liability recognized in the financial statements at December 31, 2008 was approximately $159.8 million. CONSOL Energy’s policy has been to provide for workers’ compensation benefits from operating cash flow. No funding has been provided to cover these benefits. For the year ended December 31, 2008, we made payments for workers’ compensation benefits of approximately $38.8 million, all of which was paid from operating cash flow.

CONSOL Energy is responsible under the Federal Coal Mine Health and Safety Act of 1969, as amended, for medical and disability benefits to employees and their dependents resulting from occurrences of coal workers’ pneumoconiosis disease. CONSOL Energy is also responsible under various state statutes for pneumoconiosis benefits. After our review, our independent actuaries calculate the actuarial present value of the estimated pneumoconiosis obligation based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents and discount rates. The discount rate is determined each year at the measurement date. The discount rate is estimated by utilizing a corporate yield curve model developed from corporate bond data using only bonds rated Aa by Moody’s as of the measurement date. All future coal workers’ pneumoconiosis expected benefit payments were discounted using a spot rate yield curve at December 31, 2008. The appropriate equivalent discount rate was then selected from the resulting discounted coal workers’ pneumoconiosis cash flows. For the years ended December 31, 2008 and 2007, the discount rate used to calculate the period end liability and the following year’s expense was 6.23% and 6.62%, respectively. A 0.25% increase or decrease in the discount rate would not have materially decreased or increased the 2008 coal workers’ pneumoconiosis expense. Actuarial gains associated with coal workers’ pneumoconiosis have resulted from numerous legislative changes over many years which have resulted in lower approval rates for filed claims than our assumptions originally reflected. Actuarial gains have also resulted from lower incident rates and lower severity of claims filed than our assumption originally reflected. The estimated liability recognized in the financial statements at December 31, 2008 was $200.1 million. For the year ended December 31, 2008, we paid coal workers’ pneumoconiosis benefits of approximately $11.5 million. Our obligations with respect to these liabilities are unfunded at December 31, 2008.

On September 29, 2006, Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158) was issued. SFAS 158 required, among other things, the recognition of the funded status of each defined pension benefit plan and other postretirement benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. Additionally, SFAS 158 requires an employer to measure the funded status of its plans as of the date of its year-end statement of financial position. This provision became effective for CONSOL Energy for the year ended December 31, 2008 and required a change in the measurement date from September 30 to December 31. As a result of this adoption, the company recognized an increase of $4.9 million and $11.5 million in the liabilities for coal workers’ pneumoconiosis and workers’ compensation, respectively. These increases were accounted for as a reduction in the January 1, 2008 balance of retained earnings.

Reclamation, Mine Closure and Gas Well Closing Obligations

The Surface Mining Control and Reclamation Act established operational, reclamation and closure standards for all aspects of surface mining as well as most aspects of deep mining. CONSOL Energy accrues for the costs of current mine disturbance and final mine and gas well closure, including the cost of treating mine water discharge where necessary. Estimates of our total reclamation, mine-closing liabilities, and gas well closing which are based upon permit requirements and CONSOL Energy engineering expertise related to these requirements, including the current portion, were approximately $544.3 million at December 31, 2008. This liability is reviewed annually by CONSOL Energy management and engineers. The estimated liability can significantly change if actual costs vary from assumptions or if governmental regulations change significantly.

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 primarily relate to the closure of mines and gas wells and the reclamation of land upon exhaustion of coal and gas reserves. Changes in the variables used to calculate the liabilities can have a significant effect on the mine closing, reclamation and 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 proven 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.

Income Taxes

CONSOL Energy 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. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. At December 31, 2008, CONSOL Energy has deferred tax assets in excess of deferred tax liabilities of approximately $394.1 million. The deferred tax assets are evaluated periodically to determine if a valuation allowance is necessary. There were no significant changes in the deferred tax valuation allowances in the year ended December 31, 2008.

For 2008, CONSOL Energy continues to report a deferred tax asset of approximately $34.7 million relating to CONSOL Energy’s state net operating loss carry-forwards with a full valuation allowance. A review of the positive and negative evidence regarding these benefits, primarily the history of book and tax losses on a separate company basis, concluded that a valuation allowance was warranted. A valuation allowance of $26.2 million has also been recorded against the deferred state tax asset attributable to future deductible differences for certain subsidiaries with histories of book and tax losses. These net operating losses expire at various times from 2009 to 2027. Management will continue to assess the realization of deferred tax assets based upon updated income forecast data and the feasibility of future tax planning strategies, and may record adjustments to valuation allowances against deferred tax assets in future periods as appropriate that could materially impact net income.

CONSOL Energy adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (FIN 48) on January 1, 2007. CONSOL Energy evaluates all tax positions taken on the state and federal tax filings to determine if the position is more likely than

not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, an evaluation to determine the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement is determined. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the probable amount that is more likely than not is based on judgment, historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates, that are not readily apparent from other sources, form the basis for recognizing a FIN 48 liability. Actual results could differ from those estimates upon subsequent resolution of identified matters. Estimates of our uncertain tax liabilities, including interest and the current portion, were approximately $71.2 million at December 31, 2008.

Stock Based Compensation

CONSOL Energy uses the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payments” (SFAS No. 123R). As of December 31, 2008, we have issued three types of share based payment awards: options, restricted stock units, and performance stock units. The Black-Scholes option pricing model is used to determine fair value of stock options at the grant date. Various inputs are utilized in the Black-Scholes pricing model, such as:

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stock price on measurement date,

•

exercise price defined in the award,

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expected dividend yield based on historical trend of dividend payouts,

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risk-free interest rate based on a zero-coupon treasury bond rate,

•

expected term based on historical grant and exercise behavior, and

•

expected volatility based on historic and implied stock price volatility of CONSOL Energy stock and public peer group stock.

These factors can significantly impact the value of stock options expense recognized over the requisite service period of option holders.

The fair value of each restricted stock unit awarded is equivalent to the closing market price of a share of our company’s stock. The fair value of each performance share unit is determined by the underlying share price of our company stock on the date of the grant and management’s estimate of the probability that the performance conditions required for vesting will be achieved.

As of December 31, 2008, $15.7 million of total unrecognized compensation cost related to unvested awards is expected to be recognized over a weighted-average period of 1.54 years. See Note 18 in the Notes to the Audited Consolidated Financial Statements in Item 8 in this Form 10-K for more information.

Contingencies

CONSOL Energy 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. Future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the outcome of these proceedings. See Note 25 in the Notes to the Audited Consolidated Financial Statements in Item 8 in this Form 10-K for more information.

Successful Efforts Accounting

We use the “successful efforts” method to account for our gas exploration and production activities. Under this method, cost 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 can not be made after finding sufficient quantities of reserves to continue evaluating the viability of the project. We use this accounting policy instead of the “full cost” method because it provides a more timely accounting of the success or failure of our gas exploration and production activities.

Derivative Instruments

CNX Gas enters into financial derivative instruments to manage our exposure to natural gas and oil price volatility. Our derivatives are accounted for under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended. We measure every derivative instrument at fair value and record 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 year. CNX Gas currently utilizes only cash flow hedges that are considered highly effective.

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 hedge 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.

Coal and Gas Reserve Values

There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal and gas reserves, including many factors beyond our control. As a result, estimates of economically recoverable coal and gas reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our staff. Our gas reserves have been reviewed by independent experts. Our coal reserves are periodically reviewed by an independent third party consultant. Some of the factors and assumptions which impact economically recoverable reserve estimates include:

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geological conditions;

•

historical production from the area compared with production from other producing areas;

•

the assumed effects of regulations and taxes by governmental agencies;

•

assumptions governing future prices; and

•

future operating costs.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of coal and gas attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and these variances may be material. See “Risk Factors” in Item 1A of this report for a discussion of the uncertainties in estimating our reserves.

Liquidity and Capital Resources

CONSOL Energy generally has satisfied our working capital requirements and funded our capital expenditures and debt service obligations with cash generated from operations and proceeds from borrowings. We utilize a $1 billion senior secured credit facility which expires in 2012. The facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries and collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. The agreement provides for the release of collateral at the request of CONSOL Energy upon the achievement of certain credit ratings. Fees and interest rate spreads are based on a ratio of financial covenant debt to twelve-month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), measured quarterly. The facility includes a minimum interest coverage ratio covenant of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 16.78 to 1.00 at December 31, 2008. The facility also includes a maximum leverage ratio covenant of not more than 3.25 to 1.00, measured quarterly. The leverage ratio was 1.34 to 1.00 at December 31, 2008. Affirmative and negative covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock, pay dividends and merge with another corporation. At December 31, 2008, the facility had approximately $485 million drawn and $271 million of letters of credit outstanding, leaving $244 million of unused capacity. From time to time, CONSOL Energy is required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies statutes and regulations. We sometimes use letters of credit to satisfy these requirements and these letters of credit reduce our borrowing facility capacity.

Pennsylvania Department of Environmental Protection (PA DEP) and CONSOL Energy have been negotiating a Consent Order and Agreement (the Agreement) that addresses financial assurance required by the State for CONSOL Energy’s Pennsylvania mine water treatment facilities. The Agreement requires the company to post approximately $34 million of financial assurance over a 10-year time frame as follows; 25% of the total required by March 15, 2009, and 10% of balance by March 15 of each year from 2010 through 2019. CONSOL Energy plans to use its revolving credit facility to satisfy these requirements.

CONSOL Energy and certain of our U.S. subsidiaries also participate in a receivables securitization facility for the sale on a continuous basis of eligible trade accounts receivable that will provide, on a revolving basis, up to $165 million of short-term funding or letter of credit. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary, for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to CNX Funding Corporation. CNX Funding Corporation then sells, on a revolving basis, an undivided percentage interest in the pool of eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the trade receivables. CONSOL Energy has agreed to continue servicing the sold receivables for the financial institutions for a fee based upon market rates for similar services. The cost of funds is consistent with commercial paper rates plus a charge for administrative services paid to the financial institution. At December 31, 2008, eligible accounts receivable totaled approximately $165 million. There was no subordinated retained interest at December 31, 2008. Accounts receivable totaling $165 million were removed from the consolidated balance sheet at December 31, 2008. There were no letters of credit outstanding against the facility at December 31, 2008.

CNX Gas, an 83.3% consolidated subsidiary of CONSOL Energy, utilizes a revolving credit facility providing an initial aggregate outstanding principal amount of up to $200 million, including borrowings and letters of credit, which expires in 2010. CNX Gas can request an increase in aggregate outstanding principal amount to $300 million. The agreement contains a negative pledge provision, whereas CNX Gas assets cannot be used to secure other obligations. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Covenants in the facility limit CNX Gas’ ability to dispose of assets, make investments, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. This facility includes a

leverage ratio covenant of not more than 3.00 to 1.00, measured quarterly. This ratio was 0.32 to 1.00 at December 31, 2008. The facility also includes an interest coverage ratio covenant of no less than 3.00 to 1.00, measured quarterly. This ratio was 77.29 to 1.00 at December 31, 2008. At December 31, 2008, this facility had approximately $15 million of letters of credit issued and had approximately $73 million of outstanding borrowings, leaving approximately $112 million of unused capacity. As a result of the credit agreement, CNX Gas and their subsidiaries executed a Supplemental Indenture on October 21, 2005, guaranteeing of CONSOL Energy’s 7.875% bonds.

Currently, there is an unprecedented uncertainty in the financial markets. The uncertainty in the market brings additional potential risks to CONSOL Energy. The risks include additional declines in our stock value, less availability and higher costs of additional credit streams, potential counterparty defaults, and further commercial bank failures. Although the majority of the financial institutions in our bank group appear to be strong, there are some that have been and could be considered take-over candidates. We have no indication that any such transactions would impact our current credit facility; however, the possibility does exist. Financial market disruptions may impact our collection of trade receivables. The credit worthiness of our customers is constantly monitored by CONSOL Energy. We believe that our current group of customers are sound and represent no abnormal business risk.

CONSOL Energy believes that cash generated from operations and our borrowing capacity will be sufficient to meet our working capital requirements, anticipated capital expenditures (other than major acquisitions), scheduled debt payments, anticipated dividend payments and to provide required letters of credit. Nevertheless, the ability of CONSOL Energy to satisfy our working capital requirements, debt service obligations, to fund planned capital expenditures or pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the coal and gas industries and other financial and business factors, some of which are beyond CONSOL Energy’s control.

In order to manage the market risk exposure of volatile natural gas prices in the future, CONSOL Energy enters into various physical gas supply transactions with both gas marketers and end users for terms varying in length. CONSOL Energy has also entered into various gas swap transactions that qualify as financial cash flow hedge, which exist parallel to the underlying physical transactions. The fair value of these contracts was an asset of $207 million at December 31, 2008. The ineffective portion of these contracts was insignificant to earnings in the year ended December 31, 2008. Hedge counterparties consists of commercial banks who participate in the revolving credit facility. No issues related to our hedge agreements have been encountered to date.

CONSOL Energy frequently evaluates potential acquisitions. CONSOL Energy has funded acquisitions primarily with cash generated from operations and a variety of other sources, depending on the size of the transaction, including debt financing. There can be no assurance that additional capital resources, including debt financing, will be available to CONSOL Energy on terms which CONSOL Energy finds acceptable, or at all.

Cash Flows (in millions)


	2008			2007			Change
Cash flows provided by operating activities	$	1,029		$	684		$	345
Cash used in investing activities	$	(1,099	)	$	(972	)	$	(127	)
Cash provided by financing activities	$	166		$	106		$	60

Cash flows from operating activities changed primarily due to the following items:

•

Operating cash flow increased in 2008 due to higher net income in the year-to-year comparison, as well as various other changes in operating assets, operating liabilities, other assets and other liabilities which occurred throughout both years.

•

Operating cash flow in 2008 included a $75 million cash receipt from insurance carriers related to the Buchanan incident, as previously disclosed. Operating cash flow in 2007 included a $5 million cash receipt from insurance carriers related to a previous Buchanan incident.

•

Operating cash flows were lower in 2008 due to $85 million of reduced proceeds from the accounts receivable securitization program.

•

Operating cash flows were lower in 2008 by approximately $67 million due to coal inventories. Coal inventories increased 462 thousand tons in 2008. Coal inventories decreased 147 thousand tons in 2007.

Net cash used in investing activities changed primarily due to the following items:

•

Total capital expenditures increased $22 million to $1,062 million in 2008 compared to $1,040 million in 2007. The increase was attributable to the $36 million cash proceeds paid for the acquisition of the remaining interest in Coalfield Pipeline and Knox Energy, LLC, which CNX Gas did not previously own. Increases in capital expenditures were also related to the expanded gas drilling program, as well as additional increases in capital spending throughout other segments. The increases in capital expenditures were offset, in part, by the $297 million of cash proceeds paid in 2007 for the acquisition of AMVEST.

•

CONSOL Energy purchased $67 million of CNX Gas common stock on the open market during 2008. Cash proceeds of $10 million were paid in 2007 to acquire CNX Gas common stock on the open market.

•

Proceeds from the sale of assets were $28 million in 2008 compared to $85 million in 2008. Proceeds in 2008 were primarily related to the sale of the Mill Creek Mine. Proceeds in 2007 were primarily due to the $53 million of proceeds from the sale of certain western Kentucky coal reserves to Alliance Resource Partners, L.P.

Net cash provided by financing activities changed primarily due to the following items:

•

In 2008, CONSOL Energy received approximately $237 million of proceeds from the revolving credit facility. In 2007, CONSOL Energy received approximately $248 million of proceeds from this facility. In 2008, CONSOL Energy’s 83.3% owned subsidiary, CNX Gas, received proceeds of approximately $73 million from its revolving credit facility. There was no activity under the CNX Gas revolving credit facility in 2007.

•

In 2007, CONSOL Energy paid $45 million to redeem its medium-term notes that were due in June 2007. There were no long-term debt repayments in 2008.

•

CONSOL Energy repurchased $98 million of its common stock on the open market under the share repurchase program in 2008 compared to $80 million of its common stock purchased in 2007.

•

In 2008, CONSOL Energy paid approximately $73 million of dividends compared to approximately $56 million in 2007.

The following is a summary of our significant contractual obligations at December 31, 2008 (in thousands):

Payments due by Year


	Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years		Total
Short-Term Notes Payable	$	557,700	$	—	$	—	$	—	$	557,700
Purchase Order Firm Commitments		22,624		16,253		—		—		38,877
Gas Firm Transportation Obligation		19,449		36,494		32,235		239,196		327,374
Long-Term Debt		10,036		125,063		255,094		14,870		405,063
Capital Lease Obligations		21,065		33,261		15,734		57,788		127,848
Operating Lease Obligations		55,720		96,440		58,175		168,757		379,092
Other Long-Term Liabilities(a)		365,385		488,830		481,658		2,359,741		3,695,614

Total Contractual Obligations(b)	$	1,051,979	$	796,341	$	842,896	$	2,840,352	$	5,531,568

(a)

Long-term liabilities include other post-employment benefits, work-related injuries and illnesses, mine reclamation and closure and other long-term liability costs. Estimated salaried retirement contributions required to meet minimum funding standards under ERISA are excluded from the pay-out table due to the uncertainty regarding amounts to be contributed. Estimated 2009 contributions are expected to range from $47 million to $67 million.

(b)	The significant obligation table does not include obligations to taxing authorities due to the uncertainty surrounding the ultimate settlement of amounts and timing of these obligations.

Debt

At December 31, 2008, CONSOL Energy had total long-term debt of $491 million outstanding, including the current portion of long-term debt of $22 million. This long-term debt consisted of:

•

An aggregate principal amount of $249 million of 7.875% notes ($250 million of 7.875% notes due in 2012, net of $1 million unamortized debt discount). The notes were issued at 99.174% of the principal amount. Interest on the notes is payable March 1 and September 1 of each year. Payment of the principal and premium, if any, and interest on the notes are guaranteed by most of CONSOL Energy’s subsidiaries. The notes are senior secured obligations and rank equally with all other secured indebtedness of the guarantors;

•

An aggregate principal amount of $103 million of two series of industrial revenue bonds which were issued to finance the Baltimore port facility and bear interest at 6.50% per annum and mature in 2010 and 2011;

•

$30 million in advance royalty commitments with an average interest rate of 10.7% per annum;

•

An aggregate principal amount of $20 million on a variable rate note that bears interest at 6.10% at December 31, 2008. This note was incurred by a variable interest entity that is fully consolidated in which CONSOL Energy holds no ownership interest;

•

An aggregate principal amount of $89 million of capital leases with a weighted average interest rate of 7.31% per annum;

At December 31, 2008, CONSOL Energy also had $485 million of aggregate principal amounts of outstanding borrowings and approximately $271 million of letters of credit outstanding under the $1 billion senior secured revolving credit facility.

At December 31, 2008, CNX Gas, an 83.3% owned subsidiary, had $73 million of aggregate principal amounts of outstanding borrowings and approximately $15 million of letters of credit outstanding under its $200 million revolving credit facility.

On September 15, 2008, Standard and Poor’s raised our corporate credit rating to BB+ from BB and removed all ratings from CreditWatch. The rating BB+ is the 11^th lowest out of 22 rating categories. Standard and Poor’s defines an obligation rated ‘BB’ as less vulnerable to nonpayment than other speculative issues. However, the rating indicates that an obligor faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

Total CONSOL Energy Inc. Stockholders’ Equity and Dividends

Total CONSOL Energy Inc. stockholders’ equity was $1,462 million at December 31, 2008 and $1,214 million at December 31, 2007. Stockholders’ equity increased primarily due to net income for the year ended December 31, 2008 and changes in the cash flow hedges. These increases were offset by changes in the actuarial long-term liabilities, the declaration of dividends, and the retirement 2.1 million shares of common stock. See Consolidated Statements of Stockholders’ Equity in the Audited Consolidated Financial Statements in Item 8 of this Form 10-K.

In September 2008, CONSOL Energy announced a share repurchase program of up to $500 million of the company’s common stock during a 24-month period beginning in September 2008. The share repurchase plan will be used from time-to-time depending on a number of factors including: current market conditions; the company’s financial outlook; business conditions, including cash flows and internal capital requirements; as well as alternative investment options. As of December 31, 2008, we have purchased a total of 2,741,300 shares at an average price of $35.59 per share under this program.

Recent dividend information is as follows:


Declaration Date	Amount Per Share	Record Date	Payment Date
January 30, 2009	$0.10	February 9, 2009	February 20, 2009
October 24, 2008	$0.10	November 5, 2008	November 21, 2008
August 1, 2008	$0.10	August 7, 2008	August 25, 2008
April 25, 2008	$0.10	May 6, 2008	May 27, 2008
January 30, 2008	$0.10	February 7, 2008	February 22, 2008

The declaration and payment of dividends by CONSOL Energy is subject to the discretion of CONSOL Energy’s Board of Directors, and no assurance can be given that CONSOL Energy will pay dividends in the future. CONSOL Energy’s Board of Directors determines whether dividends will be paid quarterly. The determination to pay dividends will depend upon, among other things, general business conditions, CONSOL Energy’s financial results, contractual and legal restrictions regarding the payment of dividends by CONSOL Energy, planned investments by CONSOL Energy and such other factors as the Board of Directors deems relevant. Our credit facility limits our ability to pay dividends when our leverage ratio covenant is 2.50 to 1.00 or more or our availability is less than $100 million. The leverage ratio was 1.34 to 1.00 and our availability was approximately $244 million at December 31, 2008. The credit facility does not permit dividend payments in the event of default. There were no defaults in the year ended December 31, 2008.

Off-Balance Sheet Transactions

CONSOL Energy does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on CONSOL Energy’s financial 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 May 2008, The Financial Accounting Standards Board (FASB) issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Statement 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Statement 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing Amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect this guidance to have a significant impact on CONSOL Energy.

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

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141R), and Statement of Financial Accounting Standards No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141R and SFAS 160 will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141R retains the fundamental requirements in Statement 141 “Business Combinations” while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS 160 was adopted on January 1, 2009, as required. SFAS 160 changed the accounting and reporting for minority interests, which was recharacterized as noncontrolling interests, and classified as a component of equity. All periods presented have been recast to reflect the adoption of SFAS 160.

Item 8.

Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Reports of Independent Registered Public Accounting Firms		45
Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006		47
Consolidated Balance Sheets at December 31, 2008 and 2007		48
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006		49
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006		50
Notes to Audited Consolidated Financial Statements		51

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of CONSOL Energy Inc.

We have audited the accompanying consolidated balance sheet of CONSOL Energy Inc. (and Subsidiaries) as of December 31, 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CONSOL Energy Inc. (and Subsidiaries) at December 31, 2008, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 15 to the consolidated financial statements, during the year ended December 31, 2008, the Company adopted the measurement provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Also, as indicated in Note 1, during 2009 the Company adopted Statement of Financial Accounting Standards No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CONSOL Energy, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, PA

February 17, 2009, except for SFAS 160 Adoption in Note 1 as to which the date is June 26, 2009

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of CONSOL Energy Inc.:

In our opinion, the consolidated balance sheet as of December 31, 2007 and the related consolidated statements of income, stockholders’ equity and cash flows for each of two years in the period ended December 31, 2007 present fairly, in all material respects, the financial position of CONSOL Energy Inc. and its subsidiaries (“CONSOL Energy”) at December 31, 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule (not presented herein) listed in the index appearing under Item 15(a)(2) of CONSOL Energy’s 2008 annual report on Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of CONSOL Energy’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 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, CONSOL Energy 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. As discussed in Note 1 to the consolidated financial statements, CONSOL Energy changed the manner in which it accounts for non-controlling interests effective January 1, 2009.

PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania

February 18, 2008, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of the change in accounting for non-controlling interests discussed in Note 1 to the consolidated financial statements, as to which the date is June 26, 2009.

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)


	For the Years Ended December 31,
	2008			2007			2006
Sales—Outside	$	4,181,569		$	3,324,346		$	3,286,522
Sales—Purchased Gas		8,464			7,628			43,973
Sales—Gas Royalty Interests		79,302			46,586			51,054
Freight—Outside		216,968			186,909			162,761
Other Income (Note 3)		166,142			196,728			170,861

Total Revenue and Other Income		4,652,445			3,762,197			3,715,171
Costs of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)		2,843,203			2,352,000			2,249,776
Purchased Gas Costs		8,175			7,162			44,843
Gas Royalty Interests Costs		73,962			39,921			41,879
Freight Expense		216,968			186,909			162,761
Selling, General and Administrative Expenses		124,543			108,664			91,150
Depreciation, Depletion and Amortization		389,621			324,715			296,237
Interest Expense (Note 4)		36,183			30,851			25,066
Taxes Other Than Income (Note 5)		289,990			258,926			252,539
Black Lung Excise Tax Refund		(55,795	)		24,092			—

Total Costs		3,926,850			3,333,240			3,164,251
Earnings Before Income Taxes and Noncontrolling Interest		725,595			428,957			550,920
Income Taxes (Note 6)		239,934			136,137			112,430

Net Income		485,661			292,820			438,490
Less: Net Income Attributable to Noncontrolling Interest		(43,191	)		(25,038	)		(29,608	)

Net Income Attributable to CONSOL Energy Inc. Shareholders	$	442,470		$	267,782		$	408,882

Earnings Per Share (Note 1):
Basic	$	2.43		$	1.47		$	2.23

Dilutive	$	2.40		$	1.45		$	2.20

Weighted Average Number of Common Shares Outstanding (Note 1):
Basic		182,386,011			182,050,627			183,354,732

Dilutive		184,679,592			184,149,751			185,638,106

Dividends per Share	$	0.40		$	0.31		$	0.28

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	December 31, 2008			December 31, 2007
ASSETS
Current Assets:
Cash and Cash Equivalents	$	138,512		$	41,651
Accounts and Notes Receivable:
Trade		221,729			180,545
Other Receivables		79,552			69,771
Inventories (Note 8)		227,810			163,193
Recoverable Income Taxes		33,862			19,090
Deferred Income Taxes (Note 6)		60,599			130,820
Prepaid Expenses		221,750			78,085

Total Current Assets		983,814			683,155
Property, Plant and Equipment (Note 10):
Property, Plant and Equipment		9,980,288			8,945,312
Less—Accumulated Depreciation, Depletion and Amortization		4,214,316			3,980,270

Total Property, Plant and Equipment—Net		5,765,972			4,965,042
Other Assets:
Deferred Income Taxes (Note 6)		333,543			374,811
Investment in Affiliates		72,996			94,866
Other		214,133			90,216

Total Other Assets		620,672			559,893

TOTAL ASSETS	$	7,370,458		$	6,208,090

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	385,197		$	238,312
Short-Term Notes Payable (Note 11)		557,700			247,500
Current Portion of Long-Term Debt (Note 13 and Note 14)		22,401			18,283
Other Accrued Liabilities (Note 12)		546,442			512,302

Total Current Liabilities		1,511,740			1,016,397
Long-Term Debt:
Long-Term Debt (Note 13)		393,312			398,077
Capital Lease Obligations (Note 14)		75,039			90,848

Total Long-Term Debt		468,351			488,925
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions (Note 15)		2,493,344			2,336,809
Pneumoconiosis Benefits (Note 16)		190,261			171,896
Mine Closing		404,629			399,633
Workers’ Compensation (Note 16)		128,477			118,356
Deferred Revenue		—			3,162
Salary Retirement (Note 15)		194,567			67,392
Reclamation		38,193			34,317
Other		266,550			193,666

Total Deferred Credits and Other Liabilities		3,716,021			3,325,231

Total Liabilities		5,696,112			4,830,553

Stockholders’ Equity:
Common Stock, $.01 Par Value; 500,000,000 Shares Authorized, 183,014,426 Issued and 180,549,851 Outstanding at December 31, 2008; 185,126,526 Issued and 182,291,623 Outstanding at December 31, 2007		1,830			1,851
Capital in Excess of Par Value		993,478			966,544
Preferred Stock, 15,000,000 authorized; Non issued and outstanding		—			—
Retained Earnings		1,010,902			766,536
Accumulated Other Comprehensive Loss (Note 19)		(461,900	)		(419,284	)
Common Stock in Treasury, at Cost—2,464,575 shares at December 31, 2008 and 2,834,903 Shares at December 31, 2007		(82,123	)		(101,228	)

Total CONSOL Energy Inc. Stockholders’ Equity		1,462,187			1,214,419

Noncontrolling Interest		212,159			163,118

Total Equity		1,674,346			1,377,537

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,370,458		$	6,208,090

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)


	Common Stock			Capital in Excess of Par Value			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation on Restricted Stock Units			Common Stock in Treasury			Total CONSOL Energy Inc. Stockholders' Equity			Non- Controlling Interest			Total Equity
Balance at December 31, 2005	$	1,850		$	883,316		$	252,109		$	(105,162	)	$	(6,757	)				$	1,025,356		$	93,444		$	1,118,800
Net Income								408,882												408,882			29,608			438,490
Minimum Pension Liability (Net of $6,614 Tax)											10,390									10,390						10,390
Treasury Rate Lock (Net of $53 Tax)											(81	)								(81	)					(81	)
Gas Cash Flow Hedge (Net of ($23,860) Tax)					(1,996	)					29,644									27,648			8,734			36,382

Comprehensive Income (Loss)		—			(1,996	)		408,882			39,953			—			—			446,839			38,342			485,181
Adjustment to Apply SFAS 158, (Net of $156,100 Tax), to Defined Benefit Postretirement Plans											(310,508	)								(310,508	)		140			(310,368	)
Stock Options Exercised		1			1,361															1,362						1,362
Issuance of Treasury Stock					(11,703	)		(9,034	)								34,045			13,308						13,308
Dividends ($0.28 per Share)								(51,416	)											(51,416	)					(51,416	)
Tax Benefit from Stock-Based Compensation					38,545															38,545						38,545
Purchases of Treasury Stock																	(116,450	)		(116,450	)					(116,450	)
Amortization of Stock-Based Compensation Awards					19,115															19,115			3,733			22,848
Elimination of Unearned Compensation on Restricted Stock Units					(6,757	)								6,757						—						—

Balance at December 31, 2006		1,851			921,881			600,541			(375,717	)		—			(82,405	)		1,066,151			135,659			1,201,810
Net Income								267,782												267,782			25,038			292,820
Treasury Rate Lock (Net of $52 Tax)											(81	)								(81	)					(81	)
Gas Cash Flow Hedge (Net of ($2,146) Tax)											3,445									3,445			769			4,214
FAS 158 Long-Term Liability Adjustments (net of ($27,991) Tax)											(46,931	)								(46,931	)		(78	)		(47,009	)

Comprehensive Income (Loss)		—			—			267,782			(43,567	)		—			—			224,215			25,729			249,944
Cumulative Effect of FASB Interpretation No. 48 Adoption								(3,202	)											(3,202	)					(3,202	)
Issuance of Treasury Stock								(42,110	)								61,334			19,224						19,224
Issuance of CNX Gas Stock																				—			215			215
Purchases of Treasury Stock																	(80,157	)		(80,157	)					(80,157	)
Purchase of CNX Gas Stock																				—			(1,762	)		(1,762	)
Tax Benefit from Stock-Based Compensation					23,682															23,682			16			23,698
Amortization of Stock-Based Compensation Awards					20,981															20,981			3,261			24,242
Dividends ($0.31 per share)								(56,475	)											(56,475	)					(56,475	)

Balance at December 31, 2007		1,851			966,544			766,536			(419,284	)		—			(101,228	)		1,214,419			163,118			1,377,537
Net Income								442,470												442,470			43,191			485,661
Treasury Rate Lock (Net of $55 Tax)											(77	)								(77	)					(77	)
Gas Cash Flow Hedge (Net of ($77,292) Tax)											97,833									97,833			20,813			118,646
FAS 158 Long-Term Liability Adjustments (Net of ($82,156) Tax)											(140,289	)								(140,289	)		(16	)		(140,305	)

Comprehensive Income (Loss)		—			—			442,470			(42,533	)		—			—			399,937			63,988			463,925
Adjustment to apply SFAS 158 Measurement Provision (net of $23,652 Tax)								(38,606	)		(83	)								(38,689	)		(18	)		(38,707	)
Issuance of Treasury Stock								(21,519	)								34,980			13,461						13,461
Issuance of CNX Gas Stock																				—			312			312
Purchases of Treasury Stock																	(15,875	)		(15,875	)					(15,875	)
Purchase of CNX Gas Stock																				—			(18,682	)		(18,682	)
Retirement of Common Stock (2,112,200 Shares)		(21	)		(16,876	)		(65,022	)											(81,919	)					(81,919	)
Tax Benefit from Stock-Based Compensation					22,003															22,003			62			22,065
Amortization of Stock-Based Compensation Awards					21,807															21,807			3,379			25,186
Dividends ($0.40 per share)								(72,957	)											(72,957	)					(72,957	)

Balance at December 31, 2008	$	1,830		$	993,478		$	1,010,902		$	(461,900	)		—		$	(82,123	)	$	1,462,187		$	212,159		$	1,674,346

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

CONSOL ENERGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data)


	For the Years Ended December 31,
	2008			2007			2006
Cash Flows from Operating Activities:
Net Income	$	485,661		$	292,820		$	438,490
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization		389,621			324,715			296,237
Stock-based Compensation		25,186			24,243			22,841
Gain on Sale of Assets		(23,368	)		(112,389	)		(10,417	)
Amortization of Mineral Leases		4,871			4,519			3,773
Deferred Income Taxes		135,594			59,555			19,041
Equity in Earnings of Affiliates		(11,140	)		(6,551	)		(1,201	)
Changes in Operating Assets:
Accounts Receivable Securitization		39,600			125,400			—
Accounts and Notes Receivable		(79,747	)		14,074			(52,898	)
Inventories		(53,994	)		13,448			(7,427	)
Prepaid Expenses		(5,032	)		(9,145	)		(9,011	)
Changes in Other Assets		17,081			40,164			19,020
Changes in Operating Liabilities:
Accounts Payable		64,851			(2,435	)		(4,769	)
Other Operating Liabilities		(14,020	)		(30,978	)		(115,967	)
Changes in Other Liabilities		51,546			(54,924	)		59,604
Other		2,754			1,517			7,231

Net Cash Provided by Operating Activities		1,029,464			684,033			664,547

Cash Flows from Investing Activities:
Capital Expenditures		(1,061,669	)		(743,114	)		(690,546	)
Acquisition of AMVEST		—			(296,724	)		—
Proceeds from Sale of Assets		28,193			84,791			59,963
Purchase of Stock in Subsidiary		(67,259	)		(10,000	)		—
Net Investment in Equity Affiliates		1,879			(7,057	)		(30,963	)

Net Cash Used in Investing Activities		(1,098,856	)		(972,104	)		(661,546	)

Cash Flows from Financing Activities:
Payments on Long-Term Debt		—			(45,000	)		—
Proceeds from Short-Term Debt		310,200			247,500			—
Payments on Miscellaneous Borrowings		(10,414	)		(2,935	)		(5,107	)
Tax Benefit from Stock-Based Compensation		22,003			23,682			38,545
Dividends Paid		(72,957	)		(56,475	)		(51,416	)
Issuance of Treasury Stock		15,215			19,224			13,308
Purchases of Treasury Stock		(97,794	)		(80,157	)		(116,450	)
Stock Options Exercised		—			—			1,362

Net Cash Provided by (Used In) Financing Activities		166,253			105,839			(119,758	)
Net Increase (Decrease) in Cash and Cash Equivalents		96,861			(182,232	)		(116,757	)
Cash and Cash Equivalents at Beginning of Period		41,651			223,883			340,640

Cash and Cash Equivalents at End of Period	$	138,512		$	41,651		$	223,883

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

See Note 21—Supplemental Cash Flow Information

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 1—Significant Accounting Policies:

A summary of the significant accounting policies of CONSOL Energy Inc. and subsidiaries (CONSOL Energy) is presented below. These, together with the other notes that follow, are an integral part of the consolidated financial statements.

Basis of Consolidation:

The consolidated financial statements include the accounts of majority-owned and controlled subsidiaries. The accounts of variable interest entities (VIEs) as defined by the Financial Accounting Standards Board’s (FASB) Interpretation No. 46 (FIN 46) and related interpretations, where CONSOL Energy is the primary beneficiary, are included in the consolidated financial statements. Investments in business entities in which CONSOL Energy does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. All significant intercompany transactions and accounts have been eliminated in consolidation.

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 other postretirement benefits, coal workers’ pneumoconiosis, workers’ compensation, salary retirement benefits, stock-based compensation, reclamation and mine closure liabilities, deferred income tax assets and liabilities, contingencies and coal and gas reserve values.

Cash and Cash Equivalents:

Cash and cash equivalents include cash on hand and in banks as well as all highly liquid short-term securities with original maturities of three months or less.

Trade Accounts Receivable:

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. CONSOL Energy reserves for specific accounts receivable when it is probable that all or a part of an outstanding balance will not be collected, such as customer bankruptcies. CONSOL Energy 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. Reserves for uncollectible amounts were not material in the periods presented.

Inventories:

Inventories are stated at the lower of cost or market. The cost of coal inventories is determined by the first-in, first-out (FIFO) method. Coal inventory costs include labor, supplies, equipment costs, operating overhead and other related costs. The cost of merchandise for resale is determined by the last-in, first-out (LIFO) method and includes industrial maintenance, repair and operating supplies for sale to third parties. The cost of supplies inventory is determined by the average cost method and includes operating and maintenance supplies to be used in our mining operations.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Property, Plant and Equipment:

Property, plant and equipment is carried at cost. Expenditures which extend the useful lives of existing plant and equipment are capitalized. Interest costs applicable to major asset additions are capitalized during the construction period. Costs of additional mine facilities required to maintain production after a mine reaches the production stage, generally referred to as “receding face costs,” are expensed as incurred; however, the costs of additional airshafts and new portals are capitalized. Planned major maintenance costs which do not extend the useful lives of existing plant and equipment are expensed as incurred.

Coal exploration costs are expensed as incurred. Coal exploration costs include those incurred to ascertain existence, location, extent or quality of ore or minerals before beginning the development stage of the mine.

Costs of developing new underground mines and certain underground expansion projects are capitalized. Underground development costs, which are costs incurred to make the mineral physically accessible, include costs to prepare property for shafts, driving main entries for ventilation, haulage, personnel, construction of airshafts, roof protection and other facilities. Costs of developing the first pit within a permitted area of a surface mine are capitalized. A surface mine is defined as the permitted mining area which includes various adjacent pits that share common infrastructure, processing equipment and a common ore body. Surface mine development costs include construction costs for entry roads, drilling, blasting and removal of overburden in developing the first cut for mountain stripping or box cuts for surface stripping. Stripping costs incurred during the production phase of a mine are expensed as incurred.

Advance mining royalties are advance payments made to lessors under terms of mineral lease agreements that are recoupable against future production using the units-of-production method. Depletion of leased coal interests is computed using the units-of-production method over proven and probable coal reserves. Advance mining royalties and leased coal interests are evaluated periodically for impairment issues or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

When properties are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposition is recognized in other income.

Gas well activity is accounted for under the successful efforts method of accounting. 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. The costs of producing properties and mineral interests are amortized 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 when events and circumstances indicate an adjustment is necessary, but at least once a year; those revisions are accounted for prospectively as changes in accounting estimates.

Depreciation of plant and equipment is calculated on the straight-line method over their estimated useful lives or lease terms generally as follows:


		Years
Building and improvements		10 to 45
Machinery and equipment		3 to 25
Leasehold improvements		Life of Lease

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Costs to obtain coal lands are capitalized based on the fair value at acquisition and are amortized using the units-of-production method over all estimated proven and probable reserve tons assigned to the mine. Proven and probable coal reserves exclude non-recoverable coal reserves and anticipated processing losses. Rates are updated when revisions to coal reserve estimates are made. Coal reserve estimates are reviewed when events and circumstances indicate a reserve change is needed, or at a minimum once a year. Amortization of coal interests begins when the coal reserve is produced. At an underground mine, a ton is considered produced once it reaches the surface area of the mine. Any material income effect from changes in estimates is disclosed in the period the change occurs.

Airshafts and capitalized mine development associated with a coal reserve are amortized on a units-of-production basis as the coal is produced so that each ton of coal is assigned a portion of the unamortized costs. We employ this method to match costs with the related revenues realized in a particular period. Rates are updated when revisions to coal reserve estimates are made. Coal reserve estimates are reviewed when information becomes available that indicates a reserve change is needed, or at a minimum once a year. Any material income effect from changes in estimates is disclosed in the period the change occurs. Amortization of development cost begins when the development phase is complete and the production phase begins. At an underground mine, the end of the development phase and the beginning of the production phase takes place when construction of the mine for economic extraction is substantially complete. Coal extracted during the development phase is incidental to the mine’s production capacity and is not considered to shift the mine into the production phase.

Costs for purchased and internally developed software are expensed until it has been determined that the software will result in probable future economic benefits and management has committed to funding the project. Thereafter, all direct costs of materials and services incurred in developing or obtaining software, including certain payroll and benefit costs of employees associated with the project, are capitalized and amortized using the straight-line method over the estimated useful life which does not exceed 7 years.

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. Impairment of equity investments is recorded when indicators of impairment are present and the estimated fair value of the investment is less than the assets’ carrying value. Impairment expense of $6,273 was recognized in cost of goods sold and other operating charges in December 2008 when it became probable that an option to purchase preferred equity in PFBC Environment Energy Technology would not be exercised.

Income Taxes:

The asset and liability method is used to account for income taxes. Under this approach, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in CONSOL Energy’s financial statements or tax returns. The provision for income taxes represents income taxes paid or payable for the current year and the change in deferred taxes, excluding the effects of acquisitions during the year. Deferred taxes result from differences between the financial and tax bases of CONSOL Energy’s 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 when it is more likely than not that a deferred tax benefit will not be realized.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CONSOL Energy adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. CONSOL Energy evaluates all tax positions taken on the state and federal tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, an evaluation to determine the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement, is determined. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the probable amount that is more likely than not is based on judgment, historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates, that are not readily apparent from other sources, form the basis for recognizing a FIN 48 liability. Actual results could differ from those estimates upon subsequent resolution of identified matters.

Postretirement Benefits Other Than Pensions:

Postretirement benefits other than pensions, except for those established pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the Health Benefit Act), are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and SFAS No. 112, “Employers’ Accounting for Post employment Benefits” as amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R),” which requires employers to accrue the cost of such retirement benefits for the employees’ active service periods. Such liabilities are determined on an actuarial basis and CONSOL Energy is primarily self-insured for these benefits. Postretirement benefit obligations established by the Health Benefit Act are treated as a multi-employer plan which requires expense to be recorded for the associated obligations as payments are made. This treatment is in accordance with Emerging Issues Task Force (EITF) No. 92-13, “Accounting for Estimated Payments in Connection with the Coal Industry Retiree Health Benefit Act of 1992.”

Pneumoconiosis Benefits and Workers’ Compensation:

CONSOL Energy is required by federal and state statutes to provide benefits to certain current and former totally disabled employees or their dependents for awards related to coal workers’ pneumoconiosis. CONSOL Energy is also required by various state statutes to provide workers’ compensation benefits for employees who sustain employment related physical injuries or some types of occupational disease. Workers’ compensation benefits include compensation for their disability, medical costs, and on some occasions, the cost of rehabilitation. CONSOL Energy is primarily self-insured for these benefits. Provisions for estimated benefits are determined on an actuarial basis.

Mine Closing, Reclamation and Gas Well Closing Costs:

CONSOL Energy accrues for mine closing costs, perpetual care costs and 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” (SFAS No. 143). 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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

and generally will escalate over the life of the producing asset, typically as production declines. Accretion is included in the Cost of Goods Sold and other charges line on the Consolidated Statements of Income. Asset retirement obligations primarily relate to the closure of mines and gas wells, and the reclamation of land upon exhaustion of coal and gas reserves.

Accrued mine closing costs, perpetual care costs, reclamation and 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.

Deferred Revenue:

Deferred revenues represent funding received upon the negotiation of long-term contracts. The deferred revenues will be recognized as sales revenues in future periods by amortization on a rate per ton shipped over the life of the respective contract. The rates are revised whenever there is an indication of significant changes, but at least once a year. The revisions are accounted for prospectively as changes in accounting estimates.

Retirement Plans:

CONSOL Energy has non-contributory defined benefit retirement plans covering substantially all employees not covered by multi-employer retirement plans. Effective January 1, 2006, employees hired between August 1, 2004 and December 31, 2005 that were not previously eligible to participate in the plans began accruing service. Also, as of January 1, 2006, an amendment was made to the salaried pension plan related to lump sum distributions. The CONSOL Energy salaried plan allows for lump-sum distributions of benefits earned up until December 31, 2005, at the employee’s election. CONSOL Energy’s policy is to annually fund the defined benefit pension plans at or above the minimum required by law.

Effective January 1, 2007, employees hired by CNX Gas, an 83.3% owned subsidiary, will not be eligible to participate in CNX Gas’ non-contributory defined benefit retirement plan. In lieu of participation in the non-contributory defined benefit plan, these employees began 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 employees of CONSOL Energy prior to this date, were given a one time opportunity to elect to remain in the defined benefit plan or opt to freeze their service accruals and participate in the additional 3% company contribution into their defined contribution plan. All employees hired on or after January 1, 2006, but on or before December 31, 2006, had their current non-contributory defined benefit frozen and began receiving the additional 3% company contribution into their defined contribution plan effective January 1, 2007. CNX Gas intends to freeze all defined benefit accruals as of December 31, 2016 for CNX Gas employees that elected to remain in the defined benefit plan.

Revenue Recognition:

Revenues are recognized when title passes to the customers. For domestic coal sales, this generally occurs when coal is loaded at mine or offsite storage locations. For export coal sales, this generally occurs when coal is loaded onto marine vessels at terminal locations. For gas sales, this occurs at the contractual point of delivery. For industrial supplies and equipment sales, this generally occurs when the products are delivered. For terminal, river and dock, land, research and development, and coal waste disposal services, revenue is recognized generally as the service is provided to the customer.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CNX Gas has an operational gas-balancing agreement with Columbia interstate pipeline. The imbalance agreement is managed internally using the sales method of accounting. The sales method recognizes revenue when the gas is taken by the purchaser.

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. These matching buy/sell transactions include a legal right of offset of obligations and have been simultaneously entered into with the counterparty which qualify for netting under EITF no. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counter-Party,” and are therefore reflected net on the income statement in cost of goods sold and other charges.

CNX Gas also provides gathering services to third parties by purchasing gas produced by the third party, at market prices less a fee. The gas purchased from third party producers is then resold by CNX Gas to end users or gas marketers at current market prices. These revenues and expenses are recorded gross as purchased gas revenue and purchased gas costs in the consolidated statement of income. Purchased gas revenue is recognized when title passes to the customer. Purchased gas costs are recognized when title passes to CNX Gas from the third party producer.

CONSOL Energy also has royalty interests which are the portion of the mineral interest retained by the lessor. This interest entitles the royalty interest owner to a fractional amount of the production from the property, in kind or in value, less the applicable severance taxes.

Freight Revenue and Expenses:

Shipping and handling costs invoiced to coal customers and paid to third-party carriers are recorded as Freight Revenue and Freight Expense, respectively.

Royalty Recognition:

Royalty expenses for coal rights are included in Cost of Goods Sold and Other Operating Charges when the related revenue for the coal sale is recognized. Royalty expenses for gas rights are included in Gas Royalty Interest Costs when the related revenue for the gas sale is recognized. These royalty expenses are paid in cash in accordance with the terms of each agreement. Revenues for coal and gas sold related to production under royalty contracts, versus owned by CONSOL Energy, are recorded gross. The recognized revenues for these transactions are not net of related royalty fees.

Contingencies:

CONSOL Energy, or our subsidiaries, from time to time is subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes, and other claims and actions, arising out of the normal course of business. 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. Legal fees associated with defending these various lawsuits and claims are expensed when incurred.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Treasury Stock:

On September 12, 2008, CONSOL Energy’s Board of Directors announced a share repurchase program of up to $500,000 of the company’s common stock during a twenty-four month period beginning September 9, 2008, and ending September 8, 2010. Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of stockholders’ equity in our Consolidated Balance Sheets. From time to time, treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted average cost method for determining cost. The difference between the cost of the shares and the issuance price is added to or deducted from Capital in Excess of Par Value.

On December 21, 2005, CONSOL Energy’s Board of Directors announced a share repurchase program of up to $300,000 of the company’s common stock during a twenty-four month period beginning January 1, 2006 and ending December 31, 2007.

For the years ended December 31, 2008 and 2007, we had cash expenditures under our repurchase program of $97,794 and $80,157, respectively, funded primarily by cash generated from operations. The total common shares repurchased for the years ended December 31, 2008 and 2007 were 2,741,300 and 2,087,800 at an average cost of $35.59 and $38.14 per share, respectively.

Stock-Based Compensation:

Effective January 1, 2006, CONSOL Energy uses the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123R). Under this transition method, stock-based compensation expense for the year ended December 31, 2008 and 2007 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. CONSOL Energy recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. See Note 18 to the Audited Consolidated Financial Statements for a further discussion on stock-based compensation.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Earnings per Share:

Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the reporting period. Dilutive earnings per share are computed similar 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, and the assumed vesting of restricted and performance stock units if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and outstanding restricted and performance stock units were released and that the proceeds from such activities were used to acquire shares of common stock at the average market price during the reporting period. In accordance with the provisions of SFAS 123R, CONSOL Energy includes the impact of the proforma deferred tax assets in determining potential windfalls and shortfalls for purposes of calculating assumed proceeds under the treasury stock method. Options to purchase 370,987 shares, 133,343 shares and 714,453 shares of common stock were outstanding at December 31, 2008, 2007 and 2006, respectively, but were not included in the computation of dilutive earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the year ended December 31, 2008, 18,176 performance stock units were not included in the computation of dilutive earnings per share as their effect would be anti-dilutive.


	For the Years Ended December 31,
	2008		2007		2006
Net income Attributable to CONSOL Energy Inc. Shareholders	$	442,470	$	267,782	$	408,882

Average shares of common stock outstanding:
Basic		182,386,011		182,050,627		183,354,732
Effect of stock-based compensation awards		2,293,581		2,099,124		2,283,374

Dilutive		184,679,592		184,149,751		185,638,106

Earnings per share:
Basic	$	2.43	$	1.47	$	2.23

Dilutive	$	2.40	$	1.45	$	2.20

Shares of common stock were outstanding as follows:


	2008		2007		2006
Balance, beginning of year	182,291,623		182,654,629		185,050,824
Issuance(1)	1,027,250		1,755,457		1,118,605
Repurchased-Treasury Stock Shares	(656,922	)	(2,118,463	)	(3,514,800	)
Repurchased-Retired Shares	(2,112,100	)	—		—

Balance, end of year	180,549,851		182,291,623		182,654,629

(1)	See Note—18 Stock-based Compensation for additional information

Accounting for Derivative Instruments:

CONSOL Energy accounts for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS No. 133) and its

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

corresponding amendments. SFAS No. 133 requires CONSOL Energy to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them in 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 cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income. The ineffective portions of hedges are recognized in earnings in the current period.

CONSOL Energy 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, CONSOL Energy will discontinue hedge accounting prospectively.

Accounting for Business Combinations:

The company accounts for its business acquisitions under the purchase method of accounting consistent with the requirements of SFAS No. 141, “Business Combinations.” The total cost of acquisitions is allocated to the underlying identifiable net assets, based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and the utilization of independent valuation experts, and often involves the use of significant estimates and assumptions with respect to future cash inflows and outflows, discount rates and asset lives, among other items.

Accounting for Carbon Emissions Offsets:

In 2008, CNX Gas, an 83.3% subsidiary, completed the independent verification and registration processes necessary to sell carbon emission offsets on the Chicago Climate Exchange. CNX Gas has verified approximately 8.4 million metric tons of offsets, CONSOL Energy has also verified approximately 8.3 million metric tons of offsets which may sell on the over-the-counter market. These offsets are recorded at their historical cost, which is zero. Sales of these emission offsets will be reflected in income as they occur. To date, no offsets have been sold.

Recent Accounting Pronouncements:

In May 2008, The Financial Accounting Standards Board (FASB) issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162).” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS No. 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect this guidance to have a significant impact on CONSOL Energy.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

better understand their effects on an entity’s financial positions, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and how derivative instruments and related hedged items are accounted for under SFAS 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. CONSOL Energy’s management is currently assessing the new disclosure requirements required by SFAS 161.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141R), and Statement of Financial Accounting Standards No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141R and SFAS 160 will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141R retains the fundamental requirements in SFAS 141 “Business Combinations” while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied.

SFAS 160 Adoption:

SFAS 160 was adopted on January 1, 2009, as required. SFAS 160 changed the accounting and reporting for minority interests, which has been recharacterized as noncontrolling interests, and classified as a component of equity. Noncontrolling interests are included in net income, under this standard. All periods presented have been recast to reflect the adoption of SFAS 160.

Reclassifications:

Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2008 with no effect on previously reported net income or stockholders’ equity attributable to CONSOL Energy Shareholders.

Note 2—Acquisitions and Dispositions:

In October 2008 CONSOL Energy Inc.’s Board of Directors has authorized a purchase program for shares of CNX Gas Corporation common stock for an aggregate purchase price of up to $150 million. The authorization, which is not intended to take CNX Gas private, was effective as of October 21, 2008 for a twenty-four month period. During the year ended December 31, 2008, CONSOL Energy completed the purchase of $67,259 of CNX Gas stock on the open market at an average price of $26.53 per share. The purchase of these 2,531,400 shares changed CONSOL Energy’s ownership percentage in CNX Gas from 81.7% to 83.3% at December 31, 2008. During the year ended December 31, 2007, CONSOL Energy purchased $10,000 of CNX Gas stock on the open market at an average price of $26.87 per share. The purchase of these 372,000 shares changed CONSOL Energy’s ownership percentage in CNX Gas from 81.5% to 81.7% at December 31, 2007.

In December 2008, CONSOL Energy, through a subsidiary, completed the acquisition of the outstanding 51% interest in Southern West Virginia Energy, LLC (“SWVE”) for a cash payment of $11,521. This amount is included in capital expenditures in cash used in investing activities on the Consolidated Statement of Cash Flows. The purchase price was principally allocated to property, plant and equipment. SWVE wholly-owns Southern West Virginia Resources, LLC and Minway Contracting, LLC, and had previously been a 49% subsidiary of CONSOL Energy. Prior to the acquisition of the outstanding interest, SWVE had been fully consolidated in accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” by CONSOL Energy. The proforma results for this acquisition are not material to CONSOL Energy’s financial results.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In November 2008, CONSOL Energy, through a subsidiary, completed the acquisition of North Penn Pipe & Supply, Inc. for a cash payment, net of cash acquired, of $22,550. This amount is included in capital expenditures in cash used in investing activities on the Consolidated Statements of Cash Flows. North Penn Pipe & Supply, Inc. is a distributor of oil and gas field equipment, primarily tubular goods, to the northern Appalachian Basin, a region stretching from the state of New York to southwestern Pennsylvania and northern West Virginia. The fair value of merchandise for resale acquired in this acquisition is $10,623 and is included in inventory on the Consolidated Balance Sheets. The proforma results for this acquisition are not significant to CONSOL Energy’s financial results.

In July 2008, our 83.3% subsidiary, CNX Gas, completed the acquisition of several leases and gas wells from KIS Oil & Gas Inc. for a cash payment of $19,324. The purchase price was principally allocated to property, plant and equipment. The sales agreement called for the transfer of 30 oil and gas wells and approximately 5,600 leased acres. This acquisition enhanced our acreage position in Northern Appalachia. The pro forma results for this acquisition were not significant to CONSOL Energy’s financial results.

In June 2008, CNX Gas completed the acquisition of the remaining 50% interest in Knox Energy, LLC and Coalfield Pipeline Company not already owned by CNX Gas for a cash payment of $36,000 which was principally allocated to property, plant and equipment. Prior to the acquisition of the outstanding interest, Knox Energy, LLC had been proportionately consolidated into CONSOL Energy’s financial statements during 2008. During 2006 and 2007 the equity method was used to account for these entities. Knox Energy, LLC is a natural gas production company and Coalfield Pipeline Company is a gathering and transportation company with operations in Tennessee. The pro forma results for this acquisition were not significant to CONSOL Energy’s financial results. The acquisition was not material to the CONSOL Energy’s consolidated financial statements.

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

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

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

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The AMVEST acquisition, when combined with CONSOL Energy’s adjacent coal reserves, creates a large contiguous block of coal reserves in the Central Appalachian region. Also, included in the acquisition was a highly-skilled workforce proficient in Central Appalachian surface mining. This workforce combined with CONSOL Energy’s underground mining expertise will allow us to build and transfer knowledge among operations to focus the best skill sets to development requirements of the various parts of this reserve block.

The application of purchase accounting under SFAS 141 requires that the total purchase price be allocated to the fair value of assets acquired and liabilities assumed based on the fair values of assets and liabilities at acquisition date. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:


Assets
Current Assets:
Cash and Cash Equivalents	$	7,028
Accounts and Notes Receivable:
Trade		21,343
Other Receivables		5,149
Inventories		18,459
Prepaid Expenses		937

Total Current Assets		52,916
Property, Plant and Equipment:		482,847
Other Assets:
Other		297

Total Other Assets		297

Total Assets	$	536,060

Liabilities
Current Liabilities:
Accounts Payable	$	12,595
Accrued Income Taxes		43,060
Other Accrued Liabilities		25,541

Total Current Liabilities		81,196
Deferred Credits and Other Liabilities:
Deferred Income Taxes		120,442
Postretirement Benefits Other Than Pensions		2,130
Pneumoconiosis Benefits		8,055
Mining Closing		9,345
Workers’ Compensation		1,744
Reclamation		3,911
Other		5,485

Total Deferred Credits and Other Liabilities		151,112

Total Liabilities		232,308

Net Assets Acquired	$	303,752

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The unaudited proforma results, assuming the acquisition had occurred at the beginning of each period presented below are estimated to be:


	For the Year Ended December 31,
	2007		2006
Revenue	$	3,902,186	$	3,982,175

Earnings Before Taxes	$	444,409	$	583,102

Net Income attributable to CONSOL Energy Shareholders	$	279,074	$	432,188

Basic Earnings Per Share	$	1.53	$	2.36

Dilutive Earnings Per Share	$	1.52	$	2.33

The proforma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each fiscal period presented, nor are they necessarily indicative of future consolidated results.

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

In June 2007, CONSOL Energy, through a subsidiary, exchanged certain coal assets in Northern Appalachia with Peabody Energy for coalbed methane and gas rights. This transaction was accounted for as a non-monetary exchange under Statement of Financial Accounting Standards No. 153, “Exchanges of Non-Monetary Assets,” resulting in a pre-tax gain of $50,060. Also in June 2007, CONSOL Energy, through a subsidiary, acquired certain coalbed methane and gas rights from Peabody Energy for a cash payment of $15,000 plus approximately $1,650 of various other acquisition costs.

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

In December 2006, CONSOL Energy, through a subsidiary, completed a sale/lease-back transaction for its future headquarters property. Cash proceeds were $9,548 which did not result in a gain or loss on the sale. The initial lease term is twenty years and includes an option to renew the lease term for an additional five-year period and a subsequent four-and-one-half year lease term. The lease was accounted for as a capital lease during the construction period, in accordance with the guidance provided by the Emerging Issues Task Force (“EITF”) on Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction.” Since completion of construction in August 2008, the lease has been accounted for as an operating lease. Estimated monthly rental payments of $462 will be made for the period January 1, 2009 through July 31, 2010; $552 for the period August 1, 2010 through July 31, 2018; and $581 for the period August 1, 2018 through July 31, 2028.

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

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

Note 3—Other Income:


	For the Years Ended December 31,
	2008		2007		2006
Buchanan roof collapse insurance proceeds	$	50,000	$	10,000	$	—
Gain on disposition of assets		23,368		112,389		10,417
Royalty income		20,673		14,205		27,915
Service income		14,298		12,623		13,345
Equity in earnings of affiliates		11,140		6,551		1,201
Charter & Tramp Towing Income		11,164		2,601		—
Interest income		2,363		12,792		15,369
Buchanan skip hoist damage and business interruption insurance proceeds		—		—		40,792
Buchanan fire business interruption insurance proceeds		—		—		38,415
Other		33,136		25,567		23,407

Total Other Income	$	166,142	$	196,728	$	170,861

Note 4—Interest Expense:


	For the Years Ended December 31,
	2008			2007			2006
Interest on debt	$	45,627		$	40,766		$	33,605
Interest on other payables		2,718			4,648			2,213
Interest capitalized		(12,162	)		(14,563	)		(10,752	)

Total Interest Expense	$	36,183		$	30,851		$	25,066

Note 5—Taxes Other Than Income:


	For the Years Ended December 31,
	2008			2007			2006
Production taxes	$	188,581		$	163,346		$	169,163
Payroll taxes		49,829			43,828			42,035
Property taxes		44,107			41,586			34,991
Capital Stock & Franchise Tax		6,568			7,475			7,293
VA Employment Enhancement Tax Credit		(4,190	)		(3,159	)		(5,003	)
Other		5,095			5,850			4,060

Total Taxes Other Than Income	$	289,990		$	258,926		$	252,539

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 6—Income Taxes:

Income taxes (benefits) provided on earnings consisted of:


	For the Years Ended December 31,
	2008		2007		2006
Current:
U.S. Federal	$	87,658	$	62,704	$	72,839
U.S. State		14,549		11,284		12,247
Non-U.S.		2,133		2,594		770

		104,340		76,582		85,856
Deferred:
U.S. Federal		101,869		40,278		46,332
U.S. State		33,725		19,277		(19,758	)

		135,594		59,555		26,574

Total Income Taxes	$	239,934	$	136,137	$	112,430

The components of the net deferred tax assets are as follows:


	December 31, 2008			December 31, 2007
Deferred Tax Assets:
Postretirement benefits other than pensions	$	990,336		$	997,930
Alternative minimum tax		168,276			197,009
Mine closing		133,591			139,742
Pneumoconiosis benefits		75,124			59,506
Net operating loss		57,370			63,866
Workers’ compensation		59,687			57,055
Salary retirement		74,967			38,839
Capital lease		32,212			41,415
Reclamation		14,581			13,277
Other		78,923			81,702

Total Deferred Tax Assets		1,685,067			1,690,341
Valuation Allowance**		(60,898	)		(59,908	)

Net Deferred Tax Assets		1,624,169			1,630,433
Deferred Tax Liabilities:
Property, plant and equipment		(1,085,054	)		(1,058,596	)
Advance mining royalties		(23,445	)		(23,493	)
Gas hedge		(81,061	)		(3,738	)
Other		(40,467	)		(38,975	)

Total Deferred Tax Liabilities		(1,230,027	)		(1,124,802	)

Net Deferred Tax Assets	$	394,142		$	505,631

**	Valuation allowances of ($2,663) and ($58,235) have been allocated between current and long-term deferred tax assets respectively for 2008. Valuation allowances of ($2,476) and ($57,432) have been allocated between current and long-term deferred tax assets respectively for 2007.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

According to Statement of Financial Accounting Standards Board Statement 109, “Accounting for Income Taxes”, a deferred tax asset should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. For the years ended December 31, 2008 and December 31, 2007, positive evidence considered included future income projections based on existing fixed price contracts and forecasted expenses, reversals of book to tax temporary differences, and the implementation of and/or ability to employ various tax planning strategies. Negative evidence included book and tax losses generated in prior periods, and the inability to achieve forecasted results for those periods.

During 2006, CONSOL Energy concluded that a valuation allowance was no longer warranted against a portion of its state net operating loss carry forwards in certain tax jurisdictions. In 2007 CONSOL Energy implemented a prudent and feasible tax strategy that ensured the realization of Pennsylvania loss carry forward tax benefits. For 2008 and 2007, CONSOL Energy continues to report a deferred tax asset of $22,656 and $27,881, respectively, on an after Federal tax adjusted basis relating to the remainder of its state operating loss carry forwards after valuation allowance. A review of the positive and negative evidence regarding these tax benefits, primarily the history of book and tax losses on a separate company basis, concluded that a valuation allowance was warranted. A valuation allowance of $26,184 and $23,123 on an after Federal tax adjusted basis have also been recorded for 2008 and 2007, respectively, against the deferred state tax asset attributable to future deductible temporary differences for certain CONSOL Energy subsidiaries with histories of book and tax losses. The net operating losses expire at various times between 2009 and 2027. Management will continue to assess the potential for realizing deferred tax assets based upon updated income forecast data and the feasibility of future tax planning strategies, and may record adjustments to valuation allowances against deferred tax assets in future periods as appropriate that could materially impact net income. Included in the valuation allowance against the deferred state tax assets attributable to future deductible temporary differences for 2008 and 2007 are $8,496 and $7,687, respectively, of valuation allowances for deferred tax assets related to Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans” (SFAS No. 158) in state jurisdictions which are subject to a full valuation allowance. The increase in the valuation allowances recognized on SFAS No. 158 was recognized through other comprehensive income in the applicable period.

We estimate that CONSOL Energy will utilize Federal alternative minimum tax credits of $30,464 for the year ended December 31, 2009, thereby reducing the deferred tax asset associated with the prior years’ minimum tax credits. During 2008, the Federal alternative minimum tax credits were increased $1,731 as a result of the 2007 accrual to 2007 return adjustments.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following is a reconciliation stated as a percentage of pretax income, of the United States statutory federal income tax rate to CONSOL Energy’s effective tax rate:


	For the Years Ended December 31,
	2008					2007					2006
	Amount			Percent		Amount			Percent		Amount			Percent
Statutory U.S. federal income tax rate	$	253,958		35.0	%	$	150,135		35.0	%	$	192,822		35.0	%
Excess tax depletion		(48,859	)	(6.7	)		(43,502	)	(10.1	)		(55,229	)	(10.0	)
Effect of medicare prescription drug, improvement and modernization act of 2003		2,112		0.3			1,796		0.4			1,796		0.3
Effect of domestic production activities		(7,721	)	(1.1	)		(915	)	(0.2	)		(2,538	)	(0.4	)
Net effect of state tax		31,169		4.3			20,086		4.7			(15,549	)	(2.8	)
Effect of foreign tax		2,133		0.3			787		0.2			770		0.1
Other		7,142		1.0			7,750		1.7			(9,642	)	(1.8	)

Income Tax (Benefit) Expense/Effective Rate	$	239,934		33.1	%	$	136,137		31.7	%	$	112,430		20.4	%

CONSOL Energy adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB No. 109” on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an increase of $3,202 in the liability for unrecognized tax benefits upon adoption, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. During the year ending December 31, 2008, the Company recognized a decrease of $2,726 in the liability for unrecognized tax benefits as a result of reevaluating the potential outcome of the ongoing audit of its 2004 and 2005 tax returns by the IRS, and identifying additional uncertain tax positions relating to state income taxes. During the year ending December 31, 2007, the Company recognized an increase of $13,317 in the liability for unrecognized tax benefits as a result of tax positions taken during the current period, and uncertain tax positions identified upon the acquisition of Amvest Corporation. Of the total increase in the liability for unrecognized tax benefits for the year ending December 31, 2007, $10,497 was accounted for as a reclassification from deferred Federal and state income taxes and $2,520 is attributable to uncertain tax positions recognized as a result of the acquisition of Amvest Corporation. The change in unrecognized tax benefits during 2008 and 2007 resulted in reductions in net income of $1,833 and $300, respectively.

The total amount of unrecognized tax benefits as of December 31, 2008 and 2007 were $60,691 and $63,417, respectively. If these unrecognized tax benefits were recognized, $14,657 and $12,871, respectively, would affect CONSOL Energy’s effective income tax rate.

CONSOL Energy and its subsidiaries file income tax returns in the U. S. federal, various states and Canadian jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The IRS is currently finalizing its audit report relating to CONSOL Energy’s income tax returns filed for 2004 and 2005. The Company expects to conclude this examination, and remit payment of the resulting tax deficiencies to Federal and state taxing authorities before June 30, 2009. The estimated Federal tax deficiency payable to the IRS is $12,500. This payment will have no impact on net income since the tax deficiencies for 2004 and 2005 are primarily the result of changes in the timing of tax deductible expenses.

The IRS’ examination of the Company’s 2002 and 2003 tax returns has been completed. CONSOL Energy estimates that an additional payment of approximately $1,300 of interest related to the examination will be made before March 31, 2009.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CONSOL recognizes interest accrued related to unrecognized tax benefits in its interest expense. As of December 31, 2008 and 2007, the Company had an accrued liability of $10,518 and $8,503, respectively, for interest related to uncertain tax positions. The accrued interest liabilities include $2,012 and $3,426 that were recorded in the Company’s Consolidated Income Statements for the years ended December 31, 2008 and 2007, respectively.

CONSOL recognizes penalties accrued related to unrecognized tax benefits in its income tax expense. As of December 31, 2008, there were no accrued penalties recognized. As of December 31, 2007, there was $1,200 of accrued penalties.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Balance of unrecognized tax benefits at December 31, 2007	$	63,417
Increase in unrecognized tax benefits resulting from tax positions taken during current period	$	14,444
Decrease in unrecognized tax benefits resulting from tax positions taken during prior period	($	17,170	)

Balance of unrecognized tax benefits at December 31, 2008	$	60,691

The majority of CONSOL Energy earnings before income tax was generated from domestic entities.

Note 7—Mine Closing, Reclamation & Gas Well Closing Costs:

CONSOL Energy accrues for mine closing, perpetual water care costs, and dismantling and removal costs for gas related facilities using the accounting treatment prescribed by Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). CONSOL Energy recognizes capitalized asset retirement costs by increasing the carrying amount of related long-lived assets, net of the associated accumulated depreciation. The obligation for asset retirements is included in Mine Closing, Reclamation, Other Accrued Liabilities and Other Liabilities in the Consolidated Balance Sheets.

The reconciliation of changes in the asset retirement obligations at December 31, 2008 and 2007 is as follows:


	As of December 31,
	2008			2007
Balance at beginning of period	$	530,897		$	492,308
Accretion Expense		34,888			32,469
Payments		(32,085	)		(28,427	)
Revisions in Estimated Cash Flows		30,409			2,901
Other		(19,795	)		31,646

Balance at end of period	$	544,314		$	530,897

For the year ended December 31, 2008, Other includes ($19,618) for asset dispositions and ($177) of various other items, none of which are individually significant. For the year ended December 31, 2007, Other includes obligations for reclamation, mine closing, and perpetual care of $18,974 related to the acquisition of AMVEST in July 2007. In addition, $14,907 is included in Other for gas well closing obligations related to gas wells acquired with the acquisition of the outstanding shares of an oil and gas company in October 2007. The remaining ($2,235) included in Other relates to various other items, none of which are individually significant.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 8—Inventories:


	December 31,
	2008		2007
Coal	$	93,875	$	45,614
Merchandise for resale		43,074		25,418
Supplies		90,861		92,161

Total Inventories	$	227,810	$	163,193

Merchandise for resale is valued using the LIFO cost method. The excess of replacement cost of merchandise for resale inventories over carrying LIFO value was $14,716 and $14,389 at December 31, 2008 and 2007, respectively.

Note 9—Accounts Receivable Securitization:

CONSOL Energy and certain of our U.S. subsidiaries are party to a trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. The facility allows CONSOL Energy to receive up to $165,000 on a revolving basis. The facility also allows for the issuance of letters of credit against the $165,000 capacity. At December 31, 2008, there were no letters of credit outstanding against the facility.

CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. This retained interest, which is included in Accounts and Notes Receivable Trade in the consolidated balance sheets, is recorded at fair value. Due to a short average collection cycle for such receivables, our collection experience history and the composition of the designated pool of trade accounts receivable that are part of this program, the fair value of our retained interest approximates the total amount of the designated pool of accounts receivable reduced by the amount of accounts receivables sold to the third-party financial institutions under the program. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.

The cost of funds under this facility is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $5,814 and $3,440 for the year ended December 31, 2008 and 2007, respectively. These costs have been recorded as financing fees, which are included in Cost of Goods Sold and Other Operating Charges in the Consolidated Statements of Income. No servicing asset or liability has been recorded. The receivables facility expires in April 2012.

At December 31, 2008 and 2007, eligible accounts receivable totaled approximately $165,000 and $115,500, respectively. There were no subordinated retained interests at December 31, 2008 or December 31, 2007. Accounts receivables totaling $165,000 and $125,400 were removed from the Consolidated Balance Sheet at December 31, 2008 and 2007, respectively. In accordance with the facility agreement, the company is able to receive proceeds based upon total eligible accounts receivable at the previous month-end. Proceeds at December 31, 2007, determined by eligible accounts receivable at November 30, 2007, exceeded the eligible

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

accounts receivable at December 31, 2007. The $9,900 not supported by accounts receivable at December 31, 2007 is included in the $125,400, of accounts receivable, which was removed from the consolidated balance sheet at December 31, 2007. CONSOL Energy’s $39,600 and $125,400 increase in the accounts receivable securitization program for the years ended December 31, 2008 and 2007, respectively, is reflected in cash flows from operating activities in the Consolidated Statement of Cash Flows.

Note 10—Property, Plant and Equipment


	December 31,
	2008		2007
Coal & other plant and equipment	$	4,533,793	$	4,249,698
Coal properties and surface lands		1,313,496		1,313,440
Gas properties and related development		1,379,012		889,057
Gas gathering equipment		740,396		596,171
Airshafts		615,512		582,028
Leased coal lands		502,521		458,216
Mine development		527,991		490,876
Coal advance mining royalties		365,380		363,072
Gas advance royalties		2,187		2,754

Total Property, Plant and Equipment		9,980,288		8,945,312

Less—Accumulated depreciation, depletion and amortization		4,214,316		3,980,270

Net Property, Plant and Equipment	$	5,765,972	$	4,965,042

Coal reserves are controlled either through fee ownership or by lease. The duration of the leases vary greatly; however, the lease terms generally are extended automatically to the exhaustion of economically recoverable reserves, as long as active mining continues. Coal interests held by lease provide the same rights as fee ownership for mineral extraction, and are legally considered real property interests. We also make advance payments (advanced mining royalties) to lessors under certain lease agreements that are recoupable against future production, and we make payments that are generally based upon a specified rate per ton or a percentage of gross realization from the sale of the coal. We evaluate our properties periodically for impairment issues or whenever events or circumstances indicate that the carrying amount may not be recoverable.

Coal reserves are amortized using the units-of-production method over all estimated proven and probable reserve tons assigned to the mine. Rates are updated when revisions to coal reserve estimates are made. Coal reserve estimates are reviewed when events and circumstances indicate a reserve change is needed, or at a minimum once a year. Amortization of coal interests begins when the coal reserve is placed into production. At an underground mine, a ton is considered produced once it reaches the surface area of the mine. Any material income effect from changes in estimates is disclosed in the period the change occurs.

Amortization of capitalized mine development costs associated with a coal reserve is computed on a units-of-production basis as the coal is produced so that each ton of coal is assigned a portion of the unamortized costs. We employ this method to match costs with the related revenues realized in a particular period. Rates are updated when revisions to coal reserve estimates are made. Coal reserve estimates are reviewed when information becomes available that indicates a reserve change is needed, or at a minimum once a year. Any material income effect from changes in estimates is disclosed in the period the change occurs. Amortization of

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

development costs begins when the development phase is complete and the production phase begins. At an underground mine, the end of the development phase and the beginning of the production phase takes place when construction of the mine for economic extraction is substantially complete. Coal extracted during the development phase is incidental to the mine’s production capacity and is not considered to shift the mine into the production phase. Amortization of 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 a revision, but at least once a year, and accounted for prospectively.

The following assets are amortized using the units-of-production method. Amounts reflect properties where mining or drilling operations have not yet commenced and therefore are not yet being amortized for the years ended December 31, 2008 and 2007, respectively.


	December 31,
	2008		2007
Coal properties and surface land	$	401,427	$	468,699
Airshafts	$	70,017	$	75,337
Mine development	$	98,842	$	67,328
Leased coal lands	$	311,778	$	243,177
Advance mining royalties	$	43,861	$	40,750
Gas properties and related development	$	220,848	$	101,680

As of December 31, 2008 and 2007, plant and equipment includes gross assets under capital lease of $112,890 and $113,645, respectively. For the years ended December 31, 2008 and 2007, the Northern Appalachian coal segment maintains a $37,018 capital lease for longwall shields at Enlow Fork. In addition, for the years ended December 31, 2008 and 2007, the Gas segment maintains a capital lease for the Jewell Ridge Pipeline of $66,919. As of December 31, 2008 the Gas segment also maintains a capital lease for vehicles of $3,071. All Other segment maintains a capital lease for vehicles of $5,882 at December 31, 2008. As of December 31, 2007, All Other segment maintained a capital lease for the construction of a new corporate office building of $9,708. Accumulated amortization for capital leases was $31,929 and $18,533 at December 31, 2008 and 2007, respectively. See Note 14—Leases for additional capital lease details.

Note 11—Short-Term Notes Payable:

CONSOL Energy has a five-year $1,000,000 senior secured credit facility, which extends through June 2012. The facility is secured by substantially all of the assets of CONSOL Energy and certain of its subsidiaries and collateral is shared equally and ratably with the holders of CONSOL Energy Inc. 7.875% bonds maturing in 2012. The Agreement does provide for the release of collateral at the request of CONSOL Energy upon achievement of certain credit ratings. Fees and interest rate spreads are based on a ratio of financial covenant debt to twelve-month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), measured quarterly. The facility includes a minimum interest coverage ratio of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 16.78 to 1.00 at December 31, 2008. The facility also includes a maximum leverage ratio of not more than 3.25 to 1.00, measured quarterly. The leverage ratio was 1.34 to 1.00 at December 31, 2008. Affirmative and negative covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock, pay dividends and merge with another corporation. At December 31, 2008, the $1,000,000 facility had $485,000 of borrowings outstanding and $270,752 of letters of credit outstanding, leaving $244,248 of capacity available for borrowings and the issuance of letters of credit. The facility bore a weighted average interest rate of 3.52% for the year ended December 31, 2008.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CNX Gas has a five-year $200,000 unsecured credit agreement which extends through 2010. The agreement contains a negative pledge provision, whereas CNX Gas assets cannot be used to secure other obligations. Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Covenants in the facility limit CNX Gas’ ability to dispose of assets, make investments, purchase or redeem CNX Gas stock, pay dividends and merge with another corporation. The facility includes a maximum leverage ratio covenant of not more than 3.00 to 1.00, measured quarterly. The leverage ratio was 0.32 to 1.00 at December 31, 2008. The facility also includes a minimum interest coverage ratio of no less than 3.00 to 1.00, measured quarterly. This ratio was 77.29 to 1.00 at December 31, 2008. At December 31, 2008, the CNX Gas credit agreement had $72,700 of borrowings outstanding and $14,933 of letters of credit outstanding, leaving $112,367 of capacity available for borrowings and the issuance of letters of credit. The facility bore a weighted average interest rate of 3.51% for the year ended December 31, 2008.

Note 12—Other Accrued Liabilities:


	December 31,
	2008		2007
Accrued payroll and benefits	$	59,765	$	52,850
Subsidence		54,013		46,590
Accrued other taxes		41,916		31,898
Royalties		33,857		20,068
Short-term incentive compensation		29,329		23,309
FIN 48 Liability		28,903		1,536
Other		78,925		64,508
Current portion of long-term liabilities:
Postretirement benefits other than pensions		145,429		148,020
Workers’ compensation		32,778		45,000
Mine closing		16,833		42,828
Pneumoconiosis benefits		9,833		10,976
Reclamation		4,108		5,545
Deferred Revenue		3,330		12,359
Salary retirement		2,034		1,623
Long Term Disability		5,389		5,192

Total Other Accrued Liabilities	$	546,442	$	512,302

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 13—Long-Term Debt:


	December 31,
	2008		2007
Debt:
Secured notes due 2012 at 7.875% (par value of $250,000 less unamortized discount of $654 at December 31, 2008)	$	249,346	$	249,139
Baltimore Port Facility revenue bonds in series due 2010 and 2011 at 6.50%		102,865		102,865
Advance royalty commitments		30,019		33,901
Notes due through 2011 at 6.10%		18,936		7,648
Notes due through 2013 at prime		—		10,985
Other long-term notes maturing at various dates through 2031 (total value of $1,132 less unamortized discount of $11 at December 31, 2008)		1,121		1,913

		402,287		406,451
Less amounts due in one year		8,975		8,374

Total Long-Term Debt	$	393,312	$	398,077

Advance royalty commitments and the other long-term variable rate notes had a weighted average interest rate of approximately 10.65% at December 31, 2008 and 6.80% at December 31, 2007. The bonds and notes are carried net of debt discount, which is being amortized over the life of the issue.

Annual undiscounted maturities on long-term debt during the next five years are as follows:


Year Ended December 31,	Amount
2009	$	8,975
2010		38,890
2011		85,123
2012		252,694
2013		2,400
Thereafter		14,870

Total Long-Term Debt Maturities	$	402,952

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 14—Leases:

CONSOL Energy uses various leased facilities and equipment in our operations. Future minimum lease payments under capital and operating leases, together with the present value of the net minimum capital lease payments, at December 31, 2008, are as follows:


Year Ended December 31,	Capital Leases		Operating Leases
2009	$	21,065	$	55,720
2010		19,228		53,435
2011		14,033		43,005
2012		8,218		30,160
2013		7,516		28,015
Thereafter		57,788		168,757

Total minimum lease payments	$	127,848	$	379,092

Less amount representing interest (4.38%-7.36%)		39,383

Present value of minimum lease payments		88,465
Less amount due in one year		13,426

Total Long-Term Capital Lease Obligation	$	75,039

Rental expense under operating leases was $63,170, $47,765 and $43,611 for the years ended December 31, 2008, 2007 and 2006, respectively.

Note 15—Pension and Other Postretirement Benefit Plans:

CONSOL Energy has non-contributory defined benefit retirement plans covering substantially all employees not covered by multi-employer plans. The benefits for these plans are based primarily on years of service and employee’s pay near retirement. Effective January 1, 2006, employees hired between August 1, 2004 and December 31, 2005 that were not previously eligible to participate in the plans began accruing service. The CONSOL Energy salaried plan allows for lump-sum distributions of benefits earned up until December 31, 2005 at the employees’ election.

As of January 1, 2006, lump sum benefits have been frozen and prospectively the lump sum option has been eliminated. According to Statement of Financial Accounting Standards No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” if the lump sum distributions made for the plan year, which for CONSOL Energy is January 1 to December 31, exceed the total of the service cost and interest cost for the plan year, settlement accounting is required. Lump sum payments did not exceed the threshold during 2008. Lump sum payments exceeded this threshold during 2007 and 2006. Accordingly, CONSOL Energy recognized expense of $2,734 and $17,756 for the years ended December 31, 2007 and 2006, respectively, in the results of operations. The adjustment equaled the unrecognized actuarial loss resulting from each individual who received a lump sum in that year. CONSOL Energy regularly monitors this situation.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

contribution into their defined contribution plan. CNX Gas employees who were hired prior to December 31, 2005, or who were employees of CONSOL Energy prior to this date, were given a one time opportunity to elect to remain in the defined benefit plan or opt to freeze their services accruals and participate in the additional 3% company contribution into their defined contribution plan. All employees hired on or after January 1, 2006, but on or before December 31, 2006, had their current non-contributory defined benefit frozen and began receiving the additional 3% company contribution into their defined contribution plan, effective January 1, 2007. CNX Gas intends to freeze all defined benefit accruals as of December 31, 2016 for CNX Gas employees that elected to remain in the defined benefit plan.

Certain subsidiaries of CONSOL Energy provide medical and life insurance benefits to retired employees not covered by the Coal Industry Retiree Health Benefit Act of 1992. The medical plans contain certain cost sharing and containment features, such as deductibles, coinsurance, health care networks and coordination with Medicare. Prior to August 1, 2003, substantially all employees became eligible for these benefits if they had ten years of company service and attained age 55. Effective August 1, 2003, the base eligibility was changed to age 55 with 20 years of service for salaried employees. In addition, effective January 1, 2004, a medical plan cost sharing arrangement with all salaried employees and retirees was adopted. These participants will now contribute a minimum of 20% of medical plan operating costs. Contributions may be higher, dependent on either years of service or a combination of age and years of service at retirement. Prospective annual cost increases of up to 6% will be shared 80% by CONSOL Energy and 20% by the participants. Annual cost increases in excess of 6% will be the sole responsibility of the participant. Also, any salaried or non-represented hourly employees that were hired or rehired effective January 1, 2007 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 for each year of service at retirement. Newly employed inexperienced employees represented by the UMWA, hired after January 1, 2007, will not be eligible to receive retiree benefits. In lieu of these benefits, these employees will receive a defined contribution benefit of $1 per each hour worked.

CONSOL Energy adopted the measurement provisions of SFAS 158 during the year ended December 31, 2008. As a result of the adoption, the Company recognized an increase of $2,278 and $42,599 in the liabilities for pension and other postretirement benefits, respectively. These increases were accounted for as a reduction in the January 1, 2008 balance of retained earnings.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The reconciliation of changes in the benefit obligation, plan assets and funded status of these plans at December 31, 2008 and 2007, is as follows:


	Pension Benefits at December 31,						Other Benefits at December 31,
	2008			2007			2008			2007
Change in benefit obligation:
Benefit obligation at beginning of period	$	523,381		$	486,695		$	2,484,829		$	2,386,716
AMVEST acquisition		—			5,900			—			2,130
Contractual liability(a)		103			—			2,486			—
Service cost (9/30-12/31)		2,438			—			2,639			—
Service cost		9,752			11,015			10,554			10,988
Interest cost (9/30-12/31)		8,257			—			39,960			—
Interest cost		33,029			28,710			159,837			139,221
Actuarial loss		54,243			40,271			95,372			66,000
Plan amendments		49			—			22,456			17,267
Participant contributions (9/30-12/31)		—			—			1,221			—
Participant contributions		—			—			4,884			4,487
Benefits paid (9/30-12/31)		(12,536	)		—			(37,545	)		—
Benefits paid		(46,944	)		(49,210	)		(147,920	)		(141,980	)

Benefit obligation at end of period	$	571,772		$	523,381		$	2,638,773		$	2,484,829

Change in plan assets:
Fair value of plan assets at beginning of period	$	453,203		$	369,847		$	—		$	—
AMVEST acquisition		—			4,800			—			—
Actual return on plan assets		(60,256	)		43,806			—			—
Company contributions (9/30-12/31)		905			—			36,323			—
Company contributions		42,080			84,729			143,036			137,493
Participant contributions(9/30-12/31)		—			—			1,221			—
Participant contributions		—			—			4,884			4,487
Benefits and other payments (9/30-12/31)		(12,536	)		—			(37,544	)		—
Benefits and other payments		(48,135	)		(49,979	)		(147,920	)		(141,980	)

Fair value of plan assets at end of period	$	375,261		$	453,203		$	—		$	—

Funded status:
Noncurrent assets	$	90		$	458		$	—		$	—
Current liabilities		(2,034	)		(1,623	)		(145,429	)		(148,020	)
Noncurrent liabilities		(194,567	)		(69,013	)		(2,493,344	)		(2,336,809	)

Net obligation recognized	$	(196,511	)	$	(70,178	)	$	(2,638,773	)	$	(2,484,829	)

Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss	$	336,541		$	200,577		$	1,005,922		$	1,023,754
Prior service credit		(7,621	)		(9,061	)		(214,976	)		(298,213	)

Net amount recognized (before tax effect)	$	328,920		$	191,516		$	790,946		$	725,541

(a)	Amounts offset by a contractual receivable included in Other Assets on the Consolidated Balance Sheets.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The components of net periodic benefit costs are as follows:


	Pension Benefits									Other Benefits
	For the Years Ended December 31,									For the Years Ended December 31,
	2008			2007			2006			2008			2007			2006
Components of net periodic benefit cost:
Service cost	$	9,752		$	11,015		$	15,807		$	10,555		$	10,988		$	10,093
Interest cost		33,029			28,710			28,248			159,837			139,221			129,665
Expected return on plan assets		(33,671	)		(30,656	)		(26,125	)		—			—			—
Settlement		—			2,734			17,756			—			—			—
Amortization of prior service cost (credit)		(1,114	)		(1,114	)		(1,085	)		(48,625	)		(51,001	)		(56,619	)
Recognized net actuarial loss		16,728			12,487			16,686			61,503			61,230			64,302

Benefit cost	$	24,724		$	23,176		$	51,287		$	183,270		$	160,438		$	147,441

Amounts included in accumulated other comprehensive income, expected to be recognized in 2009 net periodic benefit costs:


	Pension Benefits			Postretirement Benefits
Prior service cost (benefit) recognition	$	(1,109	)	$	(46,415	)
Actuarial loss recognition	$	22,060		$	59,879

The following table provides information related to pension plans with an accumulated benefit obligation in excess of plan assets:


	As of December 31,
	2008		2007
Projected benefit obligation	$	571,155	$	522,201
Accumulated benefit obligation	$	511,275	$	467,710
Fair value of plan assets	$	374,657	$	451,564

Assumptions:

The weighted-average assumptions used to determine benefit obligations are as follows:


	Pension Benefits For the Year Ended December 31,				Other Benefits For the Year Ended December 31,
	2008		2007		2008		2007
Discount rate	6.28	%	6.57	%	6.20	%	6.63	%
Rate of compensation increase	4.05	%	4.01	%	—		—

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The weighted-average assumptions used to determine net periodic benefit costs are as follows:


	Pension Benefits at December 31,						Other Benefits at December 31,
	2008		2007		2006		2008		2007		2006
Discount rate	6.57	%	6.00	%	5.75	%	6.63	%	6.00	%	5.75	%
Expected long-term return on plan assets	8.00	%	8.00	%	8.00	%	—		—		—
Rate of compensation increase	4.01	%	3.65	%	4.11	%	—		—		—

The long-term rate of return is the sum of the portion of total assets in each asset class held multiplied by the expected return for that class, adjusted for expected expenses to be paid from the assets. The expected return for each class is determined using the plan asset allocation at the measurement date and a distribution of compound average returns over a 20-year time horizon. The model uses asset class returns, variances and correlation assumptions to produce the expected return for each portfolio. The return assumptions used forward-looking gross returns influenced by the current Treasury yield curve. These returns recognize current bond yields, corporate bond spreads and equity risk premiums based on current market conditions.

The assumed health care cost trend rates are as follows:


	December 31,
	2008		2007		2006
Health care cost trend rate for next year	9.60	%	8.00	%	8.50	%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)	5.00	%	5.00	%	5.00	%
Year that the rate reaches ultimate trend rate	2015		2013		2011

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 Point Increase		1-Percentage Point Decrease
Effect on total of service and interest costs components	$	20,693	$	(17,286	)
Effect on accumulated postretirement benefit obligation	$	300,914	$	(257,908	)

Assumed discount rates also have a significant effect on the amounts reported for both pension and other benefit costs. A one-quarter percentage point change in assumed discount rate would have the following effect on benefit costs:


	0.25 Percentage Point Increase			0.25 Percentage Point Decrease
Pension benefit costs (decrease) increase	$	(961	)	$	1,004
Other postemployment benefits costs (decrease) increase	$	(3,959	)	$	4,105

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Plan Assets:

There are no assets in the other postretirement benefit plans at December 31, 2008 or September 30, 2007. CONSOL Energy’s pension benefit plans weighted average asset allocations at December 31, 2008 and September 30, 2007 are as follows:


	Pension Plan Assets at December 31, September 30,
	2008		2007
Asset Category:
Equity Securities	63	%	60	%
Debt Securities	37	%	40	%

Total	100	%	100	%

The weighted-average target asset allocations for the Employee Retirement Plans of CONSOL Energy Inc. are as follows: U.S. Equities 45%, International Equities 15% and Debt Securities 40% (U.S. and International). The aggregate amount of International Equity and International Fixed Income shall not exceed 50% of total account assets. The allowable asset allocation ranges are as follows: U.S. Equities 20-60%, International Equities 10-40% and Debt Securities 10-50%. The investment policy performance objective is to exceed a benchmark portfolio by at least 100 basis points over a three-year period. The benchmark portfolio consists of the following indices: S&P 500 (Large Cap), S&P 400 (Mid Cap), Russell 2000 (Small Cap), MSCI EAFE (International), Lehman Aggregate and Salomon World Government (Bonds).

There are no investments in CONSOL Energy stock held by these plans at December 31, 2008 or September 30, 2007.

Cash Flows:

CONSOL Energy expects to contribute to the pension trust using prudent funding methods. Currently, depending on asset values and asset returns held in the trust, we expect to contribute between $47,435 and $67,435 to our pension plan trust in 2009. Pension benefit payments are primarily funded from the trust. CONSOL Energy does not expect to contribute to the other postemployment plan in 2009. We intend to pay benefit claims as they are due.

The following benefit payments, reflecting expected future service, are expected to be paid:


	Pension Benefits		Other Benefits
2009	$	46,542	$	145,429
2010	$	36,290	$	152,893
2011	$	34,877	$	163,063
2012	$	34,636	$	173,455
2013	$	36,470	$	179,866
Year 2014-2018	$	214,871	$	957,530

Note 16—Coal Workers’ Pneumoconiosis (CWP) and Workers’ Compensation:

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

workers’ pneumoconiosis disease. CONSOL Energy is also responsible under various state statutes for pneumoconiosis benefits. CONSOL Energy primarily provides for these claims through a self-insurance program. The calculation of the actuarial present value of the estimated pneumoconiosis obligation is based on an annual actuarial study by independent actuaries. The calculation is based on assumptions regarding disability incidence, medical costs, indemnity levels, mortality, death benefits, dependents and interest rates. These assumptions are derived from actual company experience and outside sources. Actuarial gains associated with CWP have resulted from numerous legislative changes over many years which have resulted in lower approval rates for filed claims than our assumptions originally reflected. Actuarial gains have also resulted from lower incident rates and lower severity of claims filed than our assumption originally reflected.

CONSOL Energy is also responsible to compensate individuals who sustain employment related physical injuries or some types of occupational diseases and, on some occasions, for costs of their rehabilitation. Workers’ compensation laws will also compensate survivors of workers who suffer employment related deaths. Workers’ compensation laws are administered by state agencies with each state having its own set of rules and regulations regarding compensation that is owed to an employee that is injured in the course of employment. CONSOL Energy primarily provides for these claims through a self-insurance program. CONSOL Energy recognizes an actuarial present value of the estimated workers’ compensation obligation calculated by independent actuaries. The calculation is based on claims filed and an estimate of claims incurred but not yet reported as well as various assumptions. The assumptions include discount rate, future health care trend rate, benefit duration and recurrence of injuries. Actuarial gains associated with workers’ compensation have resulted from discount rate changes, several years of favorable claims experience, various favorable state legislation changes and overall lower incident rates than our assumptions.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CONSOL Energy adopted the measurement provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158) during the year ended December 31, 2008. As a result of this adoption, the Company recognized an increase of $4,871 and $11,523 in liabilities for coal workers’ pneumoconiosis and workers’ compensation, respectively. These increases were accounted for as a reduction in the January 1, 2008 balance of retained earnings.


	CWP December 31,						Workers’ Compensation December 31,
	2008			2007			2008			2007
Change in benefit obligation:
Benefit obligation at beginning of period	$	182,872		$	195,609		$	162,060		$	166,668
AMVEST acquisition		—			8,055			—			1,744
Contractual liability(a)		1,689			—			355			—
State administrative fees and insurance bond premiums		—			—			5,509			—
Service cost (9/30-12/31)		1,934			—			7,257			—
Service cost		7,736			5,856			29,030			29,659
Interest cost (9/30-12/31)		2,937			—			2,082			—
Interest cost		11,748			11,401			8,328			8,356
Actuarial (gain) loss		4,117			(30,303	)		(4,236	)		(11,422	)
Benefits paid (9/30-12/31)		(1,455	)		—			(11,834	)		—
Benefits paid		(11,484	)		(7,746	)		(38,790	)		(32,945	)

Benefit obligation at end of period	$	200,094		$	182,872		$	159,761		$	162,060

Current liabilities	$	(9,833	)	$	(10,976	)	$	(32,778	)	$	(45,000	)
Noncurrent liabilities		(190,261	)		(171,896	)		(126,983	)		(117,060	)

Net obligation recognized	$	(200,094	)	$	(182,872	)	$	(159,761	)	$	(162,060	)

Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial gain	$	(187,672	)	$	(219,563	)	$	(59,257	)	$	(43,952	)
Prior service credit		(2,579	)		(3,489	)		—			—

Net amount recognized (before tax effect)	$	(190,251	)	$	(223,052	)	$	(59,257	)	$	(43,952	)

(a)	Amounts offset by a contractual receivable included in Other Assets on the Consolidated Balance Sheets.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The components of the net periodic cost (credit) are as follows:


	CWP For the Years Ended December 31,									Workers’ Compensation For the Years Ended December 31,
	2008			2007			2006			2008			2007			2006
Components of Net Periodic Cost (Credit):
Service cost	$	5,036		$	5,856		$	5,962		$	29,030		$	29,659		$	30,295
Interest cost		11,748			11,401			12,068			8,328			8,356			8,368
Legal and administrative costs		2,700			2,700			2,700			3,224			3,259			3,487
Amortization of prior service cost		(728	)		(728	)		(728	)		—			—			—
Recognized net actuarial gain		(23,383	)		(22,371	)		(21,121	)		(4,938	)		(3,953	)		(2,767	)
State administrative fees and insurance bond premiums		—			—			—			5,509			10,591			7,603

Net periodic cost (credit)	$	(4,627	)	$	(3,142	)	$	(1,119	)	$	41,153		$	47,912		$	46,986

Amounts included in accumulated other comprehensive income, expected to be recognized in 2009 net periodic benefit costs:


	CWP Benefits			Workers’ Compensation Benefits
Prior service benefit recognition	$	(728	)	$	—
Actuarial gain recognition	$	(19,590	)	$	(4,200	)

Assumptions:

The weighted-average discount rate used to determine benefit obligations and net periodic (benefit) cost are as follows:


	CWP For Years Ended December 31,						Workers’ Compensation For Years Ended December 31,
	2008		2007		2006		2008		2007		2006
Benefit obligations	6.23	%	6.62	%	6.00	%	5.90	%	5.94	%	6.00	%
Net Periodic (benefit) costs	6.62	%	6.00	%	5.75	%	5.94	%	6.00	%	5.75	%

Assumed discount rates have a significant effect on the amounts reported for both CWP benefits and Workers’ Compensation costs. A one-quarter percentage point change in assumed discount rate would have the following effect on benefit costs:


	0.25 Percentage Point Increase			0.25 Percentage Point Decrease
CWP benefit (decrease) increase	$	655		$	(643	)
Workers’ Compensation costs (decrease) increase	$	(146	)	$	146

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Cash Flows:

CONSOL Energy does not intend to make contributions to the CWP or Workers’ Compensation plans in 2009. We intend to pay benefit claims as they become due.

The following benefit payments, which reflect expected future claims as appropriate, are expected to be paid:


			Workers’ Compensation
	CWP Benefits		Total Benefits		Actuarial Benefits		Other Benefits
2009	$	9,833	$	38,930	$	32,778	$	6,152
2010	$	10,319	$	41,198	$	34,800	$	6,398
2011	$	10,907	$	42,441	$	35,787	$	6,654
2012	$	11,527	$	43,345	$	36,425	$	6,920
2013	$	12,128	$	43,934	$	36,737	$	7,197
Year 2014-2018	$	68,547	$	219,146	$	178,605	$	40,541

Note 17—Other Employee Benefit Plans:

UMWA Pension and Benefit Trusts:

Certain subsidiaries of CONSOL Energy were required under prior National Bituminous Coal Wage Agreements (NBCWA) with the United Mine Workers of America (UMWA) to pay amounts to the UMWA Pension Trusts based principally on hours worked by UMWA represented employees. These multi-employer pension trusts provide benefits to eligible retirees through a defined benefit plan. A five-year labor agreement was reached in December 2006 and is effective from January 1, 2007 through December 31, 2011 (the 2007 Agreement). The 2007 Agreement requires contributions to be paid to the UMWA 1974 Pension Trust based on a rate per hour worked by UMWA employees. The contribution per hour is as follows: $2.00 per hour worked in 2007, $3.50 per hour worked in 2008, $4.25 per hour worked in 2009, $5.00 per hour worked in 2010 and $5.50 per hour worked in 2011. Total contributions for a year may differ from total expenses for the year due to the timing of actual contributions compared to the date of assessment. Total contributions to the UMWA 1974 Pension Trust were $21,140 and $11,354 for the years ended December 31, 2008 and 2007, respectively. The Pension Protection Act of 2006 (the Pension Act) requires a minimum funding ratio of 80% be maintained for this multi-employer pension plan and if the plan is determined to have a funded ratio of less than 80% it will be deemed to be “endangered”, and if less than 60% it will be deemed to be “critical”, and will in either case be subject to additional funding requirements. Based on an estimated funding percentage of 91.4%, a certification was provided by the multi-employer plan actuary, stating that the plan is in neither “endangered” nor “critical” status for the plan year beginning July 1, 2008. However, the current volatile economic environment and the rapid deterioration in the equity markets have caused investment income and the value of investment assets held in the 1974 Pension Trust to decline and lose value. In the event that an estimate or a certification of the funding ratio were to be performed by the multi-employer pension plan actuary at December 31, 2008, a likely result would be the plan being deemed to be in “endangered” or “critical” status because the funding ratio under the Pension Act would be less than 80%. Such a determination would require certain subsidiaries of CONSOL Energy to make additional contributions pursuant to a funding improvement plan implemented in accordance with the Pension Act and, therefore, could have a material impact on our operating results. The Employee Retirement Income Security Act of 1974 (ERISA), as amended in 1980, imposes certain liabilities on contributors to multi-employer pension plans in the event of a contributor’s withdrawal from the plan. The withdrawal liability would be calculated based on the contributor’s proportionate share of the plan’s unfunded vested liabilities.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The Coal Industry Retiree Health Benefit Act of 1992 (the Act) created two multi-employer benefit plans: (1) the United Mine Workers of America Combined Benefit Fund (the Combined Fund) into which the former UMWA Benefit Trusts were merged, and (2) the 1992 Benefit Fund. CONSOL Energy subsidiaries account for required contributions to these multi-employer trusts as expense when incurred.

The Combined Fund provides medical and death benefits for all beneficiaries of the former UMWA Benefit Trusts who were actually receiving benefits as of July 20, 1992. The 1992 Benefit Fund provides medical and death benefits to orphan UMWA-represented members eligible for retirement on February 1, 1993, and who actually retired between July 20, 1992 and September 30, 1994. The Act provides for the assignment of beneficiaries to former employers and the allocation of unassigned beneficiaries (referred to as orphans) to companies using a formula set forth in the Act. The Act requires that responsibility for funding the benefits to be paid to beneficiaries be assigned to their former signatory employers or related companies. This cost is recognized when contributions are assessed. Total contributions under the Act were $24,343, $32,916 and $38,147 for the years ended December 31, 2008, 2007 and 2006, respectively. Costs were reduced in 2007 by $30,389 due to the March 2007 settlement agreement with the Combined Fund that resolved all previous issues relating to the calculation of payments to the Combined Fund. See Note 25—Commitments and Contingencies in Notes to Audited Financial Statements for additional details on the settlement agreement. Based on available information at December 31, 2008, CONSOL Energy’s obligation for the Act is estimated at approximately $213,000.

The UMWA 1993 Benefit Plan is a defined contribution plan that was created as the result of negotiations for the NBCWA of 1993. This plan provides health care benefits to orphan UMWA retirees who are not eligible to participate in the Combined Fund, the 1992 Benefit Fund, or whose last employer signed the 1993 or a later NBCWA and who subsequently goes out of business. Contributions to the trust under the 2007 agreement are $1.77 per hour worked by UMWA represented employees for the 2008 period, comprised of a $0.50 per hour worked under the labor agreement and $1.27 per hour worked by UMWA represented employees under the Tax Relief and Health Care Act of 2006 (the 2006 Act). The contribution rate for the 2007 period was $2.00 per hour worked by UMWA represented employees, comprised of $0.50 per hour worked under the labor agreement and $1.50 per hour worked under the 2006 Act. Total contributions were $11,494, $11,627 and $3,356 for the years ended December 31, 2008, 2007 and 2006, respectively.

Pursuant to the provisions of the 2006 Act and the 1992 Plan, CONSOL Energy is required to provide security in an amount based on the annual cost of providing health care benefits for all individuals receiving benefits from the 1992 Plan who are attributable to CONSOL Energy, plus all individuals receiving benefits from an individual employer plan maintained by CONSOL Energy who are entitled to receive such benefits. In accordance with the 2006 Act and the 1992 Plan, the outstanding letters of credit to secure our obligation were $60,695 and $62,464 for years ended December 31, 2008 and 2007, respectively. The 2008 and 2007 security amounts were based on the annual cost of providing health care benefits and included a reduction in the number of eligible employees.

At December 31, 2008, approximately 33% of CONSOL Energy’s workforce was represented by the UMWA.

Equity Incentive Plans:

CONSOL Energy has an equity incentive plan that provides grants of stock-based awards to key employees and to non-employee directors. See Note 18 for a further discussion of CONSOL Energy’s stock-based compensation.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The CNX Gas equity incentive plan consists of the following components: stock options, stock appreciation rights, restricted stock units, performance awards, performance share units, 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. CNX Gas stock-based compensation expense resulted in pre-tax expense of $3,379, $3,260 and $3,733 to CONSOL Energy for the years ended December 31, 2008, 2007 and 2006, respectively.

CNX Gas also has 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 CNX Gas common stock. The total number of units earned, if any, by a participant will be based on the CNX Gas total stockholder return relative to the stockholder return of a pre-determined peer group of companies. CNX Gas will recognize compensation costs over the requisite service period. The basis of the compensation costs will be re-valued quarterly. As of December 2008, there were two tranches of PSUs outstanding. The first tranche, awarded in 2006, had 183,280 units outstanding and a performance measurement period from October 11, 2006 to December 31, 2009. The second tranche, awarded in 2008, had 187,382 units outstanding and a performance measurement period from January 1, 2008 to December 31, 2010. The combined fair value of these awards recorded as a liability at December 31, 2008 was $11,780. For the years ended 2008, 2007 and 2006, approximately $8,779, $2,231 and $770 of compensation costs have been recognized, respectively.

Investment Plan:

CONSOL Energy has an investment plan available to all domestic, non-represented employees. Effective January 1, 2006, the company match was 6% of base pay for all non-represented employees except for those employees of Fairmont Supply Company whose match remains at 50% of the first 12% of base pay. In addition, effective January 1, 2007, the definition of eligible compensation for employee deferrals and company match was amended to include overtime for all non-represented employees except for those employees of Fairmont Supply Company whose definition of eligible compensation will remain unchanged. Total payments and costs were $23,091, $17,896 and $14,527 for the years ended December 31, 2008, 2007 and 2006, respectively.

Long-Term Disability:

CONSOL Energy has a Long-Term Disability Plan available to all full-time salaried employees. The benefits for this plan are based on a percentage of monthly earnings, offset by all other income benefits available to the disabled.


	For The Years Ended December 31,
	2008			2007			2006
Benefit Costs	$	3,998		$	3,050		$	4,260
Discount rate assumption used to determine net periodic benefit obligations		5.92	%		5.99	%		6.00	%

Liabilities included in Deferred Credits and Other Liabilities—Other and Other Accrued Liabilities amounted to $29,645 and $27,659 for years ended December 31, 2008 and 2007, respectively.

Note 18—Stock-Based Compensation:

CONSOL Energy adopted the CONSOL Energy Inc. Equity Incentive Plan on April 7, 1999. The plan provides for grants of stock-based awards to key employees and to non-employee directors. Amendments to the

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

plan have been approved by the Board of Directors since the commencement of the plan, and the total number of shares of common stock that can be covered by grants at December 31, 2008 is 18,200,000 of which 2,600,000 are available for issuance of awards other than stock options. No award of stock options may be exercised under the plan after the tenth anniversary of the effective date of the award.

Effective January 1, 2006, CONSOL Energy adopted the fair value recognition provisions of SFAS 123R, “Share-Based Payment” (SFAS 123R) using the modified prospective transition method. Under this transition method, stock-based compensation expense for the years presented 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. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. CONSOL Energy recognizes these compensation costs net of an estimated forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term, or to an employee’s eligible retirement date, if earlier and applicable. The total stock-based compensation expense recognized was $21,807, $20,983 and $19,113 for the years ended December 31, 2008, 2007 and 2006, respectively. The related deferred tax benefit totaled $8,293, $7,938 and $7,339, for the years ended December 31, 2008, 2007 and 2006, respectively.

CONSOL Energy examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, CONSOL Energy identified two distinct employee populations. CONSOL Energy used the Black-Scholes option pricing model to value the options for each of the employee populations. The table below presents the weighted average expected term in years of the two employee populations. The expected term computation is based upon historical exercise patterns and post-vesting termination behavior of the populations. 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 forfeiture rate is based upon historical forfeiture activity. A combination of historical and implied volatility is used to determine expected volatility and future stock price trends. Total fair value of options granted during the years ended December 31, 2008, 2007 and 2006 were $11,395, $9,912 and $11,621, respectively. 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:


	December 31,
	2008			2007			2006
Weighted average fair value of grants	$	29.44		$	11.93		$	15.46
Risk-free interest rate		2.59	%		4.7	%		5.0	%
Expected dividend yield		0.5	%		0.8	%		0.6	%
Expected forfeiture rate		2.0	%		2.0	%		2.0	%
Expected volatility		46.6	%		38.2	%		38.5	%
Expected term in years		3.97 years			4.07 years			4.17 years

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

A summary of the status of stock options granted is presented below:


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2007	5,401,500		$	21.50	6.58
Granted	387,070		$	78.62
Exercised	(852,192	)	$	17.86
Forfeited	(41,514	)	$	50.68

Balance at December 31, 2008	4,894,864		$	26.40	5.93	$	43,465

Vested and expected to vest	4,859,444		$	26.25	5.92	$	43,465

Exercisable at December 31, 2008	3,397,259		$	26.40	5.06	$	42,113

These stock options will terminate ten years after the date on which they were granted. The employee stock options, covered by the Equity Incentive Plan adopted April 7, 1999, vest 25% per year, beginning one year after the grant date for awards granted prior to 2007. Employee stock options awarded after December 31, 2006 vest 33% per year, beginning one year after the grant date. There are 4,336,863 stock options outstanding under the Equity Incentive plan. Additionally, there are 460,520 fully vested employee stock options outstanding which had vesting terms ranging from six months to one year. Non-employee director stock options vest 33% per year, beginning one year after the grant date. There are 97,481 stock options outstanding under these grants. The vesting of all options will accelerate in the event of death, disability or retirement and may accelerate upon a change of control of CONSOL Energy. In 2008, the compensation committee of the board of directors changed the retirement eligible acceleration of vesting to require a minimum vesting period of 12 months. This change is effective for all stock based compensation awards issued after January 1, 2008.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between CONSOL Energy’s closing stock price on the last trading day of the year ended December 31, 2008, and the option’s 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, 2008. This amount varies based on the fair market value of CONSOL Energy’s stock. Total intrinsic value of options exercised for the year ended December 31, 2008, 2007 and 2006 was $55,131, $65,294 and $23,677, respectively.

Cash received from option exercises for the years ended December 31, 2008, 2007 and 2006 was $15,215, $19,224 and $14,670, respectively. The excess tax benefit realized for the tax deduction from option exercises totaled $22,003, $23,682 and $38,545 for the years ended December 31, 2008, 2007 and 2006, respectively. This excess tax benefit is included in cash flows from financing activities in the Consolidated Statement of Cash Flows.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Under the Equity Incentive Plan, CONSOL Energy granted certain employees and non-employee directors restricted stock unit awards. These awards entitle the holder to receive shares of common stock as the award vests. Compensation expense will be recognized over the vesting period of the units. The total fair value of the restricted stock units granted during the years ended December 31, 2008, 2007 and 2006 were $5,950, $6,373 and $7,049, respectively. The total fair value of shares vested during the years ended December 31, 2008, 2007 and 2006 was $4,720, $3,641 and $2,492, respectively. The following represents the unvested restricted stock units and corresponding fair value (based upon the closing share price) at the date of grant:


	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2007	492,562		$	31.75
Granted	76,847		$	77.43
Vested	(175,058	)	$	26.96
Forfeited	(5,055	)	$	64.22

Nonvested at December 31, 2008	389,296		$	42.57

Under the Equity Incentive Plan, CONSOL Energy granted certain employees performance share unit awards. These awards entitle the holder to receive shares of common stock subject to the achievement of certain market and performance goals. Compensation expense will be recognized over the performance measurement period of the units in accordance with the provisions of SFAS 123R for awards with market and performance vesting conditions. At December 31, 2008, achievement of the market and performance goals is believed to be probable. The total fair value of performance share units granted during the years ended December 31, 2008, 2007 and 2006 were $4,904, $3,237 and $0. The following represents the unvested performance share unit awards and their corresponding fair value (based upon the closing share price) at the date of grant:


	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2007	76,007	$	42.59
Granted	50,870	$	96.40

Nonvested at December 31, 2008	126,877	$	64.16

As of December 31, 2008, $15,749 of total unrecognized compensation cost related to unvested awards is expected to be recognized over a weighted-average period of 1.54 years. When employee stock options are exercised and restricted and performance stock unit awards become vested, the issuances are made from CONSOL Energy’s treasury stock shares which have been acquired as part of CONSOL Energy’s share repurchase program as previously discussed in Note 1.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 19—Accumulated Other Comprehensive Loss:

Components of accumulated other comprehensive loss consist of the following:


	Treasury Rate Lock			Change in Fair Value of Cash Flow Hedges			Minimum Pension Liability			Adjustments for FASB Statement No. 158			Accumulated Other Comprehensive Loss
Balance at December 31, 2005	$	502		$	(28,300	)	$	(77,364	)	$	—		$	(105,162	)
Net increase in value of cash flow hedges		—			54,002			—			—			54,002
Reclassification of cash flow hedges from other comprehensive income to earnings		—			(17,620	)		—			—			(17,620	)
Current period change		(81	)					77,364			(377,343	)		(300,060	)
Noncontrolling Interest change		—			(6,736	)		—			(141	)		(6,877	)

Balance at December 31, 2006		421			1,346			—			(377,484	)		(375,717	)
Net increase in value of cash flow hedges		—			23,943			—			—			23,943
Reclassification of cash flow hedges from other comprehensive income to earnings		—			(19,729	)		—			—			(19,729	)
Current period change		(81	)		—			—			(47,009	)		(47,090	)
Noncontrolling Interest change		—			(769	)		—			78			(691	)

Balance at December 31, 2007		340			4,791			—			(424,415	)		(419,284	)
Net increase in value of cash flow hedges		—			117,699			—			—			117,699
Reclassification of cash flow hedges from other comprehensive income to earnings		—			947			—			—			947
Current period change		(77	)		—			—			(140,305	)		(140,382	)
Prior period adjustment		—			—			—			(87	)		(87	)
Noncontrolling Interest change		—			(20,812	)		—			19			(20,793	)

Balance at December 31, 2008	$	263		$	102,625		$	—		$	(564,788	)	$	(461,900	)

The cash flow hedges that CONSOL Energy holds are disclosed in Note 24. The adjustments for FASB Statement No. 158 are disclosed in Note 15 and Note 16.

Note 20—Research and Development Costs:

CONSOL Energy operates a research and development facility devoted to providing technical support to coal, gas and other functions. Costs related to research and development are expensed as incurred. These costs were $4,003, $3,876 and $2,844 for the years ended December 31, 2008, 2007 and 2006, respectively.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 21—Supplemental Cash Flow Information:


	For the Years Ended December 31,
	2008			2007			2006
Cash paid during the year for:
Interest (net of amounts capitalized)	$	33,219		$	26,415		$	23,345
Income taxes	$	95,101		$	103,194		$	80,272
Non-cash investing and financing activities:
Adoption of FIN 48
Change in Assets	$	—		$	(39,207	)	$	—
Change in Liabilities	$	—		$	(39,207	)	$	—
Businesses acquired (Note 2)
Fair value of assets acquired	$	(26,892	)	$	(132,694	)	$	(2,776	)
Liabilities assumed	$	(26,892	)	$	(132,694	)	$	(2,776	)
Note received from property sales	$	—		$	(200	)	$	—
Capital Lease Obligation
Change in Assets	$	2,622		$	(1,083	)	$	(113,671	)
Change in Liabilities	$	2,622		$	(1,083	)	$	(113,671	)
Purchase Obligation for Real Estate
Change in Assets	$	—		$	—		$	(811	)
Change in Liabilities	$	—		$	—		$	(811	)
Purchase of Property, Plant and Equipment
Change in Assets	$	(75,818	)	$	3,219		$	(31,136	)
Change in Liabilities	$	(75,818	)	$	3,219		$	(31,136	)
Accounting for Mine Closing, Reclamation and Gas Well Closing Costs
Change in Assets	$	(29,088	)	$	3,403		$	(18,647	)
Change in Liabilities	$	(29,088	)	$	3,403		$	(18,647	)

Note 22—Concentration of Credit Risk and Major Customers:

CONSOL Energy markets steam coal, principally to electric utilities in the United States, Canada and Western Europe, and metallurgical coal to steel and coke producers worldwide. As of December 31, 2008 and 2007, accounts receivable from utilities were $251,845 and $174,536, respectively, and from steel and coke producers were and $40,788 and $23,214, respectively. Credit is extended based on an evaluation of the customer’s financial condition, and generally collateral is not required. Credit losses consistently have been minimal.

For the years ended December 31, 2008, 2007 and 2006, no customer comprised over 10% of our revenues.

Note 23—Fair Values of Financial Instruments:

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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


	Fair Value Measurements at December 31, 2008
Description	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Gas Cash Flow Hedges	$	—	$	206,509		$	—
Coal Sales Options	$	—	$	(1,937	)	$	—

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

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

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

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

The carrying amounts and fair values of financial instruments, excluding derivative financial instruments disclosed in Note 24, are as follows:


	December 31, 2008						December 31, 2007
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	138,512		$	138,512		$	41,651		$	41,651
Short-term notes payable	$	(557,700	)	$	(557,700	)	$	(247,500	)	$	(247,500	)
Long-term debt	$	(402,287	)	$	(390,278	)	$	(406,451	)	$	(420,203	)

Note 24—Derivative Instruments:

CONSOL Energy holds or purchases 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 2010. The net fair values of the outstanding instruments are an asset of $206,509 and $9,619 at December 31, 2008 and 2007, respectively.

CONSOL Energy entered into cash flow hedges for natural gas in 2008, 2007 and 2006. 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 2008, 2007 and 2006.

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 other comprehensive income or loss and are reclassified to sales in the period in which earnings are impacted by the hedged items or in the period

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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 2008, 2007 or 2006.

Assuming market rates remain constant with rates at December 31, 2008, $91,486 of the $124,510 net gain included in accumulated other comprehensive income is expected to be recognized in earnings over the next 12 months. The remaining net gain is expected to be recognized through 2010.

CONSOL Energy did not have any derivatives designated as fair value hedges in 2008, 2007 or 2006.

On February 19, 2002, CONSOL Energy entered into an interest rate lock agreement with a notional amount of $250,000 to manage the interest rate volatility prior to March 7, 2002, the pricing date of CONSOL Energy’s bond offering. This agreement essentially fixed the underlying treasury rate of the bonds at 4.928% and resulted in a net payment of $1,332 to CONSOL Energy. This receipt resulted in other comprehensive income of $814 (net of $518 deferred tax), which will be amortized to interest income over the life of the notes using the straight-line method. For the years ended December 31, 2008, 2007 and 2006, $81, $81, and $81 was amortized to interest income, respectively.

Note 25—Commitments and Contingent Liabilities:

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

On January 30, 2008, the Pennsylvania Department of Conservation and Natural Resources filed a six-count Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, asserting claims in both tort and contract against the Company for alleged damage to park property owned by the Commonwealth allegedly due to the Company’s underground mining activities. The matter was the subject of a mediation process with an independent, neutral mediator prior to the filing of the Complaint. That process terminated with no resolution and the Commonwealth then filed its Complaint. The Commonwealth claims that the Company’s underground longwall mining activities in the summer of 2005 in Greene County, Pennsylvania, caused cracks and seepage damage to the nearby Ryerson Park Dam. The Commonwealth demolished the Ryerson Dam’s spillway allegedly under its role of Parens Patrie to protect persons and property, thereby eliminating the Ryerson Park lake. The Commonwealth claims that the Company is liable for dam reconstruction costs, lake restoration costs and natural resources damages totaling $58,000. The theories of liability include general allegations of negligence, breach of contract, strict liability, nuisance, an administrative remedy claim under the Bituminous Mine Subsidence Act and a claim of fraud; the last claim seeking punitive damages. The Court, in ruling on the Company’s Preliminary Objections to the Complaint, stayed the current proceedings in the state court, holding that the Commonwealth should pursue administrative agency review of the claim because full compensatory relief, if warranted, could be provided by the particular administrative agency and then the Environmental Hearing Board, if further relief was sought. Furthermore, the Court found that the Commonwealth could not recover natural resources damages under applicable law. The remainder of the Company’s objections was preserved pending the outcome of the administrative proceedings. As to the underlying claim, the Company believes it is not responsible for the damage to the dam, that there exist numerous grounds upon which to attack the propriety of

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

the claims, and it will vigorously defend the case. However, it is reasonably possible that the ultimate liability in the future with respect to these claims may be material to the financial position, results of operations, or cash flows of CONSOL Energy.

One of our subsidiaries, Fairmont Supply Company (Fairmont), which distributes industrial supplies, currently is named as a defendant in approximately 25,000 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, Mississippi and New Jersey. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time, and in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. For the years ended December 31, 2008, 2007 and 2006, payments by Fairmont with respect to asbestos cases have not been material. Our current estimates related to these asbestos claims, individually and in the aggregate, are immaterial to the financial position, results of operations and cash flows of CONSOL Energy. However, it is reasonably possible that payments in the future with respect to pending or future asbestos cases may be material to the financial position, results of operations or cash flows of CONSOL Energy.

CONSOL Energy has also been sued in a limited number of asbestos cases in Pennsylvania and Illinois. All involve claims that the plaintiffs developed asbestos-related diseases as a result of working with or around asbestos containing products used at mines operated by subsidiaries Consolidation Coal Company or CONSOL of Kentucky. CONSOL Energy has raised a number of defenses including lack of jurisdiction and that it is not properly named as a party since CONSOL Energy did not own or operate the mines at which the alleged exposures occurred. Discovery is still in the early stages in each matter. The Company believes it is not responsible for these claims, and it will vigorously defend the cases. However, it is reasonably possible that the ultimate liability in the future with respect to these claims may be material to the financial position, results of operations, or cash flows of CONSOL Energy.

CONSOL Energy was notified in November 2004 by the United States Environmental Protection Agency (EPA) that it is a potentially responsible party (PRP) under Superfund legislation with respect to the Ward Transformer site in Wake County, North Carolina. At that time, the EPA also identified 38 other PRPs for the Ward Transformer site. On September 16, 2005, the EPA, CONSOL Energy and two other PRPs entered into an administrative Settlement Agreement and Order of Consent, requiring those PRPs to undertake and complete a PCB soil removal action, at and in the vicinity of the Ward Transformer property. In December 2005, the EPA approved the PRPs’ work plan, and field work began the first week of January 2006. On March 12, 2007, another party joined the participating PRPs and reduced CONSOL Energy’s interim allocation share from 46% to 32%. Accordingly, CONSOL Energy recognized a reduction in the previously recognized liability related to this matter. In June 2008, while conducting the PCB soil excavation on the Ward property, it was determined that PCBs may have migrated onto two adjacent properties. Estimates of removal action plans for the additional area are not yet complete. Also, in September 2008, the EPA notified CONSOL Energy and 60 other PRPs that there were additional areas of potential contamination allegedly related to the Ward Transformer Site. Estimates of the cost of the removal action plans for the additional areas are not yet complete.

The current estimated cost of remedial action for the area CONSOL Energy was originally named a PRP, including payment of the EPA’s past and future cost, is approximately $50,000. Estimates of remediation cost for

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

the additional areas discovered are not yet available and a removal action plan is not yet approved by the EPA. Therefore, estimated costs for these areas, nor a range of estimated cost for these areas, are available. There was $7,080, $1,780 and $4,820 of expense recognized in Cost of Goods Sold and Other Charges for the years ended December 31, 2008, 2007 and 2006, respectively. CONSOL Energy funded $6,000, $1,256 and $3,759 in the years ended December 31, 2008, 2007 and 2006, respectively, to an independent trust established for this remediation. The remaining liability of $7,994 is reflected in Other Accrued Liabilities at December 31, 2008. CONSOL Energy and the other participating PRPs are investigating contribution claims against other, non-participating PRPs, and such claims will be brought to recover a share of the costs incurred. CONSOL Energy’s portions of probable recoveries are estimated to be $3,420. Accordingly, an asset has been included in Other Assets for these claims. CONSOL Energy expects the majority of payments related to this liability to be made over the next year. There may be some delay in negotiating settlements with other PRPs who may want settlement of all Ward-related claims. We cannot predict the ultimate outcome of this Superfund site; however, it is reasonably possible that payments in the future with respect to this lawsuit may be material to the financial position, results of operations or cash flows of CONSOL Energy.

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

Yukon Pocahontas Coal Company, Buchanan Coal Company and Sayers-Pocahontas Coal Company filed an action on March 22, 2004 against CCC which is presently pending in the Circuit Court of Buchanan County, Virginia (the “Yukon Action”). The action is related to CCC’s depositing of untreated water from its Buchanan Mine into the void spaces of nearby mines of one of our other subsidiaries, Island Creek Coal Company (“ICCC”). The plaintiffs are seeking to stop CCC from depositing any additional water in these areas, to require CCC to remove the water that is stored there along with any remaining impurities, to recover $300,000 of compensatory and trebled damages and to recover punitive damages. Plaintiffs have twice amended the original complaint to assert additional claims for compensatory damages to the coal and gas estates of up to $3,252,000, punitive damages in the amount of $350,000, as well as interest, costs, and attorneys’ fees, against CCC. Plaintiffs have also added CONSOL Energy, CNX Gas Company, LLC and ICCC as additional defendants asserting additional damage claims of $150,000 against those defendants. The Yukon group has recently filed a demand for arbitration against ICCC which makes similar claims relating to breach of the lease for water deposits and lost coal claims. In addition, an appeal of the 2005 Arbitration Award in favor of ICCC is pending before the Buchanan Circuit Court.

Levisa Coal Company filed an action on July 10, 2006 against CCC in the Circuit Court of Buchanan County, Virginia (the “Levisa Action”). The action is for injunctive relief and declaratory judgment and sought a court order prohibiting CCC from depositing water from its Buchanan Mine into the void spaces of ICCC’s VP3 mine, part of which is under lease from Levisa Coal Company. The Plaintiff also seeks an injunction requiring CCC to remove the water already deposited in the VP3 Mine. The plaintiff claims the water adversely affects its remaining coal reserves and coalbed methane production, thereby impacting the plaintiff’s future royalties. In mid-November 2006, Levisa Coal Company petitioned the Circuit Court for a temporary injunction prohibiting the further depositing of water into the void spaces which, after a two-day hearing, the Circuit Court denied. Subsequently, the Circuit Court entered an order holding that CCC has the right to store water in the VP3 mine void based upon provisions in this lease and dismissed the action. The Virginia Supreme Court, on appeal, disagreed with the Circuit Court’s interpretation of the lease, held that CCC has no right to store water in VP3 under the lease, and reversed the dismissal and remanded the case to the Circuit Court to determine whether under equitable principles a permanent injunction should be issued. On June 13, 2008 Levisa Coal Company filed a second action against CCC in the Circuit Court of Buchanan County, Virginia relating to the deposit of

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

water by CCC into the void spaces of the VP3 mine which seeks damages of approximately $300,000, plus interest, costs and attorneys’ fees; however, this case was non-suited by the plaintiffs without prejudice. On September 18, 2008 the Virginia Supreme Court denied CCC’s request for a rehearing of its June 6, 2008 decision and CCC subsequently filed a petition of certiorari with the United States Supreme Court requesting the United States Supreme Court to review and overturn the decision of the Virginia Supreme Court. Levisa Coal Company filed additional motions in the original action with the Circuit Court seeking among other things (i) a permanent injunction to halt the deposit of water in the VP3 mine void, and (ii) as additional relief, that CCC disgorge profits and other monetary benefits including avoided losses generated by the operation of the Buchanan Mine from the date of the decision of the Virginia Supreme Court or alternatively since the date of its denial of CCC’s rehearing request until such time as all depositing and/or storage of water in the VP3 mine from the Buchanan Mine ceases. On February 10, 2009, the Circuit Court entered an order permanently enjoining CCC from depositing water in the VP3 mine void and ruled that other issues, including other requested injunctive and monetary relief, were reserved for trial or further rulings of the court. CCC has ceased depositing water into the VP3 mine void and is evaluating its options with respect to the Court’s order, including possibly appealing the order to the Virginia Supreme Court. CCC is continuing to operate the Buchanan Mine, utilizing other alternatives available to it for storing and disposing of water. CCC is also pursuing other alternatives for the disposal of this water, including the construction of a reverse osmosis plant to treat the water. However, if the permanent injunction remains in effect, there is no assurance that other alternatives will be available for the disposal of water, and CCC may be required to idle the Buchanan Mine.

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

CCC has obtained revision to its environmental permit from the Division of Mined Land Reclamation (“DMLR”) of the Virginia Department of Mines, Minerals and Energy (“DMME”) to deposit water from its Buchanan Mine into void spaces of VP3, and to permit the discharge of water into the nearby Levisa River under controlled conditions. Plaintiffs in the Yukon Action and the Levisa Action along with the Town of Grundy, Virginia, Buchanan County Board of Supervisors, and others have requested the DMME to reconsider the permit revisions issued by DMLR. Requests for temporary relief to prevent CCC from constructing and operating pursuant to the permit revisions pending a final hearing before the DMME have been rejected by the Director of the DMME. The hearing to be conducted by the Director of the DMME through a Hearing Officer appointed by the Supreme Court of Virginia has not yet been scheduled. The plaintiffs in the Yukon Action on June 13, 2006 also filed an action against the DMME in the Circuit Court of Buchanan County, Virginia seeking to enjoin DMLR and DMME from issuing the permit revisions, which were ultimately issued in September 2006 and are the subject of the administrative appeal to the Director of DMME described above. The Levisa Action plaintiff filed a nearly identical action. DMME filed demurrers, but no hearing has been conducted since the DMME issued the permit in September 2006. On December 4, 2006, both the plaintiffs in the Yukon Action and Levisa nonsuited their respective “Citizen Suits.”

We also believe DMME properly issued environmental permits to CCC authorizing it to deposit naturally accumulating water from the Buchanan Mine into VP3 as well as discharging water into the Levisa River under the controlled conditions established by the permits. CCC and the other named CONSOL Energy defendants in the Yukon Action, the Levisa Action and the Pobst/Combs Action deny all liability and intend to vigorously defend the actions filed against them in connection with the removal and deposit of water from the Buchanan

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Mine. CCC also intends to vigorously defend the environmental permits issued to it. Consequently, we have not recognized any liability related to these actions. However, if the permanent injunction in the Levisa Action remains in place, if an additional injunction were to be issued against CCC, if the environmental permits were temporarily suspended or revoked, or if damages were awarded to plaintiffs, the result may be material to the financial position, results of operations or cash flows of CONSOL Energy.

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

On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against CNX Gas Company LLC and Island Creek Coal Company, a subsidiary of CONSOL Energy, in the Circuit Court for the County of Tazewell, Virginia (Case No. CL07000065-00). The lawsuit alleged that CNX Gas conspired with Island Creek and has violated the Virginia Antitrust Act and tortuously interfered with GeoMet’s contractual relations, prospective contracts and business expectancies. CNX Gas and Island Creek filed motions to dismiss all counts of the complaint. On December 19, 2007, the court granted CNX Gas’ and Island Creek’s motions to dismiss all counts, with leave for GeoMet to file an amended complaint. On March 31, 2008, GeoMet filed an amended complaint. The amended complaint is again against CNX Gas and Island Creek, but it added CONSOL Energy and Cardinal States Gathering Company as additional defendants. The amended complaint restates allegations that CNX Gas, Island Creek and now CONSOL Energy and Cardinal States Gathering Company violated the Virginia Antitrust Act and tortuously interfered with GeoMet’s contractual relations, prospective contracts and business expectancies. The amended complaint seeks injunctive relief, compensatory damages of $385,600 and treble damages. CNX Gas continues to believe this lawsuit to be without merit and intends to vigorously defend it. CNX Gas’ action seeking to dismiss GeoMet’s complaint is pending. We cannot predict the ultimate outcome of this litigation; however, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations, or cash flows of CNX Gas.

On January 7, 2009, CNX Gas received a civil investigative demand for information and documents from the Attorney General of the Commonwealth of Virginia regarding the company’s exploration, production, transportation and sale of coalbed methane gas in Virginia. According to the request, the Attorney General is investigating whether the company may have violated the Virginia Antitrust Act. The request for information does not constitute the commencement of legal proceedings and does not make any specific allegations against the company. CNX Gas does not believe that it has violated the Virginia Antitrust Act and the company intends to cooperate with the Attorney General’s investigation.

The Company is a party to a case captioned Earl Kennedy et. al v. CNX Gas and CONSOL Energy in the Court of Common Pleas of Greene County, Pennsylvania (Case No. 225 of 2007). The lawsuit alleges that CNX Gas and CONSOL Energy conspired and were unjustly enriched, trespassed, converted, and committed fraud relating to gas and other minerals allegedly belonging to Mr. Kennedy. The suit also seeks to overturn existing law as to the ownership of coalbed methane in Pennsylvania. The complaint, as amended, seeks injunctive relief, including having us be removed from the property, quiet title and compensatory damages of $20,000. CNX Gas believes this lawsuit to be without merit and intends to vigorously defend it. We cannot predict the ultimate outcome of this litigation; however, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations, or cash flows of CNX Gas.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In April 2005, Buchanan County, Virginia (through its Board of Supervisors and Commissioner of Revenue) filed a “Motion for Judgment Pursuant to the Declaratory Judgment Act Virginia Code § 8.01-184” against CNX Gas Company LLC in the Circuit Court of the County of Buchanan (Case No. CL05000149-00) for the year 2002; the county has since filed and served two substantially similar cases for years 2003, 2004 and 2005. These cases have been consolidated. The complaint alleges that our calculation of the license tax on the basis of the wellhead value (sales price less post production costs) rather than the sales price is improper. For the period from 1999 through mid 2002, we paid the tax on the basis of the sales price, but we have filed a claim for a refund for these years. Since 2002, we have continued to pay Buchanan County taxes based on our method of calculating the taxes. However, we have been accruing an additional liability reflected in Other Liabilities on our balance sheet in an amount based on the difference between our calculation of the tax and Buchanan County’s calculation. We believe that we have calculated the tax correctly and in accordance with the applicable rules and regulations of Buchanan County and intend to vigorously defend our position. However, it is reasonably possible that the ultimate liabilities in the future with respect to these lawsuits and claims may be material to the financial position, results of operations or cash flows of CONSOL Energy.

In 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 pay, and subsequently paid, damages to the group of royalty owners that brought the suit. A final payment was subsequently made to the plaintiffs to adjust all royalties owed to the plaintiffs for subsequent periods, which effectively settled this case. CNX Gas recognized an estimated liability for other similarly situated plaintiffs who could bring similar claims. This amount is included in Other Liabilities on the balance sheet and is evaluated quarterly. CNX Gas believes that the final resolution of this matter will not have a material effect on our financial position, results of operations or cash flows.

We expensed and paid approximately $28,000 to the Combined Fund for the plan year beginning October 1, 2003 as a result of the higher per beneficiary premium rate calculated by the Commissioner of Social Security and retroactively imposed by the Combined Fund for beneficiaries assigned to CONSOL Energy and its subsidiaries. Additionally, CONSOL Energy expensed approximately $2,000 related to the higher per beneficiary premium rate for the plan year beginning October 1, 2004. The higher per beneficiary premium rate was imposed as a result of court decisions issued prior to June 10, 2003 arising from litigation over the formula used in the calculation of the annual per beneficiary premium rate owed by assigned operators, including subsidiaries of CONSOL Energy, to the Combined Fund. In August 2005, after additional litigation cases had been filed concerning the calculation and imposition of the higher per beneficiary premium rate, the United States District Court for the District of Maryland ruled that the calculation by the Commissioner of Social Security was improper, arbitrary and capricious. Subsequently, on December 31, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the decision of the District Court.

On March 28, 2007, the assigned operators, including the subsidiaries of CONSOL Energy, and the Combined Fund entered into a settlement agreement that resolved all issues relating to the calculation and imposition of the higher per beneficiary premium rate. The settlement agreement provides for full reimbursement of the higher per beneficiary premium rate calculated and imposed on the subsidiaries of CONSOL Energy and for the payment of interest on all amounts to be reimbursed. CONSOL Energy received reimbursement of approximately $33,400, which includes the reduction of $2,255 related to the unassigned beneficiary premium liability previously accrued. The reimbursement was reflected as a reduction to cost of goods sold and other charges in the year ended December 31, 2007.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In July 2007, production at the Buchanan Mine was suspended after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine by employees. The mine atmosphere was continually monitored to determine the impact of the roof falls on the mine’s ventilation system and the overall mine atmosphere. On March 17, 2008, Buchanan Mine resumed production. This incident is covered under our property and business interruption insurance policy, subject to certain deductibles. Business interruption recoveries of $50,000 were recognized as Other Income in the year ended December 31, 2008, $42,000 in the coal segment and $8,000 in the gas segment. The total recoveries for this incident under our insurance policy were $75,000. As of December 31, 2008, all recognized recoveries have been collected. No other insurance recoveries for this incident will be received.

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

CONSOL Energy filed timely claims for refunds of the BLET with the Internal Revenue Service in the amount of $26,539. In addition, the estimated interest related to the BLET refunds expected to be received is $32,444. In relation to this receivable, CONSOL Energy also recognized $3,187 of expense that will be owed to third parties upon collection of the refunds. CONSOL Energy believes that it will receive refunds of BLET erroneously paid on export sales in the amounts requested in its filing with the Internal Revenue Service plus interest as required by the EESA Act prior to December 31, 2009.

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

At December 31, 2008, CONSOL Energy has provided the following financial guarantees, unconditional purchase obligations and letters of credit to certain third parties, as described by major category in the following table. These amounts represent the maximum potential total of future payments that we could be required to make under these instruments. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credits are recorded as liabilities on the financial statements. CONSOL Energy management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on financial condition.


	Amount and Duration of Commitments
	Total Amounts Committed		Less Than 1 Year		1-3 Years		3-5 Years		Beyond 5 Years
Letters of Credit:
Employee-Related	$	186,818	$	164,154	$	22,664	$	—	$	—
Environmental		63,502		24,945		38,557		—		—
Gas		14,933		14,933		—		—		—
Other		20,432		20,282		150		—		—

Total Letters of Credit		285,685		224,314		61,371		—		—

Surety Bonds:
Employee-Related		188,251		188,251		—		—		—
Environmental		318,712		316,425		2,287		—		—
Gas		4,272		4,207		65		—		—
Other		9,890		9,588		302		—		—

Total Surety Bonds		521,125		518,471		2,654		—		—

Guarantees and unconditional purchase obligations:
Coal		448,599		271,203		171,921		2,222		3,253
Gas		32,841		29,741		—		—		3,100
Other		204,518		22,065		39,356		27,865		115,232

Total Guarantees		685,958		323,009		211,277		30,087		121,585

Total Commitments	$	1,492,768	$	1,065,794	$	275,302	$	30,087	$	121,585

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

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CONSOL Energy Inc. and CNX Gas enter into long-term unconditional purchase obligations to procure major equipment purchases, natural gas firm transportation gas drilling services and other operating goods and services. These purchase obligations are not recorded on the Consolidated Balance Sheet. As of December 31, 2008, the purchase obligations for each of the next five years were as follows:


Year Ended December 31,	Amount
2009	$	42,072
2010		35,438
2011		17,309
2012		16,354
2013		15,881
Thereafter		239,196

Total purchase obligations	$	366,250

Note 26—Segment Information:

CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the year ended December 31, 2008, the Northern Appalachian aggregated segment includes the following mines: Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork, Mine 84 and Shoemaker. For the year ended December 31, 2008, the Central Appalachian aggregated segment includes the following mines: Jones Fork Complex, the Fola Complex and the Terry Eagle Complex. For the year ended December 31, 2008, the Metallurgical aggregated segment includes the following mines: Buchanan and Amonate Complex. The Other Coal segment includes our purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to each individual mines. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energy’s All Other segment includes terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses.

100

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Segment results for the year ended December 31, 2008:


	Northern Appalachian		Central Appalachian			Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—Outside	$	2,126,182	$	330,752		$	371,539	$	355,971		$	3,184,444	$	680,990	$	316,135	$	—		$	4,181,569	(A)
Sales—Purchased Gas		—		—			—		—			—		8,464		—		—			8,464
Sales—Gas Royalty Interests		—		—			—		—			—		79,302		—		—			79,302
Freight—Outside		—		—			—		216,968			216,968		—		—		—			216,968
Intersegment Transfers		—		—			—		—			—		7,337		145,856		(153,193	)		—

Total Sales and Freight	$	2,126,182	$	330,752		$	371,539	$	572,939		$	3,401,412	$	776,093	$	461,991	$	(153,193	)	$	4,486,303

Earnings (Loss) Before Income Taxes	$	323,348	$	(35,385	)	$	189,304	$	(70,229	)	$	407,038	$	385,954	$	18,526	$	(85,923	)	$	725,595	(B)

Segment assets											$	4,387,584	$	2,094,748	$	322,137	$	565,989		$	7,370,458	(C)

Depreciation, depletion and amortization											$	299,831	$	70,010	$	19,780	$	—		$	389,621

Capital Expenditures											$	445,594	$	560,663	$	55,412	$	—		$	1,061,669

(A)	There were no sales to individual customers aggregating over 10% of revenue in 2008.

(B)	Includes equity in earnings of unconsolidated affiliates of $2,534, $551 and $8,055 for Coal, Gas and All Other, respectively.

(C)	Includes investments in unconsolidated equity affiliates of $9,386 and $25,204 and $38,406 for Other Coal, Gas and All Other, respectively. Also, included in the Coal segment is $58,983 of receivables related to the Emergency Economic Stabilization Act of 2008.

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NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Segment results for the year ended December 31, 2007:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—Outside	$	1,988,526	$	272,131	$	237,266	$	180,758		$	2,678,681	$	410,211	$	235,454	$	—		$	3,324,346	(D)
Sales—Purchased Gas		—		—		—		—			—		7,628		—		—			7,628
Sales—Gas Royalty Interests		—		—		—		—			—		46,586		—		—			46,586
Freight—Outside		—		—		—		186,909			186,909		—		—		—			186,909
Intersegment Transfers		—		—		—		—			—		6,242		129,648		(135,890	)		—

Total Sales and Freight	$	1,988,526	$	272,131	$	237,266	$	367,667		$	2,865,590	$	470,667	$	365,102	$	(135,890	)	$	3,565,469

Earnings (Loss) Before Income Taxes	$	353,255	$	25,428	$	65,080	$	(166,256	)	$	277,507	$	214,874	$	15,152	$	(78,576	)	$	428,957	(E)

Segment assets										$	4,039,513	$	1,378,709	$	253,792	$	536,076		$	6,208,090	(F)

Depreciation, depletion and amortization										$	257,349	$	48,961	$	18,405	$	—		$	324,715

Capital Expenditures										$	681,408	$	304,088	$	54,342	$	—		$	1,039,838

(D)	There were no sales to individual customers aggregating over 10% of revenue in 2007.

(E)	Includes equity in earnings of unconsolidated affiliates of $1,027, $2,174 and $3,350 for Coal, Gas and All Other, respectively.

(F)	Includes investments in unconsolidated equity affiliates of $3,101 and $56,865 and $34,900 for Coal, Gas and All Other, respectively.

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NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Segment results for the year ended December 31, 2006:


	Northern Appalachian		Central Appalachian		Metallurgical		Other Coal			Total Coal		Gas		All Other		Corporate Adjustments & Eliminations			Consolidated
Sales—Outside	$	1,861,388	$	230,781	$	357,103	$	245,173		$	2,694,445	$	389,174	$	202,903	$	—		$	3,286,522	(G)
Sales—Purchased Gas		—		—		—		—			—		43,973		—		—			43,973
Sales—Gas Royalty Interests		—		—		—		—			—		51,054		—		—			51,054
Freight—Outside		—		—		—		162,761			162,761		—		—		—			162,761
Intersegment Transfers		—		—		—		—			—		4,372		128,824		(133,196	)		—

Total Sales and Freight	$	1,861,388	$	230,781	$	357,103	$	407,934		$	2,857,206	$	488,573	$	331,727	$	(133,196	)	$	3,544,310

Earnings (Loss) Before Income Taxes	$	261,702	$	7,911	$	152,490	$	(81,511	)	$	340,592	$	252,250	$	20,396	$	(62,318	)	$	550,920	(H)

Segment assets										$	3,540,276	$	1,152,256	$	224,477	$	746,323		$	5,663,332	(I)

Depreciation, depletion and amortization										$	240,582	$	37,999	$	17,656	$	—		$	296,237

Capital Expenditures										$	488,876	$	154,243	$	47,427	$	—		$	690,546

(G)	There were no sales to individual customers aggregating over 10% of revenue in 2006.

(H)	Includes equity in earnings (losses) of unconsolidated affiliates of $977 and $224 for Gas and All Other, respectively.

(I)	Includes investments in unconsolidated equity affiliates of $52,283 and $31,936 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax Resolution.

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NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Reconciliation of Segment Information to Consolidated Amounts:

Revenue and Other Income:


	For the Years Ended December 31,
	2008			2007			2006
Total segment sales and freight from external customers	$	4,486,303		$	3,565,469		$	3,544,310
Other income not allocated to segments (Note 3)		166,142			196,728			170,861

Total Consolidated Revenue and Other Income	$	4,652,445		$	3,762,197		$	3,715,171

Earnings Before Income Taxes:
Segment Earnings Before Income Taxes for total reportable business segments	$	792,992		$	492,381		$	592,842
Segment Earnings (Loss) Before Income Taxes for all other businesses		18,526			15,152			20,396
Incentive Compensation(J)		(24,872	)		(26,770	)		(19,181	)
Compensation from restricted stock unit grants, stock option expense and performance share unit expense(J)		(21,807	)		(20,983	)		(19,113	)
Interest income (expense), net and other non-operating activity(J)		(39,244	)		(30,823	)		(24,024	)

Earnings Before Income Taxes	$	725,595		$	428,957		$	550,920


	December 31,
	2008			2007			2006
Total Assets:
Segment assets for total reportable business segments	$	6,482,332		$	5,418,222		$	4,692,532
Segment assets for all other businesses		322,137			253,792			224,477
Items excluded from segments assets:
Cash and other investments(J)		136,951			9,978			118,085
Deferred tax assets		394,142			505,631			625,227
Recoverable income taxes		33,862			19,090			1,278
Bond issuance costs		1,034			1,377			1,733

Total Consolidated Assets	$	7,370,458		$	6,208,090		$	5,663,332

(J)	Excludes amounts specifically related to gas segment.

Enterprise-Wide Disclosures:

CONSOL Energy’s Revenues by geographical location:


	For the Years Ended December 31,
	2008		2007		2006
United States	$	3,841,665	$	3,077,573	$	3,218,779
Europe		462,291		332,280		199,532
South America		94,230		40,255		30,149
Canada		88,106		115,361		95,850
Other		11		—		—

Total Revenues and Freight from External Customers (K)	$	4,486,303	$	3,565,469	$	3,544,310

(K)	CONSOL Energy attributes revenue to individual countries based on the location of the customer.

104

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CONSOL Energy’s Property, Plant and Equipment by geographical location are:


	December 31,
	2008		2007
United States	$	5,732,021	$	4,930,339
Canada		33,828		34,565
Belgium		123		138

Total Property, Plant and Equipment	$	5,765,972	$	4,965,042

Note 27—Guarantor Subsidiaries Financial Information:

The payment obligations under the $250,000, 7.875 percent per annum notes due March 1, 2012 issued by CONSOL Energy are jointly and severally, and also fully and unconditionally guaranteed by several subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission (“SEC”), the following financial information sets forth separate financial information with respect to the parent, CNX Gas, an 83.3% owned guarantor subsidiary, the remaining guarantor subsidiaries and the non-guarantor subsidiaries. CNX Gas is presented in a separate column in accordance with SEC Regulation S-X Rule 3-10. CNX Gas Corporation is a reporting company under Section 12(b) of the Securities Exchange Act of 1933, and as such, CNX Gas Corporation files its own financial statements with the Securities and Exchange Commission and those financial statements, when filed, are publicly available on Edgar. The principal elimination entries include investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all other 100% owned subsidiaries. These include, for example, deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

105

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Income Statement for the Year Ended December 31, 2008:


	Parent			CNX Gas Guarantor		Other Subsidiary Guarantors			Non-Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	688,325	$	3,231,164		$	271,612	$	(9,532	)	$	4,181,569
Sales—Purchased gas		—			8,464		—			—		—			8,464
Sales—Gas Royalty Interest		—			79,302		—			—		—			79,302
Freight—Outside		—			—		216,968			—		—			216,968
Other Income (including equity earnings)		513,910			13,330		117,486			38,376		(516,960	)		166,142

Total Revenue and Other Income		513,910			789,421		3,565,618			309,988		(526,492	)		4,652,445
Cost of Goods Sold and Other Operating Charges		72,790			129,974		2,324,210			112,402		203,827			2,843,203
Purchased Gas Costs		—			8,175		—			—		—			8,175
Gas Royalty Interest		—			74,041		—			—		(79	)		73,962
Related Party Activity		5,622			—		48,856			155,305		(209,783	)		—
Freight Expense		—			—		216,968			—		—			216,968
Selling, General and Administrative Expense		—			80,246		39,660			4,637		—			124,543
Depreciation, Depletion and Amortization		9,382			70,010		300,635			11,485		(1,891	)		389,621
Interest Expense		17,888			7,820		10,312			498		(335	)		36,183
Taxes Other Than Income		5,887			26,426		248,118			9,559		—			289,990
Black Lung Excise Tax Refund		—			—		(55,795	)		—		—			(55,795	)

Total Costs		111,569			396,692		3,132,964			293,886		(8,261	)		3,926,850

Earnings (Loss) Before Income Taxes		402,341			392,729		432,654			16,102		(518,231	)		725,595
Income Taxes (Benefit)		(40,129	)		153,656		120,315			6,092		—			239,934

Net Income		442,470			239,073		312,339			10,010		(518,231	)		485,661
Less: Net Income Attributable to Noncontrolling Interest		—			—		—			—		(43,191	)		(43,191	)

Net Income (Loss) Attributable to CONSOL Energy Inc. Shareholders	$	442,470		$	239,073	$	312,339		$	10,010	$	(561,422	)	$	442,470

106

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Balance Sheet for December 31, 2008:


	Parent		CNX Gas Guarantor			Other Subsidiary Guarantors			Non-Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	132,471	$	1,926		$	1,714		$	2,401	$	—		$	138,512
Accounts and Notes Receivable:
Trade		—		61,764			35			159,930		—			221,729
Other		1,767		3,080			68,910			5,795		—			79,552
Inventories		—		—			184,140			43,670		—			227,810
Deferred Income Taxes		115,599		(55,000	)		—			—		—			60,599
Recoverable Income Taxes		3,560		30,302			—			—		—			33,862
Prepaid Expenses		23,612		152,786			40,409			4,943		—			221,750

Total Current Assets		277,009		194,858			295,208			216,739		—			983,814
Property, Plant and Equipment:
Property, Plant and Equipment		175,027		2,112,233			7,608,072			84,956		—			9,980,288
Less-Accumulated Depreciation, Depletion and Amortization		71,781		322,470			3,793,378			26,687		—			4,214,316

Property, Plant and Equipment—Net		103,246		1,789,763			3,814,694			58,269		—			5,765,972
Other Assets:
Deferred Income Taxes		664,881		(331,338	)		—			—		—			333,543
Investment in Affiliates		3,734,125		25,204			930,708			1,102		(4,618,143	)		72,996
Other		77,253		60,148			33,184			43,548		—			214,133

Total Other Assets		4,476,259		(245,986	)		963,892			44,650		(4,618,143	)		620,672

Total Assets	$	4,856,514	$	1,738,635		$	5,073,794		$	319,658	$	(4,618,143	)	$	7,370,458

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	87,734	$	100,565		$	159,677		$	37,221	$	—		$	385,197
Accounts Payable (Recoverable)-Related Parties		1,788,768		—			(1,925,829	)		137,061		—			—
Short-Term Notes Payable		485,000		72,700			—			—		—			557,700
Current Portion of Long-Term Debt		1,473		8,462			12,093			373		—			22,401
Other Accrued Liabilities		474,947		44,323			17,322			9,850		—			546,442

Total Current Liabilities		2,837,922		226,050			(1,736,737	)		184,505		—			1,511,740
Long-Term Debt		252,145		74,682			140,956			568		—			468,351
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		2,728			2,490,616			—		—			2,493,344
Pneumoconiosis		—		—			190,261			—		—			190,261
Mine Closing		—		—			393,112			11,517		—			404,629
Workers’ Compensation		—		—			128,477			—		—			128,477
Salary Retirement		194,567		—			—			—		—			194,567
Reclamation		—		—			15,363			22,830		—			38,193
Other		109,693		50,301			80,851			25,705		—			266,550

Total Deferred Credits and Other Liabilities		304,260		53,029			3,298,680			60,052		—			3,716,021
Noncontrolling Interest Equity		—		—			—			—		212,159			212,159
Total CONSOL Energy Inc. Stockholders’ Equity		1,462,187		1,384,874			3,370,895			74,533		(4,830,302	)		1,462,187

Total Liabilities and Stockholders’ Equity	$	4,856,514	$	1,738,635		$	5,073,794		$	319,658	$	(4,618,143	)	$	7,370,458

107

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Year Ended December 31, 2008:


	Parent			CNX Gas Guarantor			Other Subsidiary Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	34,647		$	447,375		$	512,108		$	35,334		$	—	$	1,029,464

Cash Flows from Investing Activities:
Capital Expenditures	$	(11,371	)	$	(560,663	)	$	(464,603	)	$	(25,032	)	$	—	$	(1,061,669	)
Investment in Equity Affiliates		—			1,081			798			—			—		1,879
Purchase of Stock in Subsidiary		—			—			(67,259	)		—			—		(67,259	)
Proceeds from Sale of Assets		—			450			27,743						—		28,193

Net Cash Used in Investing Activities	$	(11,371	)	$	(559,132	)	$	(503,321	)	$	(25,032	)	$	—	$	(1,098,856	)

Cash Flows from Financial Activities:
Dividends Paid	$	(72,957	)	$	—		$	—		$	—		$	—	$	(72,957	)
Proceeds from Revolver		237,500			72,700			—			—			—		310,200
Purchase of Treasury Stock		(97,794	)		—			—			—			—		(97,794	)
Other Financing Activities		37,218			8,935			(8,364	)		(10,985	)		—		26,804

Net Cash Provided by (Used in) Financing Activities	$	103,967		$	81,635		$	(8,364	)	$	(10,985	)	$	—	$	166,253

108

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NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Income Statement for the Year Ended December 31, 2007:


	Parent			CNX Gas Guarantor		Other Subsidiary Guarantors		Non-Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	416,453	$	2,718,493	$	201,018	$	(11,618	)	$	3,324,346
Sales—Purchased gas		—			7,628		—		—		—			7,628
Sales – Gas Royalty Interest		—			46,586		—		—		—			46,586
Freight—Outside		—			—		186,909		—		—			186,909
Other Income (including equity earnings)		333,581			8,815		141,735		40,093		(327,496	)		196,728

Total Revenue and Other Income		333,581			479,482		3,047,137		241,111		(339,114	)		3,762,197
Cost of Goods Sold and Other Operating Charges		63,899			102,278		1,916,159		61,864		207,800			2,352,000
Purchased Gas Costs		—			7,162		—		—		—			7,162
Gas Royalty Interest		—			40,011		—		—		(90	)		39,921
Related Party Activity		9,961			—		72,897		134,213		(217,071	)		—
Freight Expense		—			—		186,909		—		—			186,909
Selling, General and Administrative Expense		—			54,825		51,029		2,810		—			108,664
Depreciation, Depletion and Amortization		7,666			48,961		259,825		10,343		(2,080	)		324,715
Interest Expense		10,370			5,606		14,312		563		—			30,851
Taxes Other Than Income		5,790			—		246,177		6,959		—			258,926
Black Lung Excise Tax Refund		—			—		24,092		—		—			24,092

Total Costs		97,686			258,843		2,771,400		216,752		(11,441	)		3,333,240

Earnings (Loss) Before Income Taxes		235,895			220,639		275,737		24,359		(327,673	)		428,957
Income Taxes (Benefit)		(31,887	)		84,961		73,848		9,215		—			136,137

Net Income		267,782			135,678		201,889		15,144		(327,673	)		292,820
Less: Net Income Attributable to Noncontrolling Interest		—			—		—		—		(25,038	)		(25,038	)

Net Income Attributable to CONSOL Energy Inc. Stockholders	$	267,782		$	135,678	$	201,889	$	15,144	$	(352,711	)	$	267,782

109

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Balance Sheet for December 31, 2007:


	Parent		CNX Gas Guarantor			Other Subsidiary Guarantors			Non-Guarantors		Elimination			Consolidated
Assets:
Current Assets:
Cash and Cash Equivalents	$	5,228	$	32,048		$	1,291		$	3,084	$	—		$	41,651
Accounts and Notes Receivable:
Trade		—		38,680			—			141,865		—			180,545
Other		840		2,428			34,619			31,884		—			69,771
Inventories		—		—			135,132			28,061		—			163,193
Deferred Income Taxes		132,089		(1,269	)		—			—		—			130,820
Recoverable Income Taxes		18,118		972			—			—		—			19,090
Prepaid Expenses		18,130		13,859			40,985			5,111		—			78,085

Total Current Assets		174,405		86,718			212,027			210,005		—			683,155
Property, Plant and Equipment:
Property, Plant and Equipment		103,223		1,480,446			7,274,197			87,446		—			8,945,312
Less-Accumulated Depreciation, Depletion and Amortization		52,103		251,367			3,638,286			38,514		—			3,980,270

Property, Plant and Equipment—Net		51,120		1,229,079			3,635,911			48,932		—			4,965,042
Other Assets:
Deferred Income Taxes		563,226		(188,415	)		—			—		—			374,811
Investment in Affiliates		2,818,267		56,865			1,305,043			—		(4,085,309	)		94,866
Other		30,242		6,772			35,600			17,602		—			90,216

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

Total Assets	$	3,637,260	$	1,191,019		$	5,188,581		$	276,539	$	(4,085,309	)	$	6,208,090

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	71,558	$	30,263		$	110,370		$	26,121	$	—		$	238,312
Accounts Payable (Recoverable)-Related Parties		1,585,484		—			(1,707,540	)		122,056		—			—
Short-Term Notes Payable		247,500		—			—			—		—			247,500
Current Portion of Long-Term Debt		—		5,819			10,464			2,000		—			18,283
Other Accrued Liabilities		105,226		25,333			372,731			9,012		—			512,302

Total Current Liabilities		2,009,768		61,415			(1,213,975	)		159,189		—			1,016,397
Long-Term Debt		258,848		66,949			154,143			8,985		—			488,925
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions		—		2,700			2,334,109			—		—			2,336,809
Pneumoconiosis		—		—			171,896			—		—			171,896
Mine Closing		—		—			388,710			10,923		—			399,633
Workers’ Compensation		—		—			118,356			—		—			118,356
Deferred Revenue		—		—			3,162			—		—			3,162
Salary Retirement		67,065		327			—			—		—			67,392
Reclamation		—		—			14,497			19,820		—			34,317
Other		87,160		36,391			52,958			17,157		—			193,666

Total Deferred Credits and Other Liabilities		154,225		39,418			3,083,688			47,900		—			3,325,231
Noncontrolling Interest Equity		—		—			—			—		163,118			163,118
Total CONSOL Energy Inc. Stockholders’ Equity		1,214,419		1,023,237			3,164,725			60,465		(4,248,427	)		1,214,419

Total Liabilities and Stockholders’ Equity	$	3,637,260	$	1,191,019		$	5,188,581		$	276,539	$	(4,085,309	)	$	6,208,090

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Year Ended December 31, 2007:


	Parent			CNX Gas Guarantor			Other Subsidiary Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	(258,800	)	$	272,448		$	649,136		$	21,249		$	—	$	684,033

Cash Flows from Investing Activities:
Capital Expenditures	$	—		$	(348,631	)	$	(372,424	)	$	(22,059	)	$	—	$	(743,114	)
Acquisition of AMVEST		—			—			(296,724	)		—			—		(296,724	)
Investment in Equity Affiliates		—			(5,783	)		(1,274	)		—			—		(7,057	)
Purchase of Stock in Subsidiary		—			—			(10,000	)		—			—		(10,000	)
Proceeds from Sale of Assets		—			187			83,754			850			—		84,791

Net Cash Used in Investing Activities	$	—		$	(354,227	)	$	(596,668	)	$	(21,209	)	$	—	$	(972,104	)

Cash Flows from Financial Activities:
Dividends Paid	$	(56,475	)	$	—		$	—		$	—		$	—	$	(56,475	)
Proceeds from Revolver		247,500			—			—			—			—		247,500
Purchase of Treasury Stock		(80,157	)		—			—			—			—		(80,157	)
Payments on Long Term Notes		—			—			(45,000	)		—			—		(45,000	)
Other Financing Activities		42,906			6,654			(7,589	)		(2,000	)		—		39,971

Net Cash Used in Financing Activities	$	153,774		$	6,654		$	(52,589	)	$	(2,000	)	$	—	$	105,839

111

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Income Statement for the Year Ended December 31, 2006:


	Parent			CNX Gas Guarantors		Other Subsidiary Guarantors			Non-Guarantors		Elimination			Consolidated
Sales—Outside	$	—		$	393,546	$	2,707,277		$	196,322	$	(10,623	)	$	3,286,522
Sales—Purchased Gas		—			43,973		—			—		—			43,973
Sales—Gas Royalty Interest		—			51,054		—			—		—			51,054
Freight—Outside		—			—		162,761			—		—			162,761
Freight—Related Parties		—			—		—			—		—			—
Other Income (including equity earnings)		459,550			26,264		98,852			35,521		(449,326	)		170,861

Total Revenue and Other Income		459,550			514,837		2,968,890			231,843		(459,949	)		3,715,171
Cost of Goods Sold and Other Operating Charges		45,285			93,519		1,895,786			43,857		171,329			2,249,776
Purchased Gas Costs		—			—		44,843			—		—			44,843
Gas Royalty Interest		—			41,998		(119	)		—		—			41,879
Related Party Activity		5,931			44,843		(10,880	)		137,341		(177,235	)		—
Freight Expense		—			—		162,761			—		—			162,761
Selling, General and Administrative Expense		—			39,168		47,775			4,207		—			91,150
Depreciation, Depletion and Amortization		6,959			37,999		243,869			9,784		(2,374	)		296,237
Interest Expense		9,437			870		14,179			580		—			25,066
Taxes Other Than Income		4,339			—		239,673			8,527		—			252,539

Total Costs		71,951			258,397		2,637,887			204,296		(8,280	)		3,164,251

Earnings (Loss) Before Income Taxes		387,599			256,440		331,003			27,547		(451,669	)		550,920
Income Taxes (Benefit)		(21,283	)		96,573		26,752			10,388		—			112,430

Net Income		408,882			159,867		304,251			17,159		(451,669	)		438,490
Less: Net Income Attributable to Noncontrolling Interest		—			—		—			—		(29,608	)		(29,608	)

Net Income Attributable to CONSOL Energy Inc. Shareholders	$	408,882		$	159,867	$	304,251		$	17,159	$	(481,277	)	$	408,882

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Condensed Statement of Cash Flows

For the Year Ended December 31, 2006:


	Parent			CNX Gas Guarantor			Other Subsidiary Guarantors			Non-Guarantors			Elimination		Consolidated
Net Cash Provided by Operating Activities	$	(71,616	)	$	243,569		$	491,590		$	1,004		$	—	$	664,547

Cash Flows from Investing Activities:
Capital Expenditures	$	(10,752	)	$	(154,243	)	$	(518,792	)	$	(6,759	)	$	—	$	(690,546	)
Investment in Equity Affiliates		—			(1,777	)		(29,186	)		—			—		(30,963	)
Proceeds from Sale of Assets		—			—			59,830			133			—		59,963

Net Cash Used in Investing Activities	$	(10,752	)	$	(156,020	)	$	(488,148	)	$	(6,626	)	$	—	$	(661,546	)

Cash Flows from Financial Activities:
Dividends Paid	$	(51,416	)	$	—		$	—		$	—		$	—	$	(51,416	)
Purchase of Treasury Stock		(116,450	)		—			—			—			—		(116,450	)
Other Financing Activities		53,173			(449	)		(3,601	)		(1,015	)		—		48,108

Net Cash Used in Financing Activities	$	(114,693	)	$	(449	)	$	(3,601	)	$	(1,015	)	$	—	$	(119,758	)

Supplemental Coal Data (unaudited):


	Millions of Tons For the Year Ended December 31,
	2008		2007		2006		2005		2004
Proved and probable reserves at beginning of period	4,526		4,272		4,546		4,509		4,148
Purchased reserves	—		177		3		56		15
Reserves sold in place	(12	)	(33	)	(2	)	(2	)	(11	)
Production	(65	)	(65	)	(67	)	(69	)	(68	)
Revisions and other changes	94		175		(208	)	52		425

Consolidated proved and probable reserves at end of period*	4,543		4,526		4,272		4,546		4,509

Proportionate share of proved and probable reserves of unconsolidated equity affiliates*	171		179		—		—		—

*	Proved and probable coal reserves are the equivalent of “demonstrated reserves” under the coal resource classification system of the U.S. Geological Survey. Generally, these reserves would be commercially mineable at year-end prices and cost levels, using current technology and mining practices.

CONSOL Energy’s coal reserves are located in nearly every major coal-producing region in North America. At December 31, 2008, 1,022 million tons were assigned to mines either in production or under development. The proved and probable reserves at December 31, 2008 include 4,012 million tons of steam coal reserves, of which approximately 7 percent has a sulfur content equivalent to less than 1.2 pounds sulfur dioxide per million British thermal unit (Btu), and an additional 15 percent has a sulfur content equivalent to between 1.2 and 2.5 pounds sulfur dioxide per million Btu. The reserves also include 531 million tons of metallurgical coal in consolidated reserves, of which approximately 65 percent has a sulfur content equivalent to less than 1.2 pounds sulfur dioxide per million Btu, and an additional 34 percent has a sulfur content equivalent to between 1.2 and 2.5 pounds sulfur dioxide per million Btu. A significant portion of this metallurgical coal can also serve the steam coal market.

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Supplemental Gas Data (unaudited):

(Dollars 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. The data presented is 100% of CNX Gas’ basis; it excludes any minority interest reduction.

Capitalized Costs:


	As of December 31,
	2008			2007
Proved Properties	$	121,605		$	104,515
Unproved Properties		220,848			101,680
Wells and Related Equipment		1,001,381			698,600
Gathering Assets		740,396			596,173

Total Property, Plant and Equipment		2,084,230			1,500,968
Accumulated Depreciation, Depletion and Amortization		(319,959	)		(252,779	)

Net Capitalized Costs	$	1,764,271		$	1,248,189

Proportionate Share of Gas Producing Net Property, Plant and Equipment of Unconsolidated Equity Affiliates	$	—		$	28,581

Costs incurred for Property Acquisition, Exploration and Development (*):


	For the Years Ended December 31,
	2008				2007				2006
	Consolidated Operations		Equity Affiliates		Consolidated Operations		Equity Affiliates		Consolidated Operations		Equity Affiliates
Property acquisitions
Proved Properties	$	17,090	$	—	$	33,205	$	—	$	8,797	$	—
Unproved Properties		119,168		—		80,313		—		765		—
Development		378,119		—		257,935		—		151,774		—
Exploration		68,495		—		16,503		—		832		2,334

Total	$	582,872	$	—	$	387,956	$	—	$	162,168	$	2,334

(*)	Includes costs incurred whether capitalized or expensed

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CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Results of Operations for Producing Activities:


	For the Years Ended December 31,
	2008						2007						2006
	Consolidated Operations			Equity Affiliates			Consolidated Operations			Equity Affiliates			Consolidated Operations			Equity Affiliates
Production Revenue	$	688,325		$	—		$	416,452		$	2,755		$	393,649		$	1,913
Royalty Interest Gas Revenue		79,302			—			46,586			294			51,054			446
Purchased Gas Revenue		8,464			—			7,628			201			43,973			356

Total Revenue		776,091			—			470,666			3,250			488,676			2,715

Lifting Costs		67,653			—			38,721			679			33,357			480
Gathering Costs		83,752			—			61,798			630			58,102			359
Royalty Expense		74,041			—			40,011			294			41,998			446
Other Costs		34,078			—			19,772			646			12,876			541
Purchased Gas Costs		8,175			—			7,162			165			44,843			299
DD&A		70,010			—			48,961			294			37,999			512

Total Costs		337,709			—			216,425			2,708			229,175			2,637

Pre-tax Operating Income		438,382			—			254,241			542			259,501			78
Income Taxes		171,407			—			98,595			210			97,728			29

Results of Operations for Producing Activities excluding Corporate and Interest Costs	$	266,975		$	—		$	155,646		$	332		$	161,773		$	49

Net Reserve Quantity (mmcfe)
Beginning Reserves(a)		1,339,909			3,584			1,263,293			2,200			1,127,724			2,672
Revisions(b)		(30,828	)		—			(25,036	)		221			109,116			(584	)
Extensions and Discoveries(c)		182,701			—			145,834			1,484			82,363			337
Production		(76,562	)		—			(57,928	)		(321	)		(55,910	)		(225	)
Acquisition of Remaining Interest in Equity Affiliate		3,584			(3,584	)		—			—			—			—
Purchases of Reserves In-Place		3,242			—			13,746			—			—			—
Sales of Reserves In-Place		—			—			—			—			—			—

Ending Reserves		1,422,046			—			1,339,909			3,584			1,263,293			2,200

Proved Developed Reserves:
Beginning of Period		667,726			3,584			609,700			2,200			549,574			2,672

End of Period		783,290			—			667,726			3,584			609,700			2,200

(a)

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 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

115

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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.

(b)	Revisions are primarily due to the lower pricing used at December 31, 2008 for reserve estimates.

(c)	Extensions and discoveries are the result of additional drilling activities which bring in offset locations as proved reserves. Additionally, extensions and discoveries are the result of the state oil and gas board’s approval of additional well locations.

CNX Gas proved gas reserves are located in the United States.

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,
	2008			2007			2006
Future Cash Flows:
Revenues	$	8,856,817		$	9,509,665		$	7,105,265
Production costs		(3,525,902	)		(3,004,619	)		(2,568,731	)
Development costs		(793,592	)		(636,436	)		(552,114	)
Income tax expense		(1,713,713	)		(2,259,415	)		(1,500,533	)

Future Net Cash Flows		2,823,610			3,609,195			2,483,887
Discounted to present value at a 10% annual rate		(1,605,176	)		(2,219,655	)		(1,548,996	)

Total standardized measure of discounted net cash flows	$	1,218,434		$	1,389,540		$	934,891

116

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following are the principal sources of change in the standardized measure of discounted future net cash flows during:


	December 31,
	2008						2007						2006
	Consolidated Operations			Equity Affiliates			Consolidated Operations			Equity Affiliates			Consolidated Operations			Equity Affiliates
Balance at Beginning of Period	$	1,384,983		$	4,557		$	933,186		$	1,705		$	1,865,097		$	5,697
Net changes in sales prices and production costs		(676,358	)		—			1,681,550			7,356			(5,327,975	)		(13,550	)
Sales net of production costs		(438,382	)		—			(207,688	)		(1,122	)		(435,909	)		(2,265	)
Net change due to revisions in quantity estimates		(63,547	)		—			479,618			5,959			1,495,140			(2,486	)
Net change due to acquisition		4,158			—			2,840			—			—			—
Acquisition of Remaining Interest in Equity Affiliate		4,557			(4,557	)
Development costs incurred during the period		378,119			—			257,935			—			151,774			—
Difference in previously estimated development costs compared to actual costs incurred during the period		(136,742	)		—			(87,408	)		—			(40,466	)		—
Changes in estimated future development costs		(398,534	)		—			(254,635	)		(214	)		(241,095	)		(12	)
Net change in future income taxes		545,702			—			(754,209	)		(4,673	)		1,743,570			7,162
Accretion of discount and other		614,478			—			(666,206	)		(4,454	)		1,723,050			7,159

Total Discounted Cash Flow at End of Period	$	1,218,434		$	—		$	1,384,983		$	4,557		$	933,186		$	1,705

117

CONSOL ENERGY INC. AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Supplemental Quarterly Information (unaudited):

(Dollars in thousands)


	Three Months Ended
	December 31, 2008		September 30, 2008			June 30, 2008		March 31, 2008
Sales	$	1,150,435	$	1,076,960		$	1,135,572	$	906,368

Freight Revenue	$	47,839	$	60,458		$	63,927	$	44,744

Costs of Goods Sold and Other Operating Charges (including Gas Royalty Interests’ Costs and Purchased Gas Costs)	$	686,418	$	762,767		$	764,137	$	656,223

Freight Expense	$	47,839	$	60,458		$	63,927	$	44,744

Net Income	$	186,224	$	102,416		$	112,790	$	84,231

Net Income Attributable to CONSOL Energy Inc. Shareholders	$	176,322	$	90,054		$	101,012	$	75,082

Total Earnings Per Share:
Basic	$	0.98	$	0.49		$	0.55	$	0.41

Dilutive	$	0.97	$	0.49		$	0.54	$	0.41

Weighted Average Shares Outstanding:
Basic		180,799,712		183,202,086			182,977,726		182,572,985

Dilutive		182,327,963		185,591,759			185,637,248		185,192,551


	Three Months Ended
	December 31, 2007		September 30, 2007			June 30, 2007		March 31, 2007
Sales	$	834,014	$	802,977		$	895,128	$	846,441

Freight Revenue	$	54,902	$	44,707		$	43,667	$	43,633

Costs of Goods Sold and Other Operating Charges (including Gas Royalty Interests’ Costs and Purchased Gas Costs)	$	643,266	$	643,873		$	605,130	$	530,906

Freight Expense	$	54,902	$	44,707		$	43,667	$	43,633

Net Income	$	12,265	$	381		$	160,801	$	119,373

Net Income Attributable to CONSOL Energy Inc. Shareholders	$	6,787	$	(5,384	)	$	153,117	$	113,262

Total Earnings Per Share:
Basic	$	0.04	$	(0.03	)	$	0.84	$	0.62

Dilutive	$	0.04	$	(0.03	)	$	0.83	$	0.61

Weighted Average Shares Outstanding:
Basic		181,835,472		181,866,727			182,195,390		182,371,296

Dilutive		184,417,123		181,866,727			185,000,122		184,815,136

118