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Consol Energy moves ahead with plan to spin off coal operations

PTRCONSOL04041714
Keith Hodan | Tribune-Review
Nicholas DeIuliis discusses his plans for heading the energy company, during an interview at the company's Southpointe headquarters, Wednesday, April 16, 2014.

Consol Energy Inc. on Wednesday gave investors a boost of confidence in its operations on a day that energy stocks took a beating.

The Cecil-based coal and natural gas producer said it will move ahead with plans to spin off its Pennsylvania coal mine operations into a separate investment vehicle it will control and possibly establish a subsidiary to run its metallurgical coal mine in Virginia while it focuses on gas drilling.

Consol’s board approved the moves, plus a $250 million stock repurchase program, on Wednesday. It also said Executive Chairman J. Brett Harvey is retiring as an employee of the company, but he will stay on as chairman of the board, a voluntary position.

Consol said the stock repurchase, to occur over two years, shows that it believes its shares have long-term value.

“It’s just part of the natural transition,” spokesman Brian Aiello said about Harvey’s move to retire six months after he stepped down as CEO. Nick DeIuliis, who replaced Harvey in May, will remain CEO.

DeIuliis oversaw the formation in September of a publicly traded, dividend-paying master limited partnership, or MLP, to operate natural gas gathering pipelines. The investment vehicle is attractive to investors because they offer high yields, low taxes and stability. The following month, he outlined plans for moving coal operations into an MLP. He identified Consol’s Bailey mine complex in Washington and Greene counties, which produce thermal coal for power plants, as an asset that could generate investment on their own.

Shares of Cone Midstream Partners MLP, which Consol formed with drilling partner Noble Energy in September, closed up $1.32 at $24.20. Its initial price was $22.

“The culmination of the structural moves completed in 2014 and anticipated for 2015 are intended to improve Consol’s valuation,” DeIuliis said. They will reduce risk to Consol’s gas exploration and production growth plan, he said.

“We continue to target … 30 percent year-over-year growth in 2015 and 2016,” DeIuliis said.

The actions were announced after the stock market closed. Consol shares closed down $1.14 at $34.96 as the energy markets were roiled by a continued drop in oil prices. They jumped 3 percent in after-hours trading.

The moves should provide more value for Consol’s coal and gas operations, said Neal Dingmann, an analyst with SunTrust in Houston. The MLP is a prudent move that would allow Consol to raise cash as a buffer to lower prices it’s getting for shale gas. “Your individual pieces are probably worth more than the sum of the parts,” he said.

Separating the coal and gas parts of Consol should generate money to reinvest in the gas business, Dingmann said.

Coal sales from the Bailey mine complex to power companies remain brisk, executives have said. The company has laid off workers and cut back production at the Buchanan mine in Virginia because of a weak market for metallurgical coal.

Harvey spent 16 years as CEO and took the company public in 1999.

He set Consol on its current course — a dual focus on coal mining and gas drilling. It began a foray into the Marcellus shale and sold off its older coal mines. Consol is the state’s 12th-biggest shale gas producer, but it still gets more than half of its revenue from coal.

In April, Harvey said he planned to remain on the board for about a year.

Michael Dudas, an analyst with Sterne Agee in New York, said Harvey’s retirement does not signal any change in direction for the coal and gas company.

“The transition from Harvey to DeIuliis has been well telegraphed and implemented logically and methodically by the board. This is the next step in the evolution,” Dudas said.

Staff writer Katelyn Ferral contributed to this report. David Conti is a staff writer for Trib Total Media. He can be reached at 412-388-5802 or [email protected].

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