CNX Gas Corporation 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from ______
Commission file number: 001-32723
CNX GAS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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20-3170639 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
5 Penn Center West, Suite 401
Pittsburgh, PA 15276
(412) 200-6700
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the
Act). Yes o No þ
The number of shares of the registrants common stock outstanding as of March 31, 2007 is
150,867,825 shares.
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
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For the Three Months Ended |
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March 31, |
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2007 |
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|
2006 |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
98,070 |
|
|
$ |
101,793 |
|
Related Party Sales |
|
|
2,191 |
|
|
|
1,630 |
|
Royalty Interest Gas Sales |
|
|
12,182 |
|
|
|
15,807 |
|
Purchased Gas Sales |
|
|
1,159 |
|
|
|
22,352 |
|
Other Income |
|
|
1,530 |
|
|
|
6,641 |
|
|
|
|
|
|
|
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Total Revenue and Other Income |
|
|
115,132 |
|
|
|
148,223 |
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|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
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|
|
|
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Lifting Costs |
|
|
8,266 |
|
|
|
8,575 |
|
Gathering and Compression Costs |
|
|
14,468 |
|
|
|
12,550 |
|
Royalty Interest Gas Costs |
|
|
10,665 |
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|
|
13,416 |
|
Purchased Gas Costs |
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|
1,019 |
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|
|
22,765 |
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Other |
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|
438 |
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(236 |
) |
General and Administrative |
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13,721 |
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|
7,305 |
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Depreciation, Depletion and Amortization |
|
|
12,098 |
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|
8,904 |
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Interest Expense |
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1,219 |
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|
7 |
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|
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|
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Total Costs and Expenses |
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61,894 |
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73,286 |
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Earnings Before Income Taxes |
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53,238 |
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|
74,937 |
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Income Taxes |
|
|
20,242 |
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|
29,061 |
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Net Income |
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$ |
32,996 |
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$ |
45,876 |
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Earnings Per Share: |
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Basic |
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$ |
0.22 |
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$ |
0.30 |
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Diluted |
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$ |
0.22 |
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$ |
0.30 |
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Weighted Average Number of Common Shares Outstanding: |
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Basic |
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150,864,825 |
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150,833,334 |
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Dilutive |
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151,068,089 |
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150,931,545 |
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|
The accompanying notes are an integral part of these consolidated financial statements.
3
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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(Unaudited) |
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March 31, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
121,327 |
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$ |
107,173 |
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Accounts Receivable: |
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Trade |
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44,953 |
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46,062 |
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Net Related Party |
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|
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2,745 |
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Other |
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2,400 |
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2,291 |
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Derivatives |
|
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|
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10,548 |
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Deferred Taxes |
|
|
4,147 |
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Other Current Assets |
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3,731 |
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3,917 |
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Total Current Assets |
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176,558 |
|
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172,736 |
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Property, Plant and Equipment, Net |
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|
961,959 |
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|
918,162 |
|
Other Assets |
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10,290 |
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|
11,820 |
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Investments in Equity Affiliates |
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53,312 |
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52,283 |
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TOTAL ASSETS |
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$ |
1,202,119 |
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|
$ |
1,155,001 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts Payable |
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Trade |
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$ |
27,358 |
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$ |
27,872 |
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Related Parties |
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|
162 |
|
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Accrued Royalties Payable |
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11,911 |
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|
11,960 |
|
Accrued Severance Taxes |
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2,791 |
|
|
|
2,576 |
|
Accrued Income Taxes |
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|
9,626 |
|
|
|
2,191 |
|
Derivatives |
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|
8,037 |
|
|
|
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|
Deferred Taxes |
|
|
|
|
|
|
3,091 |
|
Other Current Liabilities |
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|
7,436 |
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|
9,222 |
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Total Current Liabilities |
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|
67,321 |
|
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|
56,912 |
|
Deferred Taxes |
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|
128,573 |
|
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|
120,008 |
|
Capital Lease Obligation |
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|
63,222 |
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|
63,897 |
|
Other Liabilities |
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20,282 |
|
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|
15,977 |
|
Well Plugging Liabilities |
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|
9,604 |
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|
9,214 |
|
Derivatives |
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|
8,479 |
|
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|
6,465 |
|
Postretirement Benefits Other Than Pension |
|
|
2,355 |
|
|
|
2,313 |
|
|
|
|
|
|
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Total Liabilities |
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|
299,836 |
|
|
|
274,786 |
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Stockholders Equity |
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Common Stock, $.01 par value; 200,000,000 Shares
Authorized, 150,867,825 Issued and Outstanding at
March 31, 2007 and 150,864,075 Issued and
Outstanding at December 31, 2006 |
|
|
1,508 |
|
|
|
1,508 |
|
Capital in Excess of Par Value |
|
|
782,796 |
|
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|
781,960 |
|
Retained Earnings |
|
|
127,280 |
|
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|
94,337 |
|
Accumulated Other Comprehensive (Loss) Income |
|
|
(9,301 |
) |
|
|
2,410 |
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|
|
|
|
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Total Stockholders Equity |
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|
902,283 |
|
|
|
880,215 |
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|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,202,119 |
|
|
$ |
1,155,001 |
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|
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|
The accompanying notes are an integral part of these consolidated financial statements.
4
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
(Dollars in thousands)
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Accumulated |
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Capital in |
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Other |
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Total |
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Common |
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Excess of |
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Retained |
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Comprehensive |
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Stockholders |
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Stock |
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Par Value |
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|
Earnings |
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Income (Loss) |
|
|
Equity |
|
Balance at December 31, 2006 |
|
$ |
1,508 |
|
|
$ |
781,960 |
|
|
$ |
94,337 |
|
|
$ |
2,410 |
|
|
$ |
880,215 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
32,996 |
|
|
|
|
|
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|
32,996 |
|
Gas Cash Flow Hedge (Net of $8,027 tax) |
|
|
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|
(11,683 |
) |
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(11,683 |
) |
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|
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|
|
|
|
|
|
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|
Comprehensive Income (Loss) (a) |
|
|
|
|
|
|
|
|
|
|
32,996 |
|
|
|
(11,683 |
) |
|
|
21,313 |
|
FASB Interpretation No. 48 Adoption |
|
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|
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|
(53 |
) |
|
|
|
|
|
|
(53 |
) |
Stock Options Exercised |
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
67 |
|
Tax Benefit from Stock Based Compensation |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Amortization of Restricted Stock Unit Grants |
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
139 |
|
Amortization of Stock Based Compensation Awards |
|
|
|
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
625 |
|
Actuarial Salary OPEB revaluation (net of $14 tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
(24 |
) |
Actuarial Pension revaluation (net of $2 tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
1,508 |
|
|
$ |
782,796 |
|
|
$ |
127,280 |
|
|
$ |
(9,301 |
) |
|
$ |
902,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(a) |
|
Of the ($11,683) net change in accumulated other
comprehensive income (loss) in the period,
$2,503 represents hedging gains recognized in net income for the portions of the financial
hedges that settled in the current period. |
The accompanying notes are an integral part of these consolidated financial statements.
5
CNX GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
32,996 |
|
|
$ |
45,876 |
|
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation, Depletion and Amortization |
|
|
12,098 |
|
|
|
8,904 |
|
Compensation from Restricted Stock Unit Grants |
|
|
139 |
|
|
|
|
|
Compensation from Stock Option Grants |
|
|
625 |
|
|
|
471 |
|
Deferred Income Taxes |
|
|
12,527 |
|
|
|
13,856 |
|
Equity in (Earnings) of Affiliates |
|
|
(207 |
) |
|
|
(147 |
) |
Changes in Operating Assets: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
1,000 |
|
|
|
5,266 |
|
Related Party Receivable |
|
|
2,745 |
|
|
|
(1,598 |
) |
Other Current Assets |
|
|
186 |
|
|
|
(53 |
) |
Changes in Other Assets |
|
|
1,530 |
|
|
|
161 |
|
Changes in Operating Liabilities: |
|
|
|
|
|
|
|
|
Accounts Payable |
|
|
1,233 |
|
|
|
(688 |
) |
Related Party Liability |
|
|
162 |
|
|
|
|
|
Income Taxes |
|
|
7,441 |
|
|
|
11,909 |
|
Other Current Liabilities |
|
|
(1,601 |
) |
|
|
89 |
|
Changes in Other Liabilities |
|
|
2,026 |
|
|
|
1,046 |
|
Other |
|
|
219 |
|
|
|
223 |
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
73,119 |
|
|
|
85,315 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(57,535 |
) |
|
|
(40,177 |
) |
Investment in Equity Affiliates |
|
|
(822 |
) |
|
|
225 |
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
|
(58,357 |
) |
|
|
(39,952 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Capital Lease Payments |
|
|
(675 |
) |
|
|
|
|
Exercise of Stock Options |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities |
|
|
(608 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
14,154 |
|
|
|
45,363 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
107,173 |
|
|
|
20,073 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
121,327 |
|
|
$ |
65,436 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
CNX GAS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three month period
ended March 31, 2007 are not necessarily indicative of the results that may be expected for future
periods.
Certain reclassifications of previously reported data have been made to conform to the three
months ended March 31, 2007 classifications. With the exception of earnings per share data, we
discuss dollars in thousands throughout this Form 10-Q. Unless otherwise noted, we discuss
production, per unit revenue, and per unit costs net of any royalty owners interest. Unless noted
otherwise, production figures are exclusive of production attributable to equity affiliates.
Effective January 1, 2006, CNX Gas adopted Emerging Issues Task Force Issue No. 04-13,
Accounting for Purchases and Sales of Inventory with the Same Counterparty (EITF 04-13). EITF
04-13 defines when a purchase and a sale of inventory with the same party that operates in the same
line of business is recorded at fair value or considered a single non-monetary transaction subject
to the fair value exception of Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions. The purchase and sale transactions may be pursuant to a single
contractual arrangement or separate contractual arrangements and the inventory purchased or sold
may be in the form of raw materials, work-in-process, or finished goods. In general, two or more
transactions with the same party are treated as one if they are entered into in contemplation of
each other. In accordance with EITF 04-13, CNX Gas has applied this accounting to new or modified
agreements after January 1, 2006. Previously, these transactions were recorded on a gross basis.
The adoption of EITF 04-13 did not have an impact on net income or cash flows.
Basic earnings per share are computed by dividing net income by the weighted average shares
outstanding during the reporting period. Diluted earnings per share are computed similarly to basic
earnings per share except that the weighted average shares outstanding are increased to include
additional shares from the effect of dilutive potential common shares outstanding during the period
as calculated in accordance with SFAS 123R. The number of additional shares is calculated by
assuming that restricted stock units were converted and outstanding stock options were exercised
and that the proceeds from such activity were used to acquire shares of common stock at the average
market price during the reporting period. Options to purchase 479,065
and 12,100 shares of common stock were
outstanding for the three month period ending March 31, 2007 and
2006, respectively, but were not included in the
computation of diluted earnings per share because the effect would be anti-dilutive.
The computations for basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net Income |
|
$ |
32,996 |
|
|
$ |
45,876 |
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
150,864,825 |
|
|
|
150,833,334 |
|
Effect of stock based compensation |
|
|
203,264 |
|
|
|
98,211 |
|
|
|
|
|
|
|
|
Dilutive |
|
|
151,068,089 |
|
|
|
150,931,545 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.22 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.22 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
7
Note 2Pension and Other Postretirement Benefits:
The components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
Pension |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Components of Net Periodic Benefit Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
$ |
65 |
|
|
$ |
70 |
|
|
$ |
31 |
|
|
$ |
23 |
|
Interest costs |
|
|
3 |
|
|
|
1 |
|
|
|
35 |
|
|
|
25 |
|
Expected Return on Assets |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service costs credit |
|
|
|
|
|
|
|
|
|
|
(43 |
) |
|
|
(43 |
) |
Amortization of (gain) loss |
|
|
(6 |
) |
|
|
(3 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit costs |
|
$ |
62 |
|
|
$ |
66 |
|
|
$ |
28 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously disclosed in the notes to its audited consolidated financial statements for the
year ended December 31, 2006, CNX Gas does not expect to contribute to the other postretirement
benefit plan in 2007. We intend to pay benefit claims as they become due. For the period ended
March 31, 2007, there were $24 in payments made pursuant to the other postretirement benefit plan.
Note 3Income Taxes:
The following is a reconciliation, stated in dollars and as a percentage of pretax income, of
the U.S. statutory federal income tax rate to CNX Gas effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Dollars |
|
|
Rate |
|
|
Dollars |
|
|
Rate |
|
Statutory U.S. Federal Income Tax Rate |
|
$ |
18,633 |
|
|
|
35.0 |
% |
|
$ |
26,228 |
|
|
|
35.0 |
% |
Net Effect of State Income Tax |
|
|
2,097 |
|
|
|
3.9 |
% |
|
|
3,320 |
|
|
|
4.4 |
% |
Other |
|
|
(488 |
) |
|
|
(0.9 |
)% |
|
|
(487 |
) |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense/Effective Rate |
|
$ |
20,242 |
|
|
|
38.0 |
% |
|
$ |
29,061 |
|
|
|
38.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
CNX
Gas adopted the provisions of FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty
in Income Taxes, on January 1, 2007. As a result of the implementation of FIN No. 48, CNX Gas
recognized approximately a $53 net increase in the liability for unrecognized tax benefits, which
was accounted for as a reduction to the January 1, 2007 balance of retained earnings.
Included in the balance at March 31, 2007 are $3,116 of tax positions for which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties,
the disallowance of the shorter deductibility period would not affect the annual effective tax
rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The
effective tax rate for the three months ended March 31, 2007 and 2006 was calculated using the
annual effective rate projection on recurring earnings.
CNX Gas is included in the consolidated federal tax return of CONSOL Energy Inc. Income taxes
are calculated as if CNX Gas files a tax return on a separate company basis. With few exceptions,
CNX Gas is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations
by tax authorities for years before 2002. The Internal Revenue Service (IRS) commenced an
examination of CONSOL Energys U.S. income tax returns for 2004 and 2005 in 2006 that is
anticipated to be completed by the end of 2008. As of March 31, 2007, the IRS has not proposed any
significant adjustments relating to any tax position taken by CNX Gas as part of CONSOL Energys
consolidated return.
CNX Gas recognizes interest accrued related to unrecognized tax benefits in its interest
expense. During the quarter ended March 31, 2007, CNX Gas recognized interest expense of
approximately $19. Total FIN No. 48 accrued interest was $112 as of March 31, 2007.
CNX Gas recognizes penalties accrued related to unrecognized tax benefits in its income tax
expense. No penalties have been accrued during the quarter ended March 31, 2007. CNX Gas has
historically not paid penalties relating to unrecognized tax benefits.
8
Note 4Property, Plant and Equipment:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Surface Lands |
|
$ |
48,601 |
|
|
$ |
37,055 |
|
Mineral Interests |
|
|
55,628 |
|
|
|
55,623 |
|
Wells and Related Equipment |
|
|
127,424 |
|
|
|
112,009 |
|
Intangible Drilling |
|
|
406,666 |
|
|
|
383,605 |
|
Gathering Assets |
|
|
526,344 |
|
|
|
520,906 |
|
Gas Well Plugging |
|
|
5,979 |
|
|
|
5,652 |
|
Capitalized Internal Software |
|
|
6,536 |
|
|
|
6,433 |
|
|
|
|
|
|
|
|
Total Property, Plant and Equipment |
|
|
1,177,178 |
|
|
|
1,121,283 |
|
Accumulated Depreciation, Depletion and Amortization |
|
|
(215,219 |
) |
|
|
(203,121 |
) |
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
$ |
961,959 |
|
|
$ |
918,162 |
|
|
|
|
|
|
|
|
Note 5Commitments and Contingent Liabilities:
CNX Gas Company LLC is a party to a case captioned Geomet Operating Company, Inc. and
Pocahontas Mining Limited Liability Company v. CNX Gas Company LLC in the Circuit Court for
Buchanan County, Virginia (Case No. 337-06). CNX Gas has a coalbed methane gas lease with
Pocahontas Mining in southwest Virginia. With the agreement of Pocahontas Mining, GeoMet
constructed a pipeline on the property. CNX Gas sought a judicial determination that under the
terms of the lease, CNX Gas has the exclusive right to construct and operate pipelines on the
property. On April 11, 2007, the Circuit Court granted CNX Gas motion for summary judgment
against GeoMet, holding from the bench that CNX Gas has exclusive rights to construct and operate
pipelines on the property and prohibiting GeoMet from owning, operating, or maintaining its
pipeline on the property. The court granted a stay of its order, pending GeoMets appeal of the
decision to the Virginia Supreme Court. The Circuit Court has not yet entered its formal order on
the summary judgment motion. Pocahontas Mining recently amended its complaint to seek rescission
or reformation of the lease. The ultimate outcome of this litigation cannot be predicted.
On February 14, 2007, GeoMet, Inc. and certain of its affiliates filed a lawsuit against CNX
Gas Company LLC and Island Creek Coal Company, a subsidiary of CONSOL Energy, in the Circuit Court
for the County of Tazewell, Virginia. The lawsuit alleges that CNX Gas conspired with Island Creek
and has violated the Virginia Antitrust Act and has tortiously interfered with GeoMets contractual
relations, prospective contracts and business expectancies. GeoMet seeks injunctive relief, actual
damages of $561,000, treble damages and punitive damages in the amount of $350. CNX Gas and Island
Creek have filed motions to dismiss all counts. CNX Gas believes this lawsuit to be without merit
and intends to vigorously defend it.
CNX Gas is currently undergoing an audit by Buchanan County, Virginia, local taxing
authorities for the tax years 1998 through 2004. To date, the County auditors have completed a
review of the 1998 through 2001 period. As of March 31, 2007, we continued to receive requests
relating to the 2002 through 2004 period. For each of these years from 1998 through 2004, CNX Gas
has filed appropriate returns and has paid applicable license taxes based on wellhead price
calculations. The audit is ongoing with no resolution being proposed by Buchanan County as of March
31, 2007. Additionally, on April 29, 2005, Buchanan County, Virginia (through its Board of
Supervisors and Commissioner of Revenue) filed a Motion for Judgment Pursuant to the Declaratory
Judgment Act Virginia Code §8.01-184 against us in the Circuit Court of the County of Buchanan (At
Law No. CL05000149-00) for the year 2002; the County has since filed and served two substantially
similar cases for years 2003 and 2004. The complaint alleges that we failed to properly calculate
the amount of license taxes we owed to Buchanan County related to our production and sale of CBM
gas in Buchanan County. Buchanan County is seeking a determination by the court that we have
calculated, and continue to calculate, the license tax in an improper manner. We have continued to
pay Buchanan County taxes based on our method of calculating the taxes. However, we have been
accruing an additional liability on our balance sheet in an amount based on the difference between
our calculation of the tax and Buchanan Countys calculation. We believe that we have calculated
the tax correctly and in accordance with the applicable rules and regulations of Buchanan County
and intend to vigorously defend our position. CNX Gas management believes that the final resolution
of this matter will not have a material effect on our financial position or results of operations.
In October 2005, CDX Gas, LLC (CDX) alleged that certain of our vertical to horizontal CBM
drilling methods infringe several patents which they own. CDX demanded that we enter into a
business arrangement with CDX to use its patented technology. Alternatively, CDX informally
demanded a royalty of nine to ten percent of the gross production from the wells we drill utilizing
the technology allegedly covered by their patents. We believe that approximately 35 of our
producing wells to date could be covered by their claim. We deny all of these allegations and we
are vigorously contesting them. On November 14, 2005, we filed a complaint for declaratory judgment
in the U.S. District Court for the Western District of Pennsylvania (C.A. No. 05-1574), seeking a
judicial determination that we do not infringe any claim of any valid and enforceable CDX patent.
CDX filed an answer and counterclaim denying our allegations of invalidity and alleging that we
infringe certain claims of their patents. A hearing was held before a Court-appointed Special
Master with regard to the scope of the asserted CDX patents and the Special Masters report and
recommendations was adopted by order of the Court on October 13, 2006. As a result of that order
and subject to appellate review, certain of our wells may be found to infringe certain of the CDX
claims of the patents in suit, if those patents are ultimately determined to be valid and
enforceable. The report of CDXs damages expert suggests that CDX will seek (i) reasonable royalty
damages on production from allegedly infringing wells at a royalty rate of 10%, or approximately
$1,900 based on projected production through June 2007, and (ii) lost profits damages of
approximately $23,600 for allegedly infringing wells drilled though August 2006, which assumes that
CNX Gas would have no choice but to have entered into a joint operating arrangement with CDX. We
believe that there is no valid basis in the law as applied to the facts of this case for this lost
profits theory. Further, if infringement were to be found of a valid, enforceable claim of a CDX
patent, the report of CNX Gas damages expert indicates that any potential damages award would be
9
based on a royalty of 5%, or approximately $400. We continue to believe that we do not infringe
any properly construed claim of any valid, enforceable patent. We cannot predict the ultimate
outcome of this lawsuit; however, CNX Gas management believes that the final resolution of this
matter will not have a material effect on our financial position, results of operations, or cash
flows.
In 2004, Yukon Pocahontas Coal Company, Buchanan Coal Company, and Sayers-Pocahontas Coal
Company filed a complaint against Consolidation Coal Company (CCC), a subsidiary of CONSOL Energy
in the Circuit Court of Buchanan County, Virginia, seeking damages and injunctive relief in
connection with the deposit of untreated water from mining activities at CCCs Buchanan Mine into
nearby void spaces in the mine of one of CONSOL Energys other subsidiaries, Island Creek Coal
Company (ICCC). CCC believes that it had, and continues to have, the right to store water in
these void areas. On September 21, 2006, the plaintiffs filed an amended complaint in the Circuit
Court of Buchanan County, Virginia (Case No. CL04-91) which, among other things, added CONSOL
Energy, ICCC and CNX Gas Company LLC as additional defendants. The amended complaint alleges, among
other things, that CNX Gas Company LLC, as lessee and operator under certain coalbed methane gas
leases from plaintiffs, had a duty to prevent CCC from depositing water into the mine voids and
failed to do so. The proposed amended complaint seeks $150,000 in damages from the additional
defendants, plus costs, interest and attorneys fees. CNX Gas Company LLC denies that it has any
liability in this matter and intends to vigorously defend this action.
In 1999, CNX Gas was named in a suit brought by a group of royalty owners that lease gas
development rights to CNX Gas in southwest Virginia. The suit alleged the underpayment of royalties
to the group of royalty owners. The claim of underpayment of royalties related to the
interpretation of permissible deductions from production revenues upon which royalties are
calculated. The deductions at issue relate to post production expenses of gathering, compression
and transportation. CNX Gas was ordered to, and subsequently paid in 2003, approximately $12,000
(including interest) to the group of royalty owners that brought the suit for the period from 1989
to 1999. A final payment was made to the plaintiffs in 2003 for approximately $5,600 to adjust all
royalties owed to the plaintiffs from the date of the court ruling in 1999 forward to 2003, which
effectively settled this case. CNX Gas has also recognized an estimated liability for other similar
plaintiffs yet to be determined outside of this lawsuit. This amount is included in other
liabilities on the balance sheet. To date, approximately $3,900 has been paid to various other
royalty owners as a result of this case. CNX Gas management believes that the final resolution of
this matter will not have a material effect on our financial position, results of operations or
cash flows.
In addition to the foregoing, CNX Gas is subject to various pending and threatened lawsuits
and claims arising in the ordinary course of its business. While the relief claimed in these
matters may be significant, we are unable to predict with certainty the ultimate outcome of such
lawsuits and claims. We have established reserves for pending litigation which we believe are
adequate, and after consultation with counsel and giving appropriate consideration to available
insurance, we believe that the ultimate outcome of any matter currently pending against CNX Gas
will not materially affect the financial position of CNX Gas.
At March 31, 2007, CNX Gas has provided the following financial guarantees and letters of
credit to certain third parties. CNX Gas management believes that these guarantees will expire
without being funded, and therefore the commitments will not have a material adverse effect on
financial condition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts |
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
Beyond |
|
|
|
Committed |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 years |
|
Letters of Credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas |
|
$ |
16,867 |
|
|
$ |
16,695 |
|
|
$ |
172 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Letters of Credit |
|
$ |
16,867 |
|
|
$ |
16,695 |
|
|
$ |
172 |
|
|
$ |
|
|
|
$ |
|
|
Surety Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental |
|
$ |
344 |
|
|
$ |
344 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other |
|
|
20,876 |
|
|
|
20,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Surety Bonds |
|
$ |
21,220 |
|
|
$ |
21,220 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm Transportation |
|
$ |
54,066 |
|
|
$ |
7,387 |
|
|
$ |
14,585 |
|
|
$ |
11,767 |
|
|
$ |
20,327 |
|
Guarantees |
|
$ |
20,600 |
|
|
$ |
20,600 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guarantees |
|
$ |
74,666 |
|
|
$ |
27,987 |
|
|
$ |
14,585 |
|
|
$ |
11,767 |
|
|
$ |
20,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments |
|
$ |
112,753 |
|
|
$ |
65,902 |
|
|
$ |
14,757 |
|
|
$ |
11,767 |
|
|
$ |
20,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously disclosed in the notes to our audited consolidated financial statements for the
year ended December 31, 2006, CONSOL Energy has also provided certain parental guarantees related
to activity associated with CNX Gas. CNX Gas anticipates that
10
these parental guarantees will be transferred from CONSOL Energy to CNX Gas over time. CNX Gas
management believes these parental guarantees will also expire without being funded, and therefore
the commitments will not have a material adverse effect on financial condition.
Letters of Credit
On December 28, 2006, CNX Gas obtained the issuance of a letter of credit to the Commonwealth
of Pennsylvania in the amount of $20 to serve as collateral for a one year period for a permit
issued by PENNDOT.
On May 4, 2005, CNX Gas amended the amount of the existing letter of credit to Columbia Gas
Transmission Corporation. The current amount issued as a letter of credit is $1,000. This letter of
credit is to serve as collateral for all natural gas transportation and services as agreed to by
the parties. This letter of credit will be called upon should CNX Gas fail to perform its
obligation.
CNX Gas obtained the issuance of a letter of credit to East Tennessee Natural Gas, LLC to
serve as collateral for a fifteen year firm transportation contract for approximately 197,500 Mcf
per day on the Jewell Ridge lateral, which had an in-service date of October 2006. The amount of
the letter of credit at March 31, 2007 is $15,695.
On April 15, 2005, CNX Gas has obtained the issuance of a letter of credit to Allegheny Energy
Supply Co. to serve as collateral for a period of two years to cover a potential tax liability of
$152.
Surety Bonds
CNX Gas has issued surety bonds totaling $21,220. CNX Gas guarantees the performance of these
obligations.
Other Guarantees
CNX Gas is the guarantor of the obligations of a CNX Gas contractor under a loan agreement
with Huntington National Bank for $10,000 dated November 27, 2006, an agreement with Saltville Gas
Storage Company LLC for $3,600 dated October 26, 2006, an agreement with Constellation Energy
Commodities Group, Inc. for $1,000 dated October 9, 2006, and an agreement with AEP for $6,000
dated July 31, 2006.
Note 6Segment Information:
The principal activity of CNX Gas is to produce methane gas for sale primarily to gas
wholesalers. CNX Gas has two reportable segments: Central Appalachia and Northern Appalachia.
During the fourth quarter 2006, management adjusted the manner in which results were internally
reported to the chief operating decision maker. As a result of this change, the current period and
all prior periods presented have been restated to reflect the way CNX Gas manages its operations
and makes business decisions.
Reportable segment results for the three months ended March 31, 2007 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
Northern |
|
|
Total |
|
|
|
|
|
|
Adjustments & |
|
|
|
|
|
|
Appalachia |
|
|
Appalachia |
|
|
Gas |
|
|
Corporate |
|
|
Eliminations |
|
|
Consolidated |
|
Salesoutside |
|
$ |
91,836 |
|
|
$ |
6,234 |
|
|
$ |
98,070 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
98,070 |
|
Salesrelated parties |
|
|
2,178 |
|
|
|
13 |
|
|
|
2,191 |
|
|
|
|
|
|
|
|
|
|
|
2,191 |
|
Salesroyalty interest gas |
|
|
12,148 |
|
|
|
34 |
|
|
|
12,182 |
|
|
|
|
|
|
|
|
|
|
|
12,182 |
|
Salespurchased gas |
|
|
1,159 |
|
|
|
|
|
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
1,159 |
|
Other revenue |
|
|
94 |
|
|
|
|
|
|
|
94 |
|
|
|
1,436 |
|
|
|
|
|
|
|
1,530 |
|
Intersegment revenues |
|
|
19,479 |
|
|
|
742 |
|
|
|
20,221 |
|
|
|
|
|
|
|
(20,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
$ |
126,894 |
|
|
$ |
7,023 |
|
|
$ |
133,917 |
|
|
$ |
1,436 |
|
|
$ |
(20,221 |
) |
|
$ |
115,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes (A) |
|
$ |
52,992 |
|
|
$ |
(853 |
) |
|
$ |
52,139 |
|
|
$ |
1,099 |
|
|
$ |
|
|
|
$ |
53,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets (B) (C) |
|
$ |
956,931 |
|
|
$ |
99,197 |
|
|
$ |
1,056,128 |
|
|
$ |
145,991 |
|
|
$ |
|
|
|
$ |
1,202,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
$ |
10,637 |
|
|
$ |
1,461 |
|
|
$ |
12,098 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
38,295 |
|
|
$ |
19,240 |
|
|
$ |
57,535 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
57,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes equity in earnings (loss) of unconsolidated affiliates of $303 and ($96) for Central
Appalachia and Corporate segments, respectively. Corporate segment also includes $241 of related bank fees. |
11
|
|
|
|
(B) |
|
Includes investments in unconsolidated equity affiliates of $28,648 and $24,664 for Central
Appalachia and Corporate segments, respectively. |
|
(C) |
|
Includes cash of $121,327 in the Corporate segment. |
Reportable segment results for the three months ended March 31, 2006 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
Northern |
|
|
Total |
|
|
|
|
|
|
Adjustments & |
|
|
|
|
|
|
Appalachia |
|
|
Appalachia |
|
|
Gas |
|
|
Corporate |
|
|
Eliminations |
|
|
Consolidated |
|
Salesoutside |
|
$ |
95,220 |
|
|
$ |
6,573 |
|
|
$ |
101,793 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
101,793 |
|
Salesrelated parties |
|
|
1,594 |
|
|
|
36 |
|
|
|
1,630 |
|
|
|
|
|
|
|
|
|
|
|
1,630 |
|
Salesroyalty interest gas |
|
|
15,744 |
|
|
|
63 |
|
|
|
15,807 |
|
|
|
|
|
|
|
|
|
|
|
15,807 |
|
Salespurchased gas |
|
|
22,352 |
|
|
|
|
|
|
|
22,352 |
|
|
|
|
|
|
|
|
|
|
|
22,352 |
|
Other revenue |
|
|
6,260 |
|
|
|
11 |
|
|
|
6,271 |
|
|
|
370 |
|
|
|
|
|
|
|
6,641 |
|
Intersegment revenues |
|
|
12,818 |
|
|
|
190 |
|
|
|
13,008 |
|
|
|
|
|
|
|
(13,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
$ |
153,988 |
|
|
$ |
6,873 |
|
|
$ |
160,861 |
|
|
$ |
370 |
|
|
$ |
(13,008 |
) |
|
$ |
148,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes (D) |
|
$ |
72,429 |
|
|
$ |
2,603 |
|
|
$ |
75,032 |
|
|
$ |
(95 |
) |
|
$ |
|
|
|
$ |
74,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets (E) (F) |
|
$ |
788,402 |
|
|
$ |
47,227 |
|
|
$ |
835,629 |
|
|
$ |
90,402 |
|
|
$ |
|
|
|
$ |
926,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
$ |
8,331 |
|
|
$ |
573 |
|
|
$ |
8,904 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
33,061 |
|
|
$ |
7,116 |
|
|
$ |
40,177 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(D) |
|
Includes equity in earnings (loss) of unconsolidated affiliates of $369 and ($222) for
Central Appalachia and Corporate segments, respectively. Corporate segment also includes $243
of related bank fees. |
|
(E) |
|
Includes investments in unconsolidated equity affiliates of $24,484 and $24,966 for Central
Appalachia and Corporate segments, respectively. |
|
(F) |
|
Includes cash of $65,436 in the Corporate segment. |
Note 7Recent Accounting Pronouncements:
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FAS
115 (SFAS 159). SFAS 159 permits all entities to choose to measure certain eligible assets and
liabilities at fair value and would enable entities to mitigate volatility in earnings caused by
measuring related assets and liabilities differently. The Statement attempts to improve financial
reporting as it establishes presentation and disclosure requirements specific to the fair value
method. The required disclosures are aimed at enhancing the comparability of financial information
between entities. SFAS 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. Earlier application is permitted provided the entity also elects to apply
the provisions of SFAS 157. We do not expect this guidance to have a significant impact on CNX
Gas.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the United States of
America, and requires additional disclosures about fair value measurements. SFAS 157 aims to
improve the consistency and comparability of fair value measurements by creating a single
definition of fair value. The Statement emphasizes that fair value is not entity-specific, but
instead is a market-based measurement of an asset or liability. SFAS 157 upholds the requirements
of previously issued pronouncements concerning fair value measurements and expands the required
disclosures. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, however earlier application is permitted provided the reporting
entity has not yet issued financial statements for that fiscal year. We do not expect that this
guidance will have a significant impact on CNX Gas.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158),
which requires the recognition of the funded status of defined benefit postretirement plans and
related disclosures. This Statement was adopted by CNX Gas on December 31, 2006. Additionally,
SFAS 158 contains another provision which requires an employer to measure the funded status of each
of its plans as of the date of its year-end statement of financial position. This provision
becomes effective for CNX Gas for its December 31, 2008 year-end. The funded status of CNX Gas
pension and other postretirement benefit plans are currently measured as of September 30.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This Current Report on
Form 10-Q contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See Forward Looking Statements.
Unless the context otherwise requires, we, us, our, the company and CNX Gas mean CNX
Gas Corporation and its consolidated subsidiaries.
Overview
We are a natural gas exploration, development, production and gathering company with
operations in several states in the Appalachian Basin. We primarily are a coalbed methane (CBM) gas
producer with industry-leading expertise in this type of gas extraction.
Effective as of August 8, 2005, we separated our gas business from CONSOL Energy Inc. (CONSOL
Energy). The success of our operations substantially depends upon rights we received from CONSOL
Energy. As a part of our separation from CONSOL Energy, CONSOL Energy transferred to us various
subsidiaries and joint venture interests as well as all of CONSOL Energys ownership or rights to
CBM and natural gas and certain related surface rights. In addition, CONSOL Energy has given us
significant rights to conduct gas production operations associated with their coal mining activity.
These rights are not dependent upon any continuing ownership in us by CONSOL Energy. We also have
established other agreements with CONSOL Energy under which they will, among other things, provide
us certain corporate staff services and coordinate our tax filings.
CONSOL Energy continues to beneficially own approximately 81.5% of our outstanding common
stock, as such CNX Gas financial statements are consolidated into CONSOL Energys financial
statements.
Operations & Outlook
Relative to expectations, quarterly financial results were adversely affected by two items:
production and administrative costs. Company production for the quarter, though setting another
average daily record, was 0.6 Bcf below our expectations. The administrative costs were related to
legal fees and the companys ongoing software platform implementation.
Mountaineer volumes were approximately 0.5 Bcf below expectations due to longer than expected
de-watering times at new wells and extended outages at a portion of its Pine Bank processing plant.
Pine Bank is currently being upgraded to more efficiently process additional volumes.
Volumes
at Virginia Operations were about 0.1 Bcf below expectations.
Production from other areas was higher than expected, but more than offset by the temporary loss of 2 MMcf per
day of gas from certain sealed mine areas. CONSOL Energy, in order to improve mine safety, is
strengthening the seals at its Buchanan Mine. Construction is estimated to be completed around
December 1, at which time CNX Gas will be able to resume production of this shut-in gas.
During the first quarter, CNX Gas employees worked another quarter without incurring a lost
time accident.
Also during the quarter, CNX Gas drilled 58 wells in its Virginia Operations in Central
Appalachia and 10 wells in its Mountaineer play in Northern Appalachia. These figures are exclusive
of gob wells.
In Nittany, CNX Gas exploratory coalbed methane play in central Pennsylvania, two vertical
test wells have been drilled. The lower two zones in both wells has been fraced. The gas has been
tested and found to be of pipeline quality, with a Btu content slightly in excess of 1,000 per
cubic foot and a CO2 content of less than 1.2%. Flow rates are confirming our
expectations and drilling costs have been lower than we projected. Forty-two drill sites at Nittany
have been acquired.
CNX Gas has begun implementing the infrastructure construction plans for Nittany. CNX Gas will
also be filing for the drilling permits for the remaining eight wells in our original 2007 program.
13
In Cardinal, CNX Gas New Albany shale play in western Kentucky, three vertical wells are
drilled to total depth of approximately 4,000 feet and fraced. CNX Gas has been taking sidewall
core samples into the shale formation within the expected 300-foot pay zone. These samples are now
being analyzed. CNX Gas expects to announce preliminary results from Cardinal at the end of the
third quarter.
CNX Gas is maintaining its 2007 production guidance at 64 Bcf, despite the company being 0.6
Bcf short of the first quarter internal production estimate. If existing conditions continue, total
2007 production could be as much as 2.5 Bcf below the current guidance. Recently, CNX Gas has seen
improvement at its Pine Bank processing plant in Mountaineer, and with a scheduled upgrade in May,
CNX Gas may see a further increase in availability. The company also believes that follow-on wells
in these new areas of Mountaineer may not require abnormal de-watering times. There could also be
other opportunities to make up any shortfall, including some possible production from Nittany.
Production in 2008 could be positively impacted by the extended de-watering of wells in
Mountaineer. Wells decline the longer they produce, therefore delayed wells will not be as far down
their decline curves in 2008 as originally thought.
In 2007, CNX Gas continues to expect to drill 278 wells in its Virginia Operations, 57 in
Mountaineer, eight in Nittany, and three in Cardinal, for a total of 346 in its four major active
areas. Another 55 wells are expected to be drilled in other areas, for an expected company total of
401.
A portion of our gas production is associated with coal mining activities at CONSOL Energys
Buchanan Mine. These mining activities require the removal of water from the mine and the
ventilation of the mine. Several lawsuits and permit appeals have been filed that could affect the
removal of water from the mine. Separately, a lawsuit has been filed with respect to a ventilation
fan that could affect the ventilation of the mine. If operations at CONSOL Energys Buchanan Mine
are adversely affected as a result of these legal proceedings, our gas production relating to
mining activities would be adversely affected.
Results of Operations
Three Months Ended March 31, 2007 compared with Three Months Ended March 31, 2006
(Amounts reported in thousands)
Net Income
Net income changed primarily due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
98,070 |
|
|
$ |
101,793 |
|
|
$ |
(3,723 |
) |
|
|
(3.7 |
)% |
Related Party Sales |
|
|
2,191 |
|
|
|
1,630 |
|
|
|
561 |
|
|
|
34.4 |
% |
Royalty Interest Gas Sales |
|
|
12,182 |
|
|
|
15,807 |
|
|
|
(3,625 |
) |
|
|
(22.9 |
)% |
Purchased Gas Sales |
|
|
1,159 |
|
|
|
22,352 |
|
|
|
(21,193 |
) |
|
|
(94.8 |
)% |
Other Income |
|
|
1,530 |
|
|
|
6,641 |
|
|
|
(5,111 |
) |
|
|
(77.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
|
115,132 |
|
|
|
148,223 |
|
|
|
(33,091 |
) |
|
|
(22.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
|
8,266 |
|
|
|
8,575 |
|
|
|
(309 |
) |
|
|
(3.6 |
)% |
Gathering and Compression Costs |
|
|
14,468 |
|
|
|
12,550 |
|
|
|
1,918 |
|
|
|
15.3 |
% |
Royalty Interest Gas Costs |
|
|
10,665 |
|
|
|
13,416 |
|
|
|
(2,751 |
) |
|
|
(20.5 |
)% |
Purchased Gas Costs |
|
|
1,019 |
|
|
|
22,765 |
|
|
|
(21,746 |
) |
|
|
(95.5 |
)% |
Other |
|
|
438 |
|
|
|
(236 |
) |
|
|
674 |
|
|
|
285.6 |
% |
General and Administrative |
|
|
13,721 |
|
|
|
7,305 |
|
|
|
6,416 |
|
|
|
87.8 |
% |
Depreciation, Depletion and Amortization |
|
|
12,098 |
|
|
|
8,904 |
|
|
|
3,194 |
|
|
|
35.9 |
% |
Interest Expense |
|
|
1,219 |
|
|
|
7 |
|
|
|
1,212 |
|
|
|
17,314.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
|
61,894 |
|
|
|
73,286 |
|
|
|
(11,392 |
) |
|
|
(15.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
53,238 |
|
|
|
74,937 |
|
|
|
(21,699 |
) |
|
|
(29.0 |
)% |
Income Taxes |
|
|
20,242 |
|
|
|
29,061 |
|
|
|
(8,819 |
) |
|
|
(30.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
32,996 |
|
|
$ |
45,876 |
|
|
$ |
(12,880 |
) |
|
|
(28.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Net income for 2007 was lower primarily due to lower average sales prices and higher costs,
despite higher production in the quarter.
Revenue and Other Income
Revenue and other income decreased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Revenue and Other Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside Sales |
|
$ |
98,070 |
|
|
$ |
101,793 |
|
|
$ |
(3,723 |
) |
|
|
(3.7 |
)% |
Related Party Sales |
|
|
2,191 |
|
|
|
1,630 |
|
|
|
561 |
|
|
|
34.4 |
% |
Royalty Interest Gas Sales |
|
|
12,182 |
|
|
|
15,807 |
|
|
|
(3,625 |
) |
|
|
(22.9 |
)% |
Purchased Gas Sales |
|
|
1,159 |
|
|
|
22,352 |
|
|
|
(21,193 |
) |
|
|
(94.8 |
)% |
Other Income |
|
|
1,530 |
|
|
|
6,641 |
|
|
|
(5,111 |
) |
|
|
(77.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue and Other Income |
|
$ |
115,132 |
|
|
$ |
148,223 |
|
|
$ |
(33,091 |
) |
|
|
(22.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in total revenue and other income was primarily due to the accounting change
related to purchased gas sales. Outside, related party, and royalty interest gas sales as a whole
have decreased due to lower average sales price per thousand cubic feet in 2007 compared to 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Sales Volumes (Bcf) |
|
|
14.2 |
|
|
|
13.6 |
|
|
|
0.6 |
|
|
|
4.4 |
% |
Average Sales Price (per Mcf) |
|
$ |
7.04 |
|
|
$ |
7.62 |
|
|
$ |
(0.58 |
) |
|
|
(7.6 |
)% |
The decrease in average sales price is the result of the majority of CNX Gas sales being
exposed to market prices, which were lower in the current period as compared to the prior period.
However, CNX Gas periodically enters into various gas swap transactions that qualify as financial
cash flow hedges for terms varying in length. These gas swap transactions exist parallel to the
underlying physical transactions. For the three months ended March 31, 2007, these financial hedges
represented approximately 3.2 Bcf of gas sales volumes at an average
price of $7.77 per Mcf,
compared to approximately 3.7 Bcf at an average price of $6.88 per Mcf for the three months ended
March 31, 2006. Sales volumes increased as a result of additional wells coming online from our
on-going drilling program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Royalty Interest Sales Volumes (Bcf) |
|
|
1.8 |
|
|
|
1.8 |
|
|
|
0.0 |
|
|
|
0.0 |
% |
Average Sales Price (per Mcf) |
|
$ |
6.62 |
|
|
$ |
8.61 |
|
|
$ |
(1.99 |
) |
|
|
(23.1 |
)% |
Included in royalty interest gas sales are the revenues related to the portion of production
belonging to royalty interest owners sold by CNX Gas on their behalf. The average sales price
variance is a result of the majority of CNX Gas sales being exposed to market prices, which were
lower in the current period as compared to the prior period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Purchased Gas Sales Volumes (Bcf) |
|
|
0.2 |
|
|
|
2.5 |
|
|
|
(2.3 |
) |
|
|
(92.0 |
)% |
Average Sales Price (per Mcf) |
|
$ |
7.14 |
|
|
$ |
8.99 |
|
|
$ |
(1.85 |
) |
|
|
(20.6 |
)% |
Purchase gas sales volumes in the current period represent volumes of gas we sell at market
prices that were purchased from third party producers, less our gathering and marketing fees. In
the 2006 period, purchased gas sales and volumes represented volumes of gas we simultaneously
purchased from and sold to the same counterparties under contracts that were committed prior to
January 1, 2006. Accordingly, Emerging Issues Task Force Issue No. 04-13 (EITF 04-13), which we
adopted on January 1, 2006, did not apply to these transactions. As these contracts began to
expire throughout 2006 they were reflected in transportation expense.
15
Other income consists of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Insurance Settlements |
|
$ |
|
|
|
$ |
3,007 |
|
|
$ |
(3,007 |
) |
|
|
(100.0 |
)% |
Royalty Income |
|
|
|
|
|
|
2,885 |
|
|
|
(2,885 |
) |
|
|
(100.0 |
)% |
Interest Income |
|
|
1,436 |
|
|
|
370 |
|
|
|
1,066 |
|
|
|
288.1 |
% |
Third Party Gathering Revenue |
|
|
36 |
|
|
|
323 |
|
|
|
(287 |
) |
|
|
(88.9 |
)% |
Other Miscellaneous |
|
|
58 |
|
|
|
56 |
|
|
|
2 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
$ |
1,530 |
|
|
$ |
6,641 |
|
|
$ |
(5,111 |
) |
|
|
(77.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the prior year, the insurance settlements component of other income consisted of business
interruption insurance proceeds related to a CONSOL Energy mine incident in 2005 which negatively
impacted our gas production in that year.
Royalty income received from third parties, which is calculated as a percentage of the third
parties sales price, is now classified in outside sales. In the prior period the volumes were not
available nor were they considered in the prior period reserve report. In the current period these
volumes are included in both sales production and reserves.
Interest income increased in 2007, as a result of a $55,891 increase to the cash balance from
the prior period.
Costs and Expenses
Overall, costs and expenses decreased in 2007 primarily due to the accounting change related
to purchased gas costs and are made up of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifting Costs |
|
$ |
8,266 |
|
|
$ |
8,575 |
|
|
$ |
(309 |
) |
|
|
(3.6 |
)% |
Gathering and Compression Costs |
|
|
14,468 |
|
|
|
12,550 |
|
|
|
1,918 |
|
|
|
15.3 |
% |
Royalty Interest Gas Costs |
|
|
10,665 |
|
|
|
13,416 |
|
|
|
(2,751 |
) |
|
|
(20.5 |
)% |
Purchased Gas Costs |
|
|
1,019 |
|
|
|
22,765 |
|
|
|
(21,746 |
) |
|
|
(95.5 |
)% |
Other |
|
|
438 |
|
|
|
(236 |
) |
|
|
674 |
|
|
|
285.6 |
% |
General and Administrative |
|
|
13,721 |
|
|
|
7,305 |
|
|
|
6,416 |
|
|
|
87.8 |
% |
Depreciation, Depletion and Amortization |
|
|
12,098 |
|
|
|
8,904 |
|
|
|
3,194 |
|
|
|
35.9 |
% |
Interest Expense |
|
|
1,219 |
|
|
|
7 |
|
|
|
1,212 |
|
|
|
17,314.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
$ |
61,894 |
|
|
$ |
73,286 |
|
|
$ |
(11,392 |
) |
|
|
(15.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Sales Volumes (Bcf)
|
|
|
14.2 |
|
|
|
13.6 |
|
|
|
0.6 |
|
|
|
4.4 |
% |
Average Lifting Costs (per Mcf)
|
|
$ |
0.58 |
|
|
$ |
0.63 |
|
|
$ |
(0.05 |
) |
|
|
(7.9 |
)% |
Lifting costs per unit sold decreased primarily due to reduced severance taxes as a result of
lower market prices in the period to period comparison.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Sales Volumes (Bcf)
|
|
|
14.2 |
|
|
|
13.6 |
|
|
|
0.6 |
|
|
|
4.4 |
% |
Average Gathering and Compression Costs (per Mcf)
|
|
$ |
1.02 |
|
|
$ |
0.92 |
|
|
$ |
0.10 |
|
|
|
10.9 |
% |
The increase in gathering and compression costs was attributable to additional maintenance and
compressor costs, pipeline freeze up prevention costs, and additional power expenses related to
increased megawatt hour rates charged by the power company. These increases were offset by lower
firm transportation costs due to the in-service of the Jewell Ridge lateral in October 2006.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Royalty Interest Sales Volumes (Bcf) |
|
|
1.8 |
|
|
|
1.8 |
|
|
|
0.0 |
|
|
|
0.0 |
% |
Average Cost (per Mcf) |
|
$ |
5.79 |
|
|
$ |
7.31 |
|
|
$ |
(1.52 |
) |
|
|
(20.8 |
)% |
Included in royalty interest gas costs are the expenses related to the portion of production
belonging to royalty interest owners sold by CNX Gas on their behalf. The average sales price
variance is a result of the majority of CNX Gas sales being exposed to market prices, which were
lower in the current period as compared to the prior period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Purchased Gas Sales Volumes (Bcf) |
|
|
0.2 |
|
|
|
2.5 |
|
|
|
(2.3 |
) |
|
|
(92.0 |
)% |
Average Purchased Gas Costs (per Mcf) |
|
$ |
6.28 |
|
|
$ |
9.16 |
|
|
$ |
(2.88 |
) |
|
|
(31.4 |
)% |
Purchase gas sales volumes in the current period represent volumes of gas we sell at market
prices that were purchased from third party producers, less our gathering and marketing fees. In
the 2006 period, purchased gas sales and volumes represented volumes of gas we simultaneously
purchased from and sold to the same counterparties under contracts that were committed prior to
January 1, 2006. Accordingly, Emerging Issues Task Force Issue No. 04-13 (EITF 04-13), which we
adopted on January 1, 2006, did not apply to these transactions. As these contracts began to
expire throughout 2006 they were reflected in transportation expense.
Other costs and expenses increased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Exploration |
|
$ |
462 |
|
|
$ |
332 |
|
|
$ |
130 |
|
|
|
39.2 |
% |
Imbalance |
|
|
183 |
|
|
|
(421 |
) |
|
|
604 |
|
|
|
143.5 |
% |
Equity in (Earnings) of Affiliates |
|
|
(207 |
) |
|
|
(147 |
) |
|
|
(60 |
) |
|
|
(40.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Costs and Expenses |
|
$ |
438 |
|
|
$ |
(236 |
) |
|
$ |
674 |
|
|
|
285.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Higher delay rentals have increased exploration costs period over period. However, other
costs have increased primarily as a result of the shift in the value of the gas imbalance. The
imbalance has shifted from an over-delivered position in 2006 to an under-delivered position in
2007, and therefore resulted in expense for 2007 compared to income in 2006. Because contracted
quantities of gas delivered to the pipeline rarely equal physical deliveries to customers, CNX Gas
is responsible for monitoring this imbalance and adjusting contracted volumes as circumstances
warrant. This increase in imbalance cost was offset by a corresponding increase in gas sales
revenue. Additionally, equity in (earnings) of affiliates improved by $60 in 2007 compared to
2006, primarily due to additional service revenue from our Knox Energy joint venture and a lower
loss in the Buchanan Generation joint venture.
General and administrative costs increased to $13,721 in 2007 from $7,305 in 2006 primarily
due to additional litigation costs, consulting costs associated with our new integrated software
implementation, and the continued increase in staffing as a result of the separation of CNX Gas
from CONSOL Energy.
Depreciation,
depletion and amortization have increased due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
Change |
|
Production |
|
$ |
7,568 |
|
|
$ |
5,812 |
|
|
$ |
1,756 |
|
|
|
30.2 |
% |
Gathering |
|
|
4,530 |
|
|
|
3,092 |
|
|
|
1,438 |
|
|
|
46.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation, Depletion and Amortization |
|
$ |
12,098 |
|
|
$ |
8,904 |
|
|
$ |
3,194 |
|
|
|
35.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in production-related depreciation, depletion and amortization was primarily due
to the increase in units of production rates period to period. These rates, which are recalculated
annually, increased due to the higher proportion of capital assets placed in service versus the
proportion of proved developed reserve additions. These rates are generally calculated using the
net book value of assets at the end of the previous year divided by either proved or proved
developed reserves. Gathering depreciation, depletion and amortization is recorded on the
straight-line method and increased primarily as a result of the capital lease treatment of the
Jewell Ridge lateral, which went into service in October of 2006.
17
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2007 |
|
2006 |
|
Variance |
|
Change |
Earnings Before Income Taxes |
|
$ |
53,238 |
|
|
$ |
74,937 |
|
|
$ |
(21,699 |
) |
|
|
(29.0 |
)% |
Tax Expense |
|
$ |
20,242 |
|
|
$ |
29,061 |
|
|
$ |
(8,819 |
) |
|
|
(30.3 |
)% |
Effective Income Tax Rate |
|
|
38.0 |
% |
|
|
38.8 |
% |
|
|
(0.8 |
)% |
|
|
|
|
CNX Gas effective tax rate decreased in 2007 primarily due to a slight decrease in the net
effect of state income taxes and the impact of the manufacturers deduction.
Liquidity and Capital Resources
We intend to satisfy our future working capital requirements and fund our capital expenditures
with cash from operations and if necessary, our $200,000 credit facility. The credit agreement
provides for a revolving credit facility in an initial aggregate outstanding principal amount of up
to $200,000 (with the ability to request an increase in the aggregate outstanding principal amount
up to $300,000), including borrowings and letters of credit. We may use borrowings under the credit
agreement for general corporate purposes, including transaction fees, letters of credit,
acquisitions, capital expenditures and working capital. No borrowings are outstanding under our
credit facility at March 31, 2007.
CNX Gas and our subsidiaries guarantee CONSOL Energys 7.875% notes due March 1, 2012 in the
principal amount of approximately $250,000. In addition, if CNX Gas were to grant liens to a lender
as part of a future borrowing, the indenture and the agreement governing CONSOL Energys 8.25%
medium term notes due June 1, 2007 in the principal amount of $45,000 would require CNX Gas to
ratably secure both the 7.875% notes and the 8.25% medium term notes.
We believe that cash generated from operations and borrowings under our credit facility will
be sufficient to meet our working capital requirements, anticipated capital expenditures other than
major acquisitions, and to provide required financial resources for the foreseeable future.
Nevertheless, our ability to satisfy our working capital requirements or fund planned capital
expenditures will depend upon our future operating performance, which will be affected by
prevailing economic conditions in the gas industry and other financial and business factors, some
of which are beyond our control.
We have also entered into various gas swap transactions that qualify as financial cash flow
hedges, which exist parallel to the underlying physical transactions. The fair value of these
contracts was a net liability of $16,516 at March 31, 2007. The ineffective portion of the changes
in the fair value of these contracts was insignificant to earnings in the three months ended March
31, 2007.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date |
|
Year to Date |
|
|
|
|
2007 |
|
2006 |
|
Change |
Cash provided by operating activities |
|
$ |
73,119 |
|
|
$ |
85,315 |
|
|
$ |
(12,196 |
) |
Cash used in investing activities |
|
$ |
(58,357 |
) |
|
$ |
(39,952 |
) |
|
$ |
(18,405 |
) |
Cash used in financing activities |
|
$ |
(608 |
) |
|
$ |
|
|
|
$ |
(608 |
) |
|
|
|
Cash provided by operating activities decreased primarily as a result of lower average
sales prices impacting net income as previously discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations. |
|
|
|
|
Cash used in investing activities increased primarily due to our expanded capital program. |
|
|
|
|
Cash used in financing activities increased due to the Jewell Ridge capital lease payments. |
18
Contractual Commitments
The following is a summary of our significant contractual obligations at March 31, 2007. We
estimate payments, net of any applicable reimbursements, related to these items at March 31, 2007
to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Long Term Debt Obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital (Finance) Lease Obligations (a) |
|
|
65,844 |
|
|
|
2,622 |
|
|
|
5,857 |
|
|
|
6,783 |
|
|
|
50,582 |
|
Operating Lease Obligations |
|
|
6,438 |
|
|
|
1,256 |
|
|
|
2,202 |
|
|
|
1,810 |
|
|
|
1,170 |
|
Other Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Firm Transportation Obligation |
|
|
54,066 |
|
|
|
7,387 |
|
|
|
14,585 |
|
|
|
11,767 |
|
|
|
20,327 |
|
Other Liabilities (b) |
|
|
14,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,358 |
|
Well Plugging Liabilities |
|
|
9,604 |
|
|
|
401 |
|
|
|
801 |
|
|
|
801 |
|
|
|
7,601 |
|
Pension |
|
|
257 |
|
|
|
3 |
|
|
|
13 |
|
|
|
23 |
|
|
|
218 |
|
Postretirement Benefits Other than Pension |
|
|
2,366 |
|
|
|
11 |
|
|
|
68 |
|
|
|
154 |
|
|
|
2,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations (c) |
|
$ |
152,933 |
|
|
$ |
11,680 |
|
|
$ |
23,526 |
|
|
$ |
21,338 |
|
|
$ |
96,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In conjunction with the completion of the Jewell Ridge lateral in October 2006, CNX Gas
entered into a 15 year firm transportation agreement with East Tennessee Natural Gas (ETNG), a
subsidiary of Spectra Energy, at pre-determined fixed rates. The present value of our payments
under this firm transportation agreement is approximately $66 million. In addition to
providing us with transportation flexibility, the Jewell Ridge lateral will provide access for
our production to alternate and growing Southeastern and East Coast markets. |
|
(b) |
|
This item represents legal contingencies reflected on the balance sheet for potential
settlements for two of the cases referenced in Note 5 of our quarterly financial statements.
Due to the uncertainty surrounding these settlements, it is difficult to predict if and when a
payout may take place. |
|
(c) |
|
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. |
Off-Balance Sheet Transactions
We do not maintain any off-balance sheet transactions, arrangements, obligations or other
relationships with unconsolidated entities or others that are likely to have a material current or
future effect on our condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources which are not disclosed in the
notes to the consolidated financial statements.
FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Quarterly Report on Form 10-Q to
make applicable and take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf, of us. With
the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q
are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks
and uncertainties that could cause actual results to differ materially from projected results.
Accordingly, investors should not place undue reliance on forward-looking statements as a
prediction of actual results. The forward-looking statements may include projections and estimates
concerning the timing and success of specific projects and our future production, revenues, income
and capital spending. When we use the words believe, intend, expect, may, should,
anticipate, could, estimate, plan, predict, project, or their negatives, or other
similar expressions, the statements which include those words are usually forward-looking
statements. When we describe strategy that involves risks or uncertainties, we are making
forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q
speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to
update these statements unless required by securities law, and we caution you not to rely on them
unduly. We have based these forward-looking statements on our current expectations and assumptions
about future events. While our management considers these expectations and assumptions to be
reasonable, they are inherently subject to significant business, economic, competitive, regulatory
and other risks, contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties relate to, among
other matters, the following:
19
|
|
|
our business strategy; |
|
|
|
|
our financial position, cash flow, and liquidity; |
|
|
|
|
declines in the prices we receive for our gas affecting our operating results and cash flow; |
|
|
|
|
uncertainties in estimating our gas reserves and replacing our gas reserves; |
|
|
|
|
uncertainties in exploring for and producing gas; |
|
|
|
|
our inability to obtain additional financing necessary in order to fund our operations,
capital expenditures and to meet our other obligations; |
|
|
|
|
disruptions to capacity constraints in or other limitations on the pipeline systems which deliver our gas; |
|
|
|
|
competition in the gas industry; |
|
|
|
|
the availability of personnel and equipment, including our inability to retain and attract key personnel; |
|
|
|
|
increased costs; |
|
|
|
|
the effects of government regulation and permitting and other legal requirements; |
|
|
|
|
legal uncertainties relating to the ownership of the coalbed methane state, and costs
associated with perfecting title for gas rights in some of our properties; |
|
|
|
|
litigation concerning real property rights, intellectual property rights, and royalty calculations; |
|
|
|
|
our relationships and arrangements with CONSOL Energy; and |
|
|
|
|
other factors discussed under Risk Factors in the 10-K for the year ended December 31, 2006. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in our operations, CNX Gas is exposed to financial, market,
political and economic risks. The following discussion provides additional detail regarding CNX
Gas exposure to the risks of changing natural gas prices.
CNX Gas uses fixed-price contracts and derivative commodity instruments that qualify as
cash-flow hedges under Statement of Financial Accounting Standards No. 133, as amended, to minimize
exposure to market price volatility in the sale of natural gas. Our risk management policy strictly
prohibits the use of derivatives for speculative purposes.
CNX Gas has established risk management policies and procedures to strengthen the internal
control environment of the marketing of commodities produced from our asset base. All of the
derivative instruments are held for purposes other than trading. They are used primarily to reduce
uncertainty and volatility and cover underlying exposures. CNX Gas market risk strategy
incorporates fundamental risk management tools to assess market price risk and establish a
framework in which management can maintain a portfolio of transactions within pre-defined risk
parameters.
CNX Gas believes that the use of derivative instruments, along with the risk assessment
procedures and internal controls, does not expose CNX Gas to material risk. However, the use of
derivative instruments without other risk assessment procedures could materially affect CNX Gas
results of operations depending on interest rates, exchange rates or market prices. Nevertheless,
we believe that use of these instruments will not have a material adverse effect on our financial
position or liquidity.
For a summary of accounting policies related to derivative instruments, see Note 1 of the
notes to the consolidated annual financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2006.
20
Sensitivity analyses of the incremental effects on future pre-tax income of a hypothetical 10%
and 25% increase in natural gas prices for open derivative instruments as of March 31, 2007 are
provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
Incremental decrease in pre-tax income assuming a |
|
|
Hypothetical price increase of: |
|
|
10% |
|
25% |
|
|
(In millions) |
Natural Gas (1) |
|
$ |
17.4 |
|
|
$ |
41.0 |
|
|
|
|
(1) |
|
CNX Gas remains at risk for possible changes in the market value of these derivative
instruments, however, such risk should be reduced by price changes in the underlying hedged
item. The effect of this offset is not reflected in the sensitivity analyses. CNX Gas entered
into derivative instruments to convert the market prices related to portions of the 2007
through 2009 anticipated sales of natural gas to fixed prices. The sensitivity analyses
reflect an inverse relationship between increases in commodity prices and a benefit to
earnings. When commodity prices increase, pretax income decreases. As of March 31, 2007, the
fair value of these contracts was a net loss of $10,082 (net of $6,434 deferred tax). We
continually evaluate the portfolio of derivative commodity instruments and adjust the strategy
to anticipated market conditions and risks accordingly. |
Hedging Volumes
As of April 20, 2007, our hedged volumes for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
Three months |
|
Three months |
|
Three months |
|
|
|
|
ended |
|
ended |
|
ended |
|
ended |
|
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
Total Year |
2007 Fixed Price Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Mcf |
|
|
3,247,423 |
|
|
|
4,690,722 |
|
|
|
4,742,268 |
|
|
|
4,742,268 |
|
|
|
17,422,681 |
|
Weighted Average Hedge Price/Mcf |
|
$ |
7.77 |
|
|
$ |
8.00 |
|
|
$ |
8.00 |
|
|
$ |
8.00 |
|
|
$ |
7.96 |
|
2008 Fixed Price Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Mcf |
|
|
4,690,722 |
|
|
|
4,690,722 |
|
|
|
4,742,268 |
|
|
|
4,742,268 |
|
|
|
18,865,980 |
|
Weighted Average Hedge Price/Mcf |
|
$ |
8.19 |
|
|
$ |
8.00 |
|
|
$ |
8.07 |
|
|
$ |
8.07 |
|
|
$ |
8.08 |
|
2009 Fixed Price Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Mcf |
|
|
2,783,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,783,505 |
|
Weighted Average Hedge Price/Mcf |
|
$ |
8.72 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8.72 |
|
CNX Gas is exposed to credit risk in the event of nonperformance by counterparties. The
creditworthiness of counterparties is subject to continuing review.
All CNX Gas transactions are denominated in U.S. dollars, and, as a result, we do not have any
exposure to currency exchange-rate risks.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
CNX Gas, under the supervision and with the participation of its management, including the
Companys principal executive officer and principal financial officer, evaluated the effectiveness
of its disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the
Securities Act of 1934, as amended (the Exchange Act), as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and
principal financial officer have concluded that CNX Gas disclosure controls and procedures are
effective as of March 31, 2007 to ensure that information required to be disclosed by CNX Gas in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms,
and include controls and procedures designed to ensure that information required to be disclosed by
us in such reports is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
21
Changes in Internal Controls Over Financial Reporting.
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report
on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The
first through seventh paragraphs of Note 5 Commitments and Contingent Liabilities in the
notes to the Consolidated Financial Statements included in Part I of this Form 10-Q are
incorporated herein by reference.
ITEM 1A. RISK FACTORS
No material changes from our most recently filed Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
|
|
|
10.1
|
|
Offer letter of Mark D. Gibbons is incorporated by reference from the companys Current Report
on Form 8-K filed on January 26, 2007, wherein it appeared as exhibit 10.1 |
|
|
|
10.2
|
|
Description of CNX Gas 2007 Short-term incentive program is incorporated by reference from the
companys Current Report on Form 8-K filed on March 1, 2006. |
|
|
|
10.3
|
|
Transfer Agreement dated as of January 24, 2007, between the registrant and Gary J. Bench. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated:
April 27, 2007
|
|
|
|
|
|
CNX Gas Corporation
|
|
|
By: |
/s/ Nicholas J. DeIuliis
|
|
|
|
Nicholas J. DeIuliis |
|
|
|
President and Chief Executive Officer
(Duly Authorized Officer) |
|
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Mark D. Gibbons
|
|
|
|
Mark D. Gibbons |
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
23
EXHIBIT INDEX
|
|
|
10.1
|
|
Offer letter of Mark D. Gibbons is incorporated by reference from the companys Current Report
on Form 8-K filed on January 26, 2007, wherein it appeared as exhibit 10.1 |
|
|
|
10.2
|
|
Description of CNX Gas 2007 Short-term incentive program is incorporated by reference from the
companys Current Report on Form 8-K filed on March 1, 2006. |
|
|
|
10.3
|
|
Transfer Agreement dated as of January 24, 2007, between the registrant and Gary J. Bench. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
24