October 29, 2013
PITTSBURGH — CONSOL Energy Inc. has entered into an agreement to sell its Consolidation Coal Company (CCC) subsidiary, which contains all five of its longwall coal mines in West Virginia, to a subsidiary of Murray Energy Corporation (Murray Energy) for $3.5 billion in value.
“While this transaction furthers CONSOL’s E&P growth strategy,” commented J. Brett Harvey, CONSOL’s chairman and CEO, “the sale of these five mines – assets that have long contributed to America’s economic strength and our company’s legacy – was a very difficult decision for our team. The employees at these mines are among the safest and most productive miners anywhere in the world. In the end, we concluded that the time had come to sell these mature assets to ownership whose strategic direction is more aligned with those mines.”
The CCC mines being sold are McElroy Mine, Shoemaker Mine, Robinson Run Mine, Loveridge Mine, and Blacksville No. 2 Mine. Collectively, these mines produced 28.5 million tons of thermal coal in 2012. Murray Energy is acquiring approximately 1.1 billion tons of Pittsburgh No. 8 seam reserves.
CONSOL’s River and Dock Operations are included in the transaction. In 2012, the fleet of 21 towboats and 600 barges transported 19.3 million tons of coal and other commodities along the upper Ohio River system.
Aggregate value to be received totals approximately $3.5 billion. Consideration includes $850 million in cash to be paid at the closing and future payments expected to total nearly $184 million in value resulting from the retention of a royalty on select reserves, certain water treatment payments, and tolling fees at CONSOL’s Baltimore Terminal.
CONSOL Energy is also significantly de-levering its balance sheet through this disposition, with Murray Energy acquiring $2.4 billion of CONSOL balance sheet liabilities. This includes a $2.1 billion acquisition of other postretirement benefit plans (OPEB). Other acquired liabilities include $105 million of workers compensation, $61 million of coal workers’ pneumoconiosis (CWP), $13 million of long term disability, and $149 million of environmental.
Additionally, Murray Energy is acquiring CONSOL’s UMWA 1974 Pension Trust Obligations. A discussion of this obligation appears in CONSOL Energy’s 2012 SEC Form 10-K. CONSOL Energy, under contract with the UMWA, currently services the obligation through a $5.50 per hour contribution, or approximately $33 million per year. If this payment stream were to be capitalized, it would have a present value of approximately $941 million, assuming a discount rate of 4.02%.
CONSOL Energy expects to record approximately $1.3 billion of pre-tax gain on its fourth quarter 2013 financial statements as a result of the transaction, assuming the transaction closes by December 31. The transaction is expected to generate a cash tax benefit to CONSOL Energy. The purchase price is subject to a working capital adjustment.
This sale enhances CONSOL Energy’s ability to grow its gas production, enabling the company to extend its gas growth production targets beyond 2014. The 2014 gas production guidance range is 210 – 225 Bcfe, of which approximately 7 − 8% are expected to be liquids or condensates. For 2015 and 2016, the company expects 30% annual gas production growth.
“In advancing our E&P growth strategy, we expect that West Virginia will continue to play an important role,” continued Mr. Harvey. “We have a sizeable Marcellus Shale footprint in West Virginia, which will take a significant amount of labor and capital to develop.”
Also in conjunction with the sale, CONSOL Energy is realigning its dividend policy to reflect the company’s increased emphasis on growth. Beginning with the first declared quarterly dividend after the transaction closes, CONSOL Energy intends to pay a regular quarterly rate of $0.0625 per common share, for an annual rate of $0.25 per share.
As a separate action following the sale, CONSOL Energy expects to reduce its administrative expenses by approximately $65 million per year, the details of which are expected to be announced prior to closing.
CONSOL Energy is retaining coal assets that clearly align with the company’s long term strategic objectives. The company is keeping the Pennsylvania Operations, which include the Bailey, Enlow Fork, and soon-to-be-completed BMX mines. These low-cost mines, with five longwalls, and with estimated production of nearly 24 million tons in 2014, produce a high-Btu Pittsburgh-seam coal that is lower in sulfur than many Northern Appalachian coals. It can be sold domestically or abroad, as either thermal coal or high-vol coking coal.
The company is also retaining its flagship Buchanan Mine in southwestern Virginia. This longwall coal mine produces a premium low-vol coking coal for the steel industry. It typically produces 4-5 million tons per year at a cost that is probably the lowest of any domestic metallurgical coal mine.
The Miller Creek Mining Complex in southern West Virginia is also being retained, which is expected to produce about 2 million tons in 2014. After the transaction closes, CONSOL Energy will continue to have 3.1 billion tons of SEC 10-K coal reserves, including enough to support new mines in Northern Appalachia and the Illinois Basin.
With the retained mines and the 100%-owned Baltimore Terminal, CONSOL will continue to participate in the growth of the world’s thermal and metallurgical coal markets. Earlier this month the International Energy Agency (IEA) forecast meaningful continued growth in world demand for thermal coal. The ability to serve both domestic and international markets with premium thermal and metallurgical coal provides tremendous optionality.
Completion of the sale to the subsidiary of Murray Energy is subject to a number of conditions, including expiration of the Hart Scott Rodino Antitrust Improvements Act waiting period and other customary conditions. The closing of the transaction is not subject to a financing condition. The parties expect to close the transaction by year-end 2013.