General

Overall demand for thermal coal decreased in 2012 versus 2011 levels from a sharp decrease in natural gas prices in early 2012 and a corresponding shift towards gas-fired generation, warm winter weather, as well as a modest decline in electric generation output. Over the course of 2012, coal-fired generation, however, regained domestic share of the power market from rising natural gas prices throughout 2012 which increased above the fuel switching breakeven point. Domestically, coal inventories at electric generators were elevated versus historical averages for much of the year. The hotter than normal summer, declining coal production, and rising thermal exports, all helped to reduce coal inventories in the latter part of the year. U.S. electric demand during the fourth quarter of 2012 is estimated to be slightly higher than 2011 levels, as weather returned to more normal patterns.

However, U.S. thermal coal exports enjoyed solid international demand in the first three quarters of 2012 but slowed slightly during the fourth quarter. Total 2012 thermal coal exports were up 50% from last year as producers sought demand abroad to offset weaker domestic demand noted above. Atlantic market spot coal prices fell throughout the year with an oversupply of U.S. coal hitting the European market. Spot prices began to flatten in the fourth quarter as supply moderated and winter season approached. Longer-term fundamentals for U.S. thermal coal exports remain favorable as subsidized mining in Europe is phased out, nuclear growth plans are curtailed, and coal continues to maintain a cost advantage over other more expensive oil-linked fuels.

Global steel demand has been under pressure and as a consequence, metallurgical coal used to make steel is in less demand. For 2012, metallurgical coal demand slowed as world blast furnace output grew by approximately 1%. Production grew, but demand was below the historical 6-8% growth rate recorded this past decade. In particular, Asian, European, and South American demand growth all slowed. We expect global infrastructure development will continue to drive future metallurgical and steel demand growth. Consistent with last year, China continues to provide the bulk of the world's blast furnace output with approximately 60% of world production. While demand growth was slowing, global metallurgical coal production growth remained strong. Global metallurgical coal supply grew in 2012, particularly from rising exports in Australia. International settlement prices declined throughout the year to levels much lower than 2011 highs, further underscoring an oversupplied market.

In response to the weak market conditions, CONSOL Energy idled its Buchanan Mine and its Amonate Complex in early September 2012. The Buchanan Mine resumed production the week of November 5 with a five-day work week schedule, while Amonate remained idled for the remainder of 2012. Buchanan typically produces about 400 thousand tons per month. Amonate was expected to produce about 35 thousand tons per month. Also in response to metallurgical and thermal market conditions, Buchanan and Blacksville No. 2 were both idled in March and April 2012. Our focus for 2013 will be to increase our target markets and customer base.

Also in response to the current weak market conditions for domestic coal and recent proposals and final rules adopted by the EPA, CONSOL Energy issued a notice under the Workers Adjustment and Retraining Notification Act (WARN) of a layoff at its Fola Operations near Bickmore, West Virginia. The layoffs were effective on September 1, 2012. Regular production from underground operations was idled on September 1, 2012. Production from the surface areas was idled as of June 29, 2012, and employees have been reassigned to reclamation activities. The idling of the Fola Complex reduced total annual Company production by approximately 800 thousand tons. On December 14, 2012, CONSOL Energy issued another WARN of its intent to complete the idling of its Fola operations. The layoff is expected to occur during a 14-day period beginning on February 14, 2013. Layoffs are expected to affect 131 surface and office employees and 16 employees at the company's Little Eagle Deep Mine.

There was an over-supply of natural gas early in 2012 with the warm winter and modest economic environment. One bright spot for demand was record power generation output, as utilities capitalized on the sharp decline in natural gas prices early in the year. After several years of rising supply, natural gas production growth moderated with the decline in prices. The supply and demand imbalance narrowed as the year progressed as power generation rose, supply moderated, and imports of liquefied natural gas (LNG) and Western Canadian gas declined. Additionally, U.S. exports to eastern Canada and Mexico have increased to further balance the market. More normal weather, and a warmer than average July, put upward pressure on natural gas prices. During the fourth quarter in particular, prices rose on expectations of higher demand before moderating amid mild December temperatures.

Longer-term rebalancing will be aided by declining conventional production and the large shift in drilling focus for oil and "liquids rich" gas plays. As natural-gas-targeted rigs have fallen throughout the year, oil-targeted rigs have sharply increased. The widespread perception that shale gas production will yield lower and less volatile natural gas prices could spur additional demand as electric generators choose to build additional high-efficiency baseload gas power plants. Additional demand will come from the petrochemical industry and developing sources of demand such as increased wide-scale use of natural gas vehicles. The prospect

of U.S. natural gas exports through LNG facilities is also under consideration. CONSOL Energy continues to believe that its natural gas assets will bring balance to CONSOL Energy's portfolio of long-lived energy resources.

A failure to return to normal weather patterns could have a negative short-term impact on CONSOL Energy's natural gas and domestic thermal coal demand. For much of 2012, the coal and natural gas industries worked through the effects of last year's mild winter temperatures. A repeat in 2013 could exacerbate existing strain. Additionally, uncertainty in the short term economic outlook could lead to a slowing of global economic expansion. Economic uncertainty is currently driven by the European sovereign debt crisis, lingering budget and political uncertainty in the U.S., increasing retirements of U.S. nuclear units, instability in the Middle East oil-producing region, and economic and political transitions in Asia. The fundamental long-term drivers of CONSOL Energy's business remain unchanged as the global demand for low-cost, reliable sources of energy and metallurgical coal remain strong in both the developed and developing world.

CONSOL Energy engaged in several asset sale transactions in the year ended December 31, 2012:

• In April 2012, CONSOL Energy sold its non-producing Elk Creek reserves in southern West Virginia. The transaction resulted in cash proceeds of $26 million and a gain on sale of assets of $11 million.

• In February 2012, CONSOL Energy sold it's non-producing Burning Star #4 reserves in Illinois. The transaction resulted in cash proceeds of $13 million and a gain on sale of assets of $11 million.

• In June 2012, CONSOL Energy sold its non-producing Northern Powder River Basin assets in southern Montana and northern Wyoming for $170 million in cash to Cloud Peak Energy. Additionally, CONSOL Energy retained an 8% production royalty interest on approximately 200 million tons of permitted fee coal. This transaction resulted in a pre-tax gain of $151 million.

• In June 2012, CONSOL Energy expanded an existing mining joint venture with a privately-held company in Central Pennsylvania. The joint venture will self-fund, through retained earnings, a $54 million (gross) expansion in 2012 and 2013. The expansion will enable CONSOL Energy's share of high-vol and mid-vol forecasted coal production to increase from 150,000 tons in 2012 to 900,000 tons in 2015.

• In December 2012, CONSOL Energy sold non-producing western Canadian coal assets for $103 million. Ram River Coal Corp., a private Ontario company created by Forbes & Manhattan Inc. (F&M) (a private merchant bank headquartered in Toronto, Canada) acquired 100% of CONSOL Energy's Ram River and Scurry Ram coal properties for aggregate consideration of $105 million ($102.5 million payable to CONSOL Energy). On closing, Ram River Coal Corp. made an aggregate cash payment of $55.0 million ($52.5 million payable to CONSOL Energy) and under the terms of the asset purchase agreement provides for additional payments to CONSOL Energy of $25.5 million on or before June 21, 2013 and $24.5 million on or before June 21, 2014. The transaction resulted in an after-tax gain of $60.7 million.

• In December 2012, CONSOL Energy agreed to sell its interest in other coal assets, subject to certain conditions, in Alberta, for $24 million. The buyer is Riversdale Resources, headquartered in Sydney, Australia. The primary asset is Grassy Mountain Surface Mine. The sale is anticipated to close during the second quarter of 2013, and as such, no gain has been recognized as of December 31, 2012.

• CONSOL Energy continues to explore potential sales of assets.

CONSOL Energy engaged in several other transactions in the year ended December 31, 2012. These transactions include the following:

• In November 2012, CONSOL Energy offered a voluntary severance incentive program (VSIP) to active salaried corporate and operation support employees with 30 years of service, or more. Under this program, eligible employees who accepted the offer will receive a severance payment equal to one year's salary and the 2013 accrued vacation earned as of December 31, 2012. Approximately 100 employees volunteered for the program. Severance and vacation pay was approximately $13.3 million and was recognized in other accrued liabilities at December 31, 2012. These enhanced benefits were paid in January 2013.

• On July 27, 2012 a structural failure occurred at CONSOL Energy's newly installed above-ground conveyor system at the Bailey Preparation Plant in Southwestern Pennsylvania. The belt system conveys coal from the Bailey and Enlow Fork mines to the Bailey Preparation Plant. This incident caused a total of four longwalls to be idled for approximately three weeks, at which point one rebuilt conveyor belt was re-started. Production from these mines was at approximately 60% of normal for most of the remainder of the third quarter. The company's net income would have been an estimated $53 million higher, had the conveyor belt incident not occurred. This impact is before the receipt of any insurance proceeds and any other proceeds under the indemnity provisions of the construction contract. CONSOL Energy has received $2.3 million of business interruption insurance proceeds related to this incident, included in its 2012 results of operations. Although CONSOL Energy's insurance claim is higher than the proceeds received to date, there is no guarantee that additional monies will be received.

• In June 2012, CONSOL Energy announced that it acquired a non-controlling interest in Epiphany Solar Water Systems, a privately-held company founded in New Castle, PA in 2009. Epiphany Solar Water Systems is testing what is believed to be the world's first concentrated solar powered water purification system. Under the agreement, CONSOL Energy has made an initial investment of $0.5 million and one of its Marcellus gas well locations in Greene County served as the site to pilot test this solar powered water purification system. Initial testing of the Epiphany unit demonstrated the efficacy of the approach. Based on results of the pilot test, system improvements and upgrades are being implemented. Additional testing is ongoing and will be used to evaluate system enhancements in the coming months.

• In April 2012, CONSOL Energy announced certain changes to the salaried other post-retirement benefit plan that current retirees and current active employees will receive as of January 1, 2014. The change provides a fixed annual retiree medical contribution into a Health Reimbursement Account for eligible employees. The money in the account can be used to help pay for a commercial medical plan, Medicare Part B and Part D premiums and other qualified expenses. Employees who work or worked in corporate or operational support positions at retirement and who are age 50 or older at December 31, 2013 will receive the revised benefit in lieu of the current retiree medical and prescription drug coverage. Employees who work or worked in corporate or operations support positions who are under age 50 at December 31, 2013 will receive no retiree medical or prescription drug benefit. CONSOL Energy remeasured the salaried other postretirement plan as of March 31, 2012 to recognize these changes. The remeasurement reflects the reduction in benefits and the change in discount rate from 4.51% at December 31, 2011 to 4.57% at March 31, 2012. The remeasurement resulted in a reduction of approximately $80.6 million of Other Post-Retirement Benefits (OPEB) liability with a corresponding offset to Other Comprehensive Income, net of applicable deferred taxes. The change resulted in a $9.4 million reduction in OPEB expense compared to what was originally expected to be recognized for the year ended December 31, 2012. The change was made to align CONSOL Energy's corporate and operational support compensation package more closely with our peer group.

• Pennsylvania enacted Act 13 of 2012, which provides for the comprehensive regulation of Marcellus Shale development in Pennsylvania. Among other things, Act 13 requires an impact fee be paid annually on all nonconventional gas wells drilled in the state. The annual fee is based on annual average sales price and is modified annually for a 15-year period for each well. The impact fee also required the first year fee be paid on all applicable wells drilled before January 1, 2012 with subsequent annual fees to apply each year thereafter. CONSOL Energy's retroactive impact fee related to wells drilled prior to January 1, 2012 was approximately $4 million. This amount was paid in September 2012.

• On December 10, 2012, CONSOL Energy's board of directors accelerated the declaration and payment of the regular quarterly dividend of $0.125 per share, payable on December 28, 2012, to shareholders of record on December 21, 2012.

CONSOL Energy is managing several significant matters that may affect our business and impact our financial results in the future including the following:

• Challenges in the overall environment in which we operate create increased risks that we must continuously monitor and manage. These risks include
(i) increased prices for commodities such as diesel fuel, synthetic rubber and steel that we use in our operations (although prices for some of these commodities declined during the year from previous years), (ii) increased scrutiny of existing safety regulations and the development of new safety regulations and (iii) additional environmental restrictions.

• Federal and state environmental regulators are reviewing our operations more closely and are more strictly interpreting and enforcing existing environmental laws and regulations, resulting in increased costs and delays. For example, we entered into a consent decree with the EPA and the West Virginia Department of Environmental Protection pursuant to which we agreed to construct an advanced technology mine water treatment plant and related facilities to reduce high levels of chlorides in water discharges from certain of our mines in Northern West Virginia, at a total estimated cost of approximately $200 million. The new facility must be placed into service no later than May 2013.

• Federal and state regulators have proposed regulations which, if adopted, would adversely impact our business. These proposed regulations could require significant changes in the manner in which we operate and/or would increase the cost of our operations. For example, the Department of Interior, Office of Surface Mining Reclamation and Enforcement (OSM) is currently preparing an environmental impact statement relating to OSM's consideration of five alternatives for amending its coal mining stream protection rules. All of the alternatives, except the no action alternative, could make it more costly to mine our coal and/or could eliminate the ability to mine some of our coal. Other examples are the Mercury and Air Toxic Standards (MATS) (remanded by the court and reproposed by the EPA in November 2012) and the Utility Maximum Achievable Control Technology (Utility MACTS) rules issued by the EPA. These new regulations set mercury and air toxic standards for new and existing coal and oil fired electric utility steam generating units and include more stringent new source performance standards (NSPS) for particulate matter (PM), SO2 and NOx. Although the EPA intends to reconsider certain aspects of these new rules, some older coal fired

power plants may be retired or have operation time reduced rather than install additional expensive emission controls which could reduce the amount of coal consumed. On April 18, 2012, the EPA published new final New Source Performance Standards for gas wells and related facilities. These rules apply to wells that were hydraulically fractured after August 23, 2011 and require the implementation by January 1, 2015 of technologies that capture the gas that is currently vented or flared during completion (hydrofracturing) of a well. Low pressure wells, including coalbed methane wells, are excluded from these new standards.
• In April 2012, the EPA published its proposed New Source Performance Standards (NSPS) for carbon dioxide emissions from coal powered electric generating units. The proposed rules will apply to new power plants and to existing plants that make major modifications. If the rules are adopted as proposed, the only new coal fired power plants that will be able to meet the proposed emission limits will be coal fired plants with carbon dioxide capture and storage (CCS). Commercial scale CCS is not likely to be available in the near future, and if available, it may make coal fired electric generation units uneconomical compared to new gas fired electric generation units. Thus, if finalized the proposed rules could seriously threaten the construction of new coal fired electric generating units.

• In May 2012, CONSOL Energy received a citizens' Notice of Intent to Sue from the Sierra Club, the Ohio Valley Environmental Coalition and the West Virginia Highlands Conservancy alleging violations of the Clean Water Act relating to selenium at its Fola mining complex in central West Virginia. On June 5, 2012, the West Virginia Department of Environmental Protection issued an Administrative Order to Fola. Fola is complying with the Administrative Order. On September 4, 2012, the citizens group filed a complaint against Fola in the U.S District Court for the Southern District of West Virginia covering the same matters addressed in the State Administrative Order.

• In late June 2012, CONSOL Energy received informal notification from the Pennsylvania Department of Environmental Protection of the Department's intent pursuant to a Technical Guidance Document entitled "Surface Water Protection-Underground Bituminous Coal Mining" to require a change in the mine plan of a pending application for a permit for expansion of the Company's Bailey longwall mine. If ultimately required, this change in mine plan could have a material effect on CONSOL Energy's forecasted production for 2015. Although CONSOL Energy does not agree that a modification of its mining plan is necessary to comply with applicable regulatory performance standards, CONSOL Energy is currently reviewing the notification and any modifications that would be required if CONSOL Energy is compelled to modify its application.

• Under our joint venture agreements with Noble Energy and Hess, each of them has the right to perform due diligence on the title to the oil and gas interests which we conveyed to them and to assert that title to the acreage is defective. If they establish any title defects which are not resolved in favor of CONSOL Energy or if the subject acreage is reassigned to us at our request, then subject to certain deductibles, Noble's and Hess's respective aggregate carried cost obligation under the joint venture agreements will be reduced by the value the parties previously allocated to the affected acreage in the transaction. If a significant percentage of the oil and gas interests we contributed have title defects, the carried costs could be materially reduced and our aggregate share of the drilling and completion costs for wells in these joint ventures could materially increase. To date, Noble has asserted formal title defects with respect to approximately 30,171 gross deal acres, which have an aggregate transaction value of $196 million. We believe that we will resolve most of those defects favorably to CONSOL Energy. To date, we have conceded defects to Noble which have an aggregate value equal to less than the applicable deductibles and the impact of these conceded defects on the Company's financial statements has not been material. In the case of our Ohio Utica Shale joint venture with Hess, based on title work performed by Hess, we believe that there are chain of title issues with respect to approximately 36,000 of the joint venture acres, most of which likely cannot be cured. Hess's 50% interest in these 36,000 acres has an allocated transaction value of approximately $146 million and may result in a corresponding reduction of the associated carried interest. The loss of these Utica Shale acres itself will not have a material impact on the Company's financial statements. After accounting for these defective acres, there are approximately 161,000 acres in our Ohio Utica Shale joint venture with Hess.

• A pension settlement charge is reasonably possible to occur in 2013. When lump sum payments from the pension plan exceed the service and interest expense, pension settlement accounting requires unamortized actuarial gains and loss related to the lump sum payouts be amortized immediately. The 2013 threshold for pension settlement recognition is $55 million. If the threshold for pension settlement is reached, the pension settlement charge could be material to the financial results of CONSOL Energy. Also, pension settlement would require the pension plan to be remeasured using updated assumptions. The updated assumptions would include resetting the discount rate used in the actuarial calculation.

• CONSOL is also in negotiations with the authority that operates the Pittsburgh International Airport for the lease of the oil and gas rights on approximately 8,800 acres surrounding the airport. These are contiguous acres which are in the liquids area of the Marcellus Shale play.

Results of Operations
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Net Income Attributable to CONSOL Energy Shareholders CONSOL Energy reported net income attributable to CONSOL Energy shareholders of $388 million, or $1.70 per diluted share, for the year ended December 31, 2012. Net income attributable to CONSOL Energy shareholders was $632 million, or $2.76 per diluted share, for the year ended December 31, 2011.
The coal division includes thermal coal, high volatile metallurgical coal, low volatile metallurgical coal and other coal. The total coal division contributed $656 million of earnings before income tax for the year ended December 31, 2012 compared to $933 million for the year ended December 31, 2011. The total coal division sold 56.5 million tons of coal produced from CONSOL Energy mines, excluding our portion of tons sold from equity affiliates, for the year ended December 31, 2012 compared to 62.7 million tons for the year ended December 31, 2011.
The average sales price and average cost of goods sold per ton for all active coal operations were as follows:

                                            For the Years Ended December 31,
                                                                            Percent
                                        2012          2011      Variance     Change
Average Sales Price per ton sold    $   67.11       $ 72.25    $  (5.14 )    (7.1 )%
Average Costs of Goods Sold per ton     52.56         50.69        1.87       3.7  %
Margin                              $   14.55       $ 21.56    $  (7.01 )   (32.5 )%

The lower average sales price per ton sold reflects a decrease in the global metallurgical coal markets, slightly offset by higher thermal coal average prices as a result of several successful renegotiations of domestic thermal contracts where pricing took effect January 1, 2012. The coal division priced 10.5 million tons on the export market at an average sales price of $76.33 per ton for the year ended December 31, 2012 compared to 11.7 million tons at an average price of $121.29 per ton for the year ended December 31, 2011. All other tons were sold on the domestic market. The decreased sales tonnage is primarily due to decreased coal demand in both thermal and metallurgical markets and curtailed shipments due to the Bailey Belt incident discussed previously.

Average costs per ton sold increased $1.87 per ton in the period-to-period comparison due primarily to the following:

•         Average cost of goods sold per ton increased due to fewer tons sold.
          Fixed costs are allocated over fewer sales tons, resulting in higher
          unit costs.


•         The idle longwalls at the Blacksville Mine and the Buchanan Mine during
          March and April 2012 resulted in an increase in unit costs of
          approximately $2.16 per ton as the fixed costs were allocated over
          fewer tons.


•         Average depreciation, depletion and amortization increased due to
          additional assets placed into service after the 2011 period.


•         Average operating supplies and maintenance costs per ton increased due
          to additional equipment maintenance, timing of major equipment overhaul
          costs, increased fuel and lubricants and use of pumpable cribs for roof
          support.


•         Average labor and labor related expenses increased primarily as result
          of the impact of the UMWA contract wage increases, offset, in part, by
          lower overtime hours worked.


•         Average retirement and disability cost per ton decreased due to the
          improvement in other postretirement benefits discussed in the long-term
          liabilities section below.

The total gas division includes coalbed methane (CBM), shallow oil and gas, Marcellus and other gas. The total gas division contributed $39 million of earnings before income tax for the year ended December 31, 2012 compared to $130 million for the year ended December 31, 2011. Total gas production was 156.3 billion net cubic feet for the year ended December 31, 2012 compared to 153.5 billion net cubic feet for the year ended December 31, 2011. Total gas production increased primarily due to the on-going drilling program, partially offset by 10.7 billion net cubic feet of production related to both the 2011 divestiture of Antero Resources Appalachian Corp. (Antero) and the 2011 Noble Joint Venture. Production also decreased due to the Buchanan Mine idling as previously discussed.
The average sales price and average costs for all active gas operations were as follows:

. . .