Regional utilities controlled by FirstEnergy (NYSE: FE) and American Electric Power (NYSE: AEP) now have a new dominant supplier of Pittsburgh-seam coal to their power plants – Ohio-based Murray Energy.
CONSOL Energy (NYSE: CNX) announced Dec. 5 that it has closed on its previously announced agreement to sell its unionized Consolidation Coal Co. (CCC) subsidiary, which includes all five of its longwall coal mines in northern West Virginia, to a subsidiary of Murray Energy for $3.5bn in value. The transaction was originally announced on Oct. 28.
“The completion of this complex transaction this year,” said J. Brett Harvey, chairman and CEO of CONSOL, “enables us to enter 2014 with our focus of achieving our gas growth production targets of 210–225 Bcfe for 2014 and 30% annual gas production growth in 2015 and 2016.”
The total consideration paid in the transaction includes $850m in cash paid at the closing and future payments expected to total nearly $184m in value resulting from the retention of a royalty on select reserves and tolling fees at CONSOL’s Baltimore Terminal, a rail-to-ship coal export facility.
CONSOL Energy is also significantly de-levering its balance sheet in the transaction, with Murray Energy acquiring $2.4bn of CONSOL balance sheet liabilities. Murray Energy is also acquiring CONSOL’s United Mine Workers of America (UMWA) union 1974 Pension Trust obligations, which have a present value of about $941m. The cash purchase price is subject to a working capital adjustment, which is expected to be immaterial.
In connection with the closing of the transaction, for a transitional period CONSOL Energy will either guaranty certain of the commercial liabilities being assumed by Murray Energy in the transaction or will become the direct payee of Murray Energy for future payments. The value of the guaranties which CONSOL will recognize in its financial statements is not expected to be material to the results of operations or the financial condition of CONSOL Energy.
This deal makes Murray Energy the dominant producer of Pittsburgh-seam coal, with CONSOL giving up that long-held position. It has retained the non-union Bailey and Enlow Fork longwall mines in that seam in southwest Pennsylvania. The BMX project, which is essentially a third longwall for Bailey, is being added and is due for operation next year. So CONSOL’s production out of that seam will still top 20 million tons per year.
Murray, in the meantime, already owned the Powhatan No. 6 and Century longwall mines in Ohio, with Century in the process of getting a second longwall. Those mines also work the high-sulfur Pittsburgh seam, which due to various qualities like high-Btu content and ease of mining with a longwall, is the dominant coal seam in Northern Appalachia. The five ex-CONSOL mines now shift dominance of production from that seam to Murray Energy, controlled by coal operator Robert Murray.
Major customers for the ex-CONSOL mines include various utilities and merchant generation arms of the major utility companies, including FirstEnergy’s Monongahela Power subsidiary. The Robinson Run mine is right next to FirstEnergy’s Harrison power plant, while McElroy and Shoemaker are near AEP’s Mitchell power plant.
This sale deal included the McElroy, Shoemaker, Blacksville, Loveridge, and Robinson Run longwall mining complexes in West Virginia, certain coal reserves, related river transportation and dock facilities, and other assets. Collectively, these five mines produced 28.5 million tons of thermal coal in 2012.
Murray Energy before this deal operated six underground longwall mining systems and 23 continuous mining units at mines in Utah, Illinois, Kentucky and Ohio. For the past few years it has been working on permits for a brand-new longwall mine in the Pittsburgh seam in Harrison County, W.Va., and is nearing final permit approval on that project.
Consolidation Coal operates an equal number of longwalls (six) and CMs (23). McElroy has two longwalls, while the other four mines have one apiece.
This deal nearly doubles Murray’s annual coal production, from 30.1 million tons per year to 58.6 million tons per year, based on mine production rates as of June 30 of this year.