UPDATE 3-Consol to sell 5 W.Va. mines as coal regulations increase

Mon Oct 28, 2013 5:37pm EDT

By Ernest Scheyder

Oct 28 (Reuters) - Consol Energy Inc said on Monday it would sell five West Virginia coal mines to privately held Murray Energy Corp as it focuses more on the growth of its natural gas operations amid regulatory uncertainty for the coal industry.

Consol is selling the mines, which comprise roughly half its coal production, for $850 million cash, as well as $184 million in future royalty payments for its coal reserves.

Murray will also assume $2.4 billion of Consol's liabilities, mostly for worker pensions and other benefits.

Coal producers have come under increased regulatory pressure in the past five years from the Obama administration, making the industry unpopular on Wall Street.

"We are going to be an exploration and production company with a coal subsidiary," Consol Chief Financial Officer David Khani said on a conference call with investors, using the term for companies that produce natural gas.

As a privately held company, Murray will be able to focus on long-term returns for its mines rather than quarterly results and payouts to Wall Street. Murray currently operates eight coal mines.

The five mines being sold are some of Consol's oldest and most expensive, but produce a steady stream of coal. Consol, which was founded during the U.S. Civil War, said it would keep cheaper coal mines in Pennsylvania and Virginia and use cash from the sale to build out its natural gas operations.

The company has large holdings in the Marcellus and Utica natural gas fields in Pennsylvania and Ohio, and drills for natural gas underneath Pittsburgh International Airport.

It expects the deal with Murray to close by the end of the year.

"These mines do not support our growth strategy," Consol Chief Executive Officer J. Brett Harvey said on the conference call.

The deal will cut Consol's annual administrative expenses by $65 million, but will also lower income. Consol plans to reduce its annual dividend in half to 25 cents once the deal closes.

That did not sit well on Wall Street, where shares of Consol fell 1.4 percent to $37.60 in morning trading. (For a related BREAKINGVIEWS column, please click )

Consol primarily sells thermal coal, which is used to generate electricity, but also sells a small portion of higher-margin metallurgical coal, which is used to make steel.

With the U.S. shale gas revolution cutting the price of natural gas, U.S. power plants have been burning less coal, sharply denting demand and thermal coal prices. Meanwhile, a glut of steel in China and other fast-growing regions has eroded demand for metallurgical coal.

The threat of U.S. regulation has also discouraged coal generation.

The Obama administration last month announced regulations setting strict limits on the amount of carbon pollution that can be generated by any new U.S. power plant. The guidelines, which the coal industry has vowed to fight, would make it nearly impossible to build coal plants without using carbon emission-capturing technology that foes say is unproven and uneconomical.

NATURAL GAS POTENTIAL

Consol said the sale of the mines would give it time and cash to expand its natural gas production.

For 2014, the company expects to produce 210 billion to 225 billion cubic feet of natural gas. On Monday, Consol said it expected production to increase 30 percent each year.

"We have the assets if we want to take that number higher," said Khani, the CFO.

Stifel and Bank of America Corp advised Consol.

Goldman Sachs and Deutsche Bank are providing financing for Murray, which was one of 28 bidders for the mine assets.

Consol plans to release quarterly results on Tuesday.

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