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

Net income changed primarily due to the following items (table in millions):



                                                 2008         2007       Dollar        Percentage
                                                Period       Period     Variance         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 Minority
Interest                                            725          429          296            69.0 %
Income Tax Expense                                  240          136          104            76.5 %

Earnings Before Minority Interest                   485          293          192            65.5 %
Minority Interest                                    43           25           18            72.0 %

Net Income                                      $   442      $   268    $     174            64.9 %

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



                                                            Dollar       Percentage
                                        2008      2007     Variance        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.

                                                                           Percentage
                                         2008      2007      Variance        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.

                                                                                        Percentage
                                                       2008      2007      Variance       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.

                                                                                    Percentage
                                                   2008      2007      Variance       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.

                                                                                           Percentage
                                                     2008       2007       Variance          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.

                                                                  Dollar       Percentage
                                                 2008    2007    Variance        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:



                                                               Dollar       Percentage
                                           2008      2007     Variance        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.

                                                                                      Percentage
                                                2008        2007       Variance         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.

. . .