NEW YORK ( TheStreet) -- Pittsburgh coal and natural gas producer Consol Energy (CNX - Get Report) said Monday it agreed to sell its Consolidation Coal unit, including five coal mines in West Virginia, to privately held Murray Energy for $3.5 billion in an effort to focus on its gas business in the Marcellus Shale, among other locations.
The price includes $850 million in cash, $184 million in future payments - from royalties, water treatment plants and tolling fees at its Baltimore coal export terminal - and $2.4 billion in assumed liabilities, the biggest being $2.1 billion in postretirement benefit plans. Consol expects to book a $1.3 billion pre-tax gain in its fourth quarter from the sale if it closes by year-end.
While the company also is cutting its dividend in half, it expects to use the cash toward its natural gas development projects, with a 30% production growth goal for 2015 and 2016 from the 23% to 32% orginally targeted for next year. Consol expects its gas production to reach 210 billion to 225 billion cubic feet equivalent, 7% to 8% of which will be higher-value liquids or condensates.
"While this transaction furthers Consol's E&P growth strategy, 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," Consol chairman and CEO J. Brett Harvey said in a statement. "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."On a conference call with analysts and investors, management said the sale had been in the works for about six months and that the company had reached out to 28 bidders, including international and U.S. companies and private equity firms. But Consol management said Clairsville, Ohio-based Murray ended up being the clear winner, primarily because of the assumption of liabilities, even though others offered more or all cash, including one that, at the last minute, was trying to trump Murray's bid. Management said the company has two other asset packages on the block that are close to completion, all non-core natural gas assets, and may consider others. It also may split its natural gas and its remaining coal assets into separate companies and is looking at spinning its pipeline business into a master limited partnership. Analysts at Simmons & Co. International said the announcement didn't come as a surprise, as the company had indicated it didn't believe it was receiving full value for the coal assets in its stock price, and is a positive for streamlining the company. "Some investors may be disappointed in the magnitude of the cash portion of the transaction," they said. "However, we believe it is critical to include the legacy liability payments in the transaction value and the divestiture seems to screen attractively at first glance when including those payments." As for the valuation, Simmons says the price works out to 9.2 times next year's expected Ebitda of $377 million, using the liability capitalization method and excluding the United Mine Workers of America 1974 pension trust liabilities. Using Ebitda of $410 million, which includes the pension liabilities, the deal is valued at 10.7 times next year's Ebitda. "These compare favorably to recent transactions," the analysts said. Excluding the value of the legacy liabilities, the transaction was accomplished at 2.7 times the $377 million in expected Ebitda and 2.5 times the expected $410 million in Ebitda. Using only the $213 million in Ebitda and the $1.034 billion in cash and royalty receipts, the transaction was done at 4.9 times. The mines include the McElroy, which produced 7.1 million tons year-to-date, the Shoemaker (4.1 million tons), the Robinson Run (4.2 million tons), the Loveridge (4.1 million tons) and the Blacksville No. 2 (2.1 million tons). Simmons notes the Blacksville mine was affected by a fire and produced 4.3 million tons in 2011 and 3.2 million tons in 2012. Collectively, the mines produced 28.5 million tons of thermal coal last year, Consol said. The divested production makes up about 51% of Consol's production, which totals 42.5 million. The reserves amount to 1.1 billion. 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. Consol will lose $213 million in Ebitda next year as a result of the sale, or between $377 million and $410 million in Ebitda including employee and environmental liabilities. The liabilities Murray is assuming include $105 million of workers compensation, $61 million of coal workers' pneumoconiosis, $13 million of long term disability and $149 million of environmental. Murray is acquiring Consol's UMWA 1974 Pension Trust Obligations. Consol said it services the obligations through a $5.50 per hour contribution, or $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 said. Consol is keeping its Pennsylvania operations, including the Bailey/Enlow Fork complex and the BMX mine, which is expected to start up at the end of the first quarter of next year. It's also keeping the low-volatile Buchanan longwall mine in southwestern Virginia, which supplies the steel industry with 4 million to 5 million tons per year at low cost, the Miller Creek complex in southern Virgniia, which is expected to produce 2 million tons this year, and the Baltimore terminal assets. "We've kept the jewels and the jewels will continue to perform," Harvey said on the call. John Bridges, an analyst at JP Morgan, applauded the sale of the coal assets, saying it was like having "a bank on the backside of the gas grill." After the transaction closes, Consol said it will continue to have 3.1 billion tons of coal reserves, including enough to support new mines in Northern Appalachia and the Illinois Basin.After closing, Consol also expects to cut administrative costs by $65 million per year. Stifel, Nicolaus & Co. Inc.'s Pat Keeley was Consol's primary financial adviser while BofA Merrill Lynch assisted. Legal counsel included Greenberg Traurig LLP's David Gitlin and Robert Goldich, Wachtell, Lipton, Rosen & Katz's David Katz, Joseph Larson, Nathanial Asker, Adam Shapiro, Eric Rosof and Deborah Paul, Steptoe & Johnson PLLC and Buchanan Ingersoll & Rooney PC. Deutsche Bank advised Murray and Deutsche Bank and Goldman Sachs & Co. are providing financing for the deal. Kirkland & Ellis LLP's William Sorabella, Daniel Michaels, Ashley Gregory, Christian Nagler, Adi Herman and Dylan Hanson are counseling Murray
--By Claire Poole in Houston
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