General

The U.S. economy may have bottomed in the third quarter. Depending on the pace and sustainability of the recovery from the current recession, we believe substantial opportunities exist for our coal and gas businesses. Due to the significant fiscal spending and relaxed monetary policy in the United States, a modest recovery appears likely in the United States in 2010. This should lead to an increase in demand for energy products from industrial customers, power generators and steel producers.

Steel plant capacity utilization rates in the United States and globally continue to improve from the beginning of the year and are nearly double of what they were at year-end 2008. Domestic steel mill capacity is approximately 60% and Asian steel mills currently are using about 75% of their capacity. Export demand for metallurgical coal, especially from China, is having a positive impact on pricing and has led many industry analysts to predict a shortage of high-quality metallurgical coal in the near-term.

Current inventories at coal-fired power generators are near all-time highs due to the contraction in the U.S. economy. Customers in our major market area had an estimated 60 days of inventory on hand at the first of October. The company believes the overhang in thermal inventories is likely to continue into at least the first half of 2010. CONSOL Energy believes, however, that when thermal coal markets tighten, they will do so quickly. Industry analysts expect annualized coal production to fall by 80 to 100 million tons in 2009 and anticipate a permanent reduction as producers in Central Appalachia face increased financial, safety, and permitting issues which will eventually decrease supply.

For 2010, industrial and power demand is likely to increase due to the expectations of an improvement in economic activity. Moreover, higher natural gas prices in 2010 should lead power generators to dispatch coal ahead of natural gas. We anticipate up to 30 million tons of coal could displace natural gas in 2010. In addition, approximately 19 gigawatts of new coal-fired electricity generation capacity is set to come online by the end of 2012. This new demand, coupled with permanent cuts in coal production as well as safety and regulatory issues, is setting the stage for coal supply shortages over the next few years. With the continued build-out of scrubbers by generators, increased economic activity and its low cost position, CONSOL Energy is in a position to gain market share.

The U.S. natural gas market has shown signs of stability, because the total rig count appears to have bottomed at approximately 700 rigs. The expectations of lower natural gas production, coupled with expectations of increased demand due to an improving economy and a return to normal weather patterns, has led to an improvement in pricing. With its low costs and rising production volumes, CNX Gas should benefit from improved pricing.

Results of Operations

Three Months Ended September 30, 2009 Compared with Three Months Ended
September 30, 2008

Net Income Attributable to CONSOL Energy Shareholders

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



                                               2009        2008        Dollar          Percentage
                                              Period      Period      Variance           Change
Sales Outside                                 $ 1,023     $ 1,053     $     (30 )            (2.8 )%
Sales Purchased Gas                                 1           2            (1 )           (50.0 )%
Sales Gas Royalty Interest                          8          23           (15 )           (65.2 )%
Freight-Outside                                    36          60           (24 )           (40.0 )%
Other Income                                       26          35            (9 )           (25.7 )%

Total Revenue and Other Income                  1,094       1,173           (79 )            (6.7 )%
Cost of Goods Sold and Other Charges              707         740           (33 )            (4.5 )%
Purchased Gas Costs                                 1           2            (1 )           (50.0 )%
Gas Royalty Interest Costs                          6          21           (15 )           (71.4 )%

Total Cost of Goods Sold                          714         763           (49 )            (6.4 )%
Freight Expense                                    36          60           (24 )           (40.0 )%
Selling, General and Administrative
Expense                                            32          31             1               3.2 %
Depreciation, Depletion and Amortization          110          96            14              14.6 %
Interest Expense                                    8           9            (1 )           (11.1 )%
Taxes Other Than Income                            66          70            (4 )            (5.7 )%

Total Costs                                       966       1,029           (63 )            (6.1 )%

Earnings Before Income Taxes                      128         144           (16 )           (11.1 )%
Income Tax Expense                                 35          42            (7 )           (16.7 )%

Net Income                                         93         102            (9 )            (8.8 )%
Less: Net Income Attributable to
Noncontrolling Interest                             6          12            (6 )           (50.0 )%

Net Income Attributable to CONSOL Energy
Inc. Shareholders                             $    87     $    90     $      (3 )            (3.3 )%

Net income attributable to CONSOL Energy shareholders for the three months ended September 30, 2009 was $87 million compared to $90 million in the 2008 period. Net income attributable to CONSOL Energy shareholders for the 2009 period decreased in comparison to the 2008 period primarily due to:

• Lower volumes of coal sold;

• Higher average unit costs of goods sold per ton sold; and

• Lower average sales prices received for volumes of gas sold.

Lower net income attributable to CONSOL Energy shareholders was offset, in part, by the following items:

• Higher average coal sales prices received;

• Higher gas sales volumes; and

• Lower average unit costs per thousand cubic feet of gas sold.

See discussion below for additional details of the changes in net income in the period-to-period comparison.

Revenue and Other Income

Revenue and other income decreased due to the following items:



                                       2009      2008      Dollar        Percentage
                                      Period    Period    Variance         Change
     Sales:
     Produced Coal                    $   800   $   751   $      49             6.5 %
     Purchased Coal                        -         29         (29 )        (100.0 )%
     Produced Gas                         154       190         (36 )         (18.9 )%
     Industrial Supplies                   49        51          (2 )          (3.9 )%
     Other                                 20        32         (12 )         (37.5 )%

     Total Sales-Outside                1,023     1,053         (30 )          (2.8 )%
     Gas Royalty Interest                   8        23         (15 )         (65.2 )%
     Purchased Gas                          1         2          (1 )         (50.0 )%
     Freight Revenue                       36        60         (24 )         (40.0 )%
     Other Income                          26        35          (9 )         (25.7 )%

     Total Revenue and Other Income   $ 1,094   $ 1,173   $     (79 )          (6.7 )%

The increase in company produced coal sales revenue during the 2009 period was due to higher average sales prices per ton sold, offset, in part, by lower tons sold.

                                        2009      2008                     Percentage
                                       Period    Period     Variance         Change
    Produced Tons Sold (in millions)      13.6      14.9         (1.3 )          (8.7 )%
    Average Sales Price Per Ton        $ 58.85   $ 50.50   $     8.35            16.5 %

The increase in average sales price in the period-to-period comparison primarily reflects higher prices negotiated in previous periods when there was a significant increase in the global demand for coal. Sales of company produced coal decreased in the current period due to delivery deferments of Central and Northern Appalachian coals. Coal consumption by the electric power sector continued to decline during the quarter due mainly to lack of industrial demand. Metallurgical grade coal sales volumes were flat due to the steady demand for steel in the period-to-period comparison. Lower volumes of coal sold reduced sales income by approximately $64 million dollars in the period-to-period 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 decrease of $29 million in purchased coal sales revenue was primarily due to lower demand in the period-to-period comparison, offset, in part, by higher sales prices.

The $36 million decrease in produced gas sales revenue in the 2009 period compared to the 2008 period was due to lower average sales price per thousand cubic feet sold, offset, in part, by higher sales volumes.

                                                2009       2008                       Percentage
                                               Period     Period      Variance          Change
Produced Gas Sales Volume (in billion cubic
feet)                                             24.5       19.4           5.1             26.3 %
Average Sales Price Per thousand cubic feet    $  6.30    $  9.73    $    (3.43 )          (35.3 )%

Sales volumes increased as a result of additional wells coming online from our on-going drilling program. The decrease in average sales price is the result of the general market price decreases in the period-to-period comparison. The general market price decline was offset, in part, by the various gas swap transactions entered into by CNX Gas. These gas swap transactions qualify as financial cash flow hedges that exist parallel to the underlying physical transactions. These financial hedges represented approximately 13.2 Bcf of our produced gas sales volumes for the three months ended September 30, 2009 at an average price of $8.69 per Mcf. In the three months ended September 30, 2008, these financial hedges represented approximately 12.8 Bcf at an average price of $9.44 per Mcf.

The $2 million decrease in revenues from the sale of industrial supplies was primarily due to lower sales volumes. Economic conditions had a negative impact on major customers, particularly those serving the auto and housing markets.

The $12 million decrease in other sales was primarily attributable to decreased revenues from barge towing and terminal services. The decrease is related to lower tonnage moved by barge towing and terminal services in the 2009 period compared to the 2008 period.

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 decrease in market prices, contractual differences among leases and the mix of average and index prices used in calculating royalties contributed to the period-to-period change.

                                                2009       2008                       Percentage
                                               Period     Period      Variance          Change
Gas Royalty Interest Sales Volumes (in
billion cubic feet)                                2.4        2.4            -                -
Average Sales Price Per thousand cubic feet    $  3.46    $  9.71    $    (6.25 )          (64.4 )%

Purchased gas sales volumes represent volumes of gas that are sold at market prices that were purchased from third-party producers.

                                                2009       2008                       Percentage
                                               Period     Period      Variance          Change
Purchased Gas Sales Volumes (in billion
cubic feet)                                        0.4        0.2           0.2            100.0 %
Average Sales Price Per thousand cubic feet    $  3.53    $ 10.20    $    (6.67 )          (65.4 )%

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 decreased $24 million in the 2009 period primarily related to lower domestic shipments to customers whom CONSOL Energy pays the freight and then passes on the cost to the customer.

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

                                               2009        2008         Dollar          Percentage
                                              Period      Period       Variance           Change
Gain on sale of assets                        $     3     $     9     $       (6 )           (66.7 )%
Reversal/recognition of unrealized losses
on options                                         -            6             (6 )          (100.0 )%
Contract towing                                     1           3             (2 )           (66.7 )%
Equity in earnings of affiliates                    6           2              4             200.0 %
Other miscellaneous                                16          15              1               6.7 %

Total other income                            $    26     $    35     $       (9 )           (25.7 )%

Gain on sale of assets decreased $6 million in the period-to-period comparison due to various miscellaneous transactions that occurred throughout both periods, none of which were individually significant.

Mark-to-market adjustments for free standing coal sales options resulted in approximately $6 million of reversal of unrealized losses in the 2008 period. The September 30, 2009 market price of coal did not materially change from June 30, 2009 and therefore, the mark-to-market adjustments did not result in any significant income adjustment in the 2009 period.

Contract towing revenue has decreased approximately $2 million due primarily to the general slow-down in the economy, negatively impacting the volume of material being shipped via river transportation.

Equity in earnings of affiliates increased $4 million in the 2009 period due to various transactions entered into by our equity affiliates throughout both periods, none of which were individually material.

Other miscellaneous income increased $1 million in the period-to-period comparison due to various miscellaneous transactions that occurred throughout both periods, none of which were individually material.

Costs

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



                                                2009         2008        Dollar          Percentage
                                               Period       Period      Variance           Change
Cost of Goods Sold and Other Charges
Produced Coal                                 $    514     $    545     $     (31 )            (5.7 )%
Purchased Coal                                       2           32           (30 )           (93.8 )%
Produced Gas                                        51           50             1               2.0 %
Industrial Supplies                                 50           51            (1 )            (2.0 )%
Closed and Idle Mines                               39           19            20             105.3 %
Other                                               51           43             8              18.6 %

Total Cost of Goods Sold and Other
Charges Outside                                    707          740           (33 )            (4.5 )%
Gas Royalty Interest                                 6           21           (15 )           (71.4 )%
Purchased Gas                                        1            2            (1 )           (50.0 )%

Total Cost of Goods Sold                      $    714     $    763     $     (49 )            (6.4 )%

Produced coal cost of goods sold and other charges decreased primarily due to lower sales volumes offset, in part, by a 3.1% increase in average unit cost per ton sold.

                                               2009        2008                         Percentage
                                              Period      Period       Variance           Change
Produced Tons Sold (in millions)                 13.6        14.9           (1.3 )            (8.7 )%
Average Cost of Goods Sold and Other
Charges per Ton                               $ 37.77     $ 36.64     $     1.13               3.1 %

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

• In general, the average cost of goods sold per unit has increased $0.43 per ton due to the reduced amount of tons sold from CONSOL Energy mines. The reduction in tons sold reflects the weak economic environment which has affected electricity generation and correspondingly impacted the demand for coal. Fixed costs incurred at our mining operations are now spread over fewer tons sold, which has negatively impacted average unit costs.

• Labor costs have increased $0.53 per ton sold primarily due to the effects of wage increases at the union and non-union mines from labor contracts which began in 2007. These contracts call for specified hourly wage increases in each year of the contract. Labor costs also increased due to the higher average number of employees in the 2009 period compared to the 2008 period reflecting the utilization of new work schedules that require more manpower. The average increase in unit cost for labor was also impacted by lower sales volumes due to the economic environment as discussed above.

These increases in average cost of goods sold and other charges per ton sold were offset, in part, by the following:

• Contract Mining Fees decreased $0.57 per ton sold due to lower contractor usage in the 2009 period compared to the 2008 period.

• Subsidence cost decreased $0.30 per ton sold due to the 2008 period including additional expenses related to settlement agreements entered into between CONSOL Energy and the Pennsylvania Department of Environmental Protection (PA DEP). The settlement agreements stipulate additional work to be performed on streams that were impacted by underground mining prior to the current regulation regarding stream disturbance.

Purchased coal cost of goods sold consists of costs from processing purchased coal in our preparation plants for blending purposes to meet customer coal specifications, coal purchased and sold directly to the customer and costs for processing third party coal in our preparation plants. The decrease of $30 million in purchased coal cost of goods sold and other charges in the 2009 period was primarily due to lower volumes purchased.

Gas cost of goods sold and other charges increased due primarily to a 26.3% increase in volumes of produced gas sold, offset, in part, by a 18.4% decrease in average unit costs.

                                                2009       2008                       Percentage
                                               Period     Period      Variance          Change
Produced Gas Sales Volumes (in billion
cubic feet)                                       24.5       19.4           5.1             26.3 %
Average Cost per thousand cubic feet           $  2.09    $  2.56    $    (0.47 )          (18.4 )%

Average costs per unit decreased in the 2009 period as a result of several factors, including the following:

• Well service costs decreased by $0.08 per thousand cubic feet due to lower contract rig hours needed as a result of less pump maintenance being required in the 2009 period.

• Gob well collection costs decreased $0.08 per thousand cubic feet due primarily to idling contractor crews for approximately five weeks during the current period. The idling of the crews was related to the Buchanan long wall being idled in the previous periods.

• Water disposal costs have decreased $0.07 per thousand cubic feet due to lower volumes of water. Lower volumes of water are the result of the slow-down in coal bed methane well drilling activities due to the overall economic environment. Also, water disposal costs are lower in the period-to-period comparison due to lower rates being charged in the current period as a result of contract renegotiations with these contractors.

• Repairs and maintenance cost per unit decreased by $0.06 per thousand cubic feet due to lower spending needed in the current period to maintain wells. In addition, road maintenance costs were lower in the period-to-period comparison related to less water being hauled as discussed above.

• Other costs decreased $0.36 per thousand cubic feet primarily due to the impact of additional gas volumes sold during the period. Dollars spent remained consistent in the period-to-period comparison, therefore additional volumes decreased the average unit cost per thousand cubic feet sold.

These decreases in average costs per unit were offset, in part, by the following items:

• CNX Gas has incurred approximately $0.12 per thousand cubic feet of costs related to idling various drilling rigs throughout the company. Some of CNX Gas' drilling contracts require minimum payments be made to the contracting party when drilling rigs are not being used. The CNX Gas drilling program has been slowed down pending a change in the economic environment. These idle rig charges resulted in an increase to costs.

• Firm transportation costs have increased $0.07 per thousand cubic feet due primarily to acquiring additional capacity in the Northern Appalachian region after the 2008 period.

• Power and fuel costs increased $0.04 per thousand cubic feet primarily due to a power rate increase which occurred after the 2008 period.

Industrial supplies cost of goods sold decreased $1 million primarily due to lower sales volumes as a result of the slow-down in the economic environment.

Closed and idle mine cost of goods sold increased approximately $20 million in the 2009 period compared to the 2008 period. The increase was primarily attributable to $13 million of costs incurred at Mine 84 to pull underground equipment out of the mine in preparation of idling, to construct seals to close sections of the underground mine works, and complete work necessary for the mine to be maintained in an efficient manner. Also, approximately $6 million of costs were due to adjustments for reclamation liabilities related to mine plan changes and estimate changes at Powellton, one of our surface locations. Increases were also attributable to the idled Shoemaker Mine incurring approximately $2 million of additional expenses in the current period related to continuing to maintain the mine in an idled status. These increases in closed and idle mine cost of goods sold were offset, in part, by a $1 million reduction due to various transactions that occurred throughout both periods, none of which were individually material.

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

                                                2009        2008         Dollar          Percentage
                                               Period      Period       Variance           Change
Dry hole and other costs                       $     5     $    -      $        5             100.0 %
Stock-based compensation                             9           3              6             200.0 %
Incentive compensation                               8           9             (1 )           (11.1 )%
Terminal/River operations                           14          20             (6 )           (30.0 )%
Miscellaneous other                                 15          11              4              36.4 %

Other cost of goods sold and other charges     $    51     $    43     $        8              18.6 %

Dry hole and other costs were incurred in the 2009 period related to the determination that certain areas where an exploration well was drilled would not be economical to pursue. The costs for the exploration wells, which were previously capitalized, were expensed. Other costs include costs which were previously capitalized related to a lease. The lease was surrendered due to the properties being widely scattered and not adjacent to any of our operating units at this time. Also, costs related to particular permits where management has determined that no drilling will take place have been expensed.

Stock-based compensation expense increased $6 million in the period-to-period comparison. The 2008 period included a reduction of expense related to the CNX Gas performance share program reflecting a decrease in the market price of CNX Gas common stock at September 30, 2008. The performance share program was converted into CONSOL Energy restricted stock units. The 2009 year-to-date period also includes additional expense due to expanding the stock-based compensation program to include additional employees.

. . .