CONSOL Energy (NYSE: CNX) has taken a transformative step by entering into an agreement to sell its unionized Consolidation Coal Co. (CCC) subsidiary, which contains all five of its longwall coal mines in West Virginia, to a subsidiary of Murray Energy for $3.5bn in value.
Murray Energy is an Ohio-based company founded by coal operator Robert Murray that already operates one unionized longwall mine in the Pittsburgh seam in northern Appalachia – Powhatan No. 6 in Ohio – and also a non-union Pittsburgh-seam longwall operation – Century in Ohio. The five CONSOL mines to be sold also work the Pittsburgh seam, so this mine sale marks a major shift in dominance of the Pittsburgh seam, a hugely important source of high-sulfur coal, to Murray Energy. This is of particular interest to the power companies that rely on this coal for their power plants.
CONSOL is retaining its massive, adjacent Bailey and Enlow Fork mines in southwest Pennsylvania, which also work the Pittsburgh seam. Both are non-union operations and each have two longwalls. What is essentially a third longwall for Bailey, the BMX project, is due for operation next year.
“While this transaction furthers CONSOL’s E&P growth strategy,” said 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 (which actually has two longwalls), Shoemaker, Robinson Run, Loveridge and Blacksville No. 2. 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.
U.S. Mine Safety and Health Administration data shows that Murray’s Century mine in Ohio produced 6.7 million tons in the first nine months of this year and 8.4 million tons in all of 2012. Murray’s Powhatan No. 6 mine produced 4.2 million tons in the first nine months of this year and 5.8 million tons in all of 2012. Add the 14.2 million tons of total 2012 production from those two mines to the 28.5 million tons of thermal coal figure given by CONSOL for the five mines it is selling to Murray and you get 42.7 million tons of production from the Pittsburgh seam that Murray would now control.
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 about $3.5bn. Consideration includes $850m in cash to be paid at the closing and future payments expected to total nearly $184m in value resulting from the retention of a royalty on select reserves, certain water treatment payments, and tolling fees at CONSOL’s Baltimore Terminal.
This deal takes a lot of negatives off the CONSOL balance sheet
CONSOL Energy is also significantly de-levering its balance sheet through this disposition, with Murray Energy acquiring $2.4bn of CONSOL balance sheet liabilities. This includes a $2.1bn acquisition of other postretirement benefit plans (OPEB). Other acquired liabilities include $105m of workers compensation, $61m of coal workers’ pneumoconiosis (CWP), $13m of long term disability, and $149m of environmental.
Additionally, Murray Energy is acquiring CONSOL’s UMWA 1974 Pension Trust Obligations. CONSOL Energy, under contract with the UMWA, currently services the obligation through a $5.50 per hour contribution, or approximately $33m per year. If this payment stream were to be capitalized, it would have a present value of about $941m, assuming a discount rate of 4.02%.
CONSOL Energy expects to record about $1.3bn of pre-tax gain on its fourth quarter 2013 financial statements as a result of the transaction, assuming the transaction closes by Dec. 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.
CONSOL retains some coal operations, including Miller Creek in W.Va.
CONSOL said it is retaining coal assets that clearly align with the company’s long term strategic objectives. It 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 longwall mine in southwestern Virginia, which works the Pocahontas seam. This mine produces a premium low-vol coking coal for the steel industry. It typically produces 4 million-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 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 said it 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.
Stifel, Nicolaus & Co. acted as primary financial advisor to CONSOL Energy. BofA Merrill Lynch was also a financial advisor. Greenberg Traurig LLP; Wachtell, Lipton, Rosen & Katz; Steptoe & Johnson PLLC; and Buchanan Ingersoll & Rooney PC acted as legal counsel.
Completion of the sale to a 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.