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CONSOL Divests $3.5B in Coal Assets

Zacks Equity Research

CONSOL Energy Inc. (CNX) completed the sale of its Consolidation Coal Company (CCC) subsidiary to an unit of Murray Energy Corporation for $3.5 billion. The divestiture was announced in late October this year.

The divestment was intended to intensify focus on achieving gas production targets of 210–225 Bcfe for 2014 and gas production growth of 30% annually in 2015 and 2016.

The assets of the CCC subsidiary include five longwall coal mines – McElroy, Shoemaker, Robinson Run, Loveridge and Blacksville No. 2 mines – in West Virginia that produced a combined 28.5 million tons of thermal coal in 2012. In addition, the company will also sell its river and dock operations with a fleet of 600 barges and 21 towboats.

The sales consideration comprises $850 million cash and Murray Energy assuming $2.4 billion of CONSOL’s liabilities.  Additionally, nearly $184 million is expected as future payment from the retention of a royalty on select reserves and tolling fees at CONSOL Energy's Baltimore Terminal.

Murray Energy is also assuming CONSOL's UMWA 1974 Pension Trust obligations worth approximately $941 million at present. The transaction, in a way, has also helped CONSOL deleverage its balance sheet.

The transaction also includes CONSOL guarantying some of the commercial liabilities acquired by Murray Energy or will become the direct payee of Murray Energy for future payments, though for a transitional period. However, it will not impact CONSOL materially.

Due to the divestiture, CONSOL expects to record a pre-tax gain of about $1.3 billion along with a cash tax-benefit. Moreover, the company expects to lower its administrative expenses by $65 million annually, favorably impacting margin expansion.

CONSOL also expects to pay regular dividend effective from the first quarter of 2014 at a quarterly rate of 6.25 cents per share. The annualized rate implies a yield of 0.7% based on yesterday’s closing price. The company seeks to better align its dividend policy reflecting its growth strategy, though the yield still lags the industry average substantially.

Arch Coal Inc. (ACI), another player from the same industry closed the sale of its Canyon Fuel subsidiary on August for net cash proceeds of $423 million. The assets included Sufco and Skyline longwall mines and the Dugout Canyon continuous miner operation as well as a total of 105 million tons of coal reserves in Utah.

CONSOL presently carries a Zacks Rank #3 (Hold). However, some better-ranked coal stocks include Alpha Natural Resources, Inc. (ANR) and Suncoke Energy Partners, L.P. (SXCP). Both the stocks carry a Zacks Rank #2 (Buy).

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