Heard off the street: CNX Gas alters plans in case Consol comes courting again Sunday, August 24, 2008 By Len Boselovic, Pittsburgh Post-Gazette

Five months after a buyout offer from "big brother" Consol Energy
was terminated, CNX Gas has formalized provisions for how its top
executives would be treated should the Upper St. Clair coal producer
come courting again.

Consol [Ticker: CNX] spun off a minority interest in Robinson-based CNX Gas [CXG]
in 2005, retaining an 81.5 percent interest in the natural gas
producer. The coal miner purchased additional shares last summer,
increasing its stake to 81.7 percent.

Early this year, Consol had second thoughts about the break up. On
Jan. 29, Consol offered to exchange 0.44 of its shares for each of the
27.7 million CNX Gas shares it did not own. Based on Consol's closing
price the previous day, the offer valued CNX Gas shares at $33.70, 12
percent above the close the previous day.

The proposal was made directly to CNX Gas shareholders, not to CNX
Gas' board of directors, which is elected by Consol. CNX Gas'
eight-member board includes five people who were directors and/or
executives of Consol. A sixth director, CNX Gas Chief Executive Officer
Nicholas J. DeIuliis, still draws pay from the coal producer.

Consol withdrew the offer March 25, saying it was no longer in the
interests of shareholders for two reasons: unreasonable price demands
from some CNX Gas shareholders and a volatile stock market that made it
difficult to determine the ultimate price tag on the all-stock
transaction.

Even before Consol and CNX Gas publicly disclosed they were
considering reuniting, one issue on the table was how Mr. DeIuliis and
other CNX Gas executives would be compensated for the stock options,
restricted stock and other equity incentives they had earned.
Provisions of CNX Gas' incentive plan only outlined how the incentives
would be treated if someone other than Consol purchased all of the
shares, says CNX Gas spokesman Dan Zajdel.

A prospectus Consol filed March 6 disclosed that Mr. DeIuliis raised
the matter as early as Jan. 21 in conversations with Consol CEO J.
Brett Harvey and CNX Gas Chairman Philip W. Baxter, a former Consol
director and one of the gas producer's two independent directors.

In the end, Consol agreed to pay cash for the stock options and
restricted stock, and gave them the option of taking cash or Consol
equity for their performance share units. Consol estimated that, based
on the trading range of CNX Gas shares in the five days after the offer
was made, Mr. DeIuliis would have received about $9.6 million and three
other CNX Gas executives would have been paid a total of about $5.8
million, according to the prospectus.

Last week, CNX Gas disclosed it had amended its incentive plan to cover the contingency of Consol making another offer.

"The board wanted to take action that provided some clarity where
cloudiness existed," Mr. Zajdel said. "We really don't see this as a
big deal."

Under the formalized arrangement, vested stock options would be
cashed out in the event of a Consol buyout. Options that aren't vested
would be converted to Consol options and continue to vest at the same
pace as they do now. So would shares of restricted stock. For half of
their performance share units, the executives would have the option of
cashing them out or converting them to Consol performance share units.
The other half would automatically be converted into performance share
units.

The changes also provide for severance payments for Mr. DeIuliis and
other top executives if they were terminated or resigned under certain
circumstances following a reunification.

Mr. Zajdel says that unlike the mostly cash payments executives
would have received if Consol's January offer had been accepted, the
new provisions give them more "skin in the game" if Consol ends up
making a successful offer. That's because more of their incentives
would be converted to incentives linked to the performance of Consol
shares.

Consol has not made a new offer. It said in March it would continue
purchasing CNX Gas shares based on price and other considerations.

The reasons Consol gave when it made the proposal in January still
make sense. Consol spun off CNX Gas because it believed the value of
the natural gas business wasn't reflected in the price of Consol
shares. Being a separate company also was supposed to sharpen
management focus.

In January, Mr. Harvey said Wall Street had a better appreciation of
the value of the natural gas operations and that increasing the gas
part of Consol's business would be prudent given regulatory concerns
about coal. Moreover, reuniting the two companies would result in
administrative cost savings of at least $5 million, Consol told
shareholders in the prospectus.

Through the end of July, CNX Gas shares had generated annualized
returns of about 11 percent since their January 2006 debut, roughly a
third of the returns Consol shareholders have enjoyed over the same
period. CNX Gas closed Friday at $30.46, leaving it down nearly 5
percent for the year. Consol, which hit a 52-week high of $119.10 in
June, finished at $69.49, down 3 percent for the year.