Coal producer CONSOL Energy Inc. (CNX) agreed to buy the Appalachian exploration and production business of Dominion Resources Inc. (D) for $3.475 billion in cash. This acquisition will substantially increase CONSOL’s natural gas reserves and production capacity – further enhancing its position as a leading diversified energy company with a balanced portfolio of coal and natural gas.

The acquisition makes CONSOL Energy the largest and among the fastest growing and lowest cost producers of natural gas in the Appalachian basin. It will gain a leading position in the strategic Marcellus Shale fairway as its development assets triple to approximately 750,000 acres with the addition of Dominion’s approximately 500,000 Marcellus Shale acres in Pennsylvania and West Virginia.

Since 2005, CONSOL Energy expects to double its annual gas production to 100 Bcf in 2010. This acquisition will further accelerate that trend with the addition of the extremely attractive resource-rich, low-cost Marcellus Shale assets. Two compelling aspects of this transaction are that 98% of Dominion’s Marcellus acres are held by production and the average net revenue interest is 87.5%.

With this acquisition, CONSOL will increase its total proved gas reserves by more than 50% to roughly 3 trillion cubic feet and double its potential gas resource base to 41 trillion cubic feet. 

CONSOL Energy will acquire a total of 1.46 million oil and gas acres from Dominion along with over 9,000 producing wells that are expected to produce more than 41 Bcfe in 2010.
Upon completion of the transaction, CONSOL Energy’s natural gas business is expected to account for as much as 35% of its total revenue.

The company expects to raise approximately $4.0 billion and is targeting a balanced mix of equity and debt to fund the acquisition and development of the acquired acreage.  Following the transaction, CONSOL Energy will maintain its strong balance sheet and liquidity position.  The transaction is expected to close by April 30, 2010, subject to regulatory approvals and customary closing conditions.

Impact of Sale on Dominion

Dominion’s decision to sell its E&P business came as a result of its previously-announced plan to monetize the Marcellus acreage. Dominion’s regulated businesses are now expected to contribute about 70% of consolidated operating earnings in 2011, up from less than 45% in 2006. 

Exiting the E&P business will enhance the visibility of Dominion’s core natural gas pipeline and storage businesses. The company expects to reduce its on-going capital expenditures by approximately $200 million per year. The company also affirmed its 2010 operating earnings guidance of $3.20 to $3.40 per share.


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