Consol Energy Inc. will make an offer for all of the outstanding shares of independent producer CNX Gas Corp. in a stock-for-stock deal valued at approximately $932 million, the company said last Tuesday. Coal producer Consol, which already owns approximately 81.7% of CNX's 151 million shares, said it was making the offer to diversify its energy mix.

Consol said it will offer CNX stockholders 0.4425 shares of Consol Energy common stock for each outstanding share of CNX common stock, the equivalent of $33.70 per share, or a 12% premium, based upon CNX's closing price last Monday.

Consol's offer will be made directly to CNX stockholders and will not be conditioned upon any requirement for recommendation of its offer by CNX's independent directors. The offer will be conditioned upon the tender of a majority of the outstanding CNX shares and other conditions. Consol said it "does not intend to take any retributive action" if its offer is unsuccessful.

CNX said its board of directors has formed a special committee of independent directors, consisting of Philip W. Baxter and John R. Pipski, to evaluate Consol's offer. The special committee has retained Skadden, Arps, Slate, Meagher & Flom LLP as its legal counsel and UBS Investment Bank as its exclusive financial adviser.

"If Consol Energy does commence the exchange offer, then within 10 business days following such commencement CNX Gas will advise its stockholders of its position regarding the exchange offer as determined by the special committee," CNX said. "CNX Gas requests its stockholders to defer making a determination whether to accept or reject the exchange offer until they have been advised of the position of the CNX Gas special committee with respect to the exchange offer."

If the deal goes through, Consol intends to effect a "short form" merger of CNX Gas with a subsidiary of Consol Energy.

With carbon constraints expected to become part of U.S. energy regulation over the next 10 years, Consol expects to benefit from the addition of CNX's gas assets to its mix, said Consol CEO J. Brett Harvey. But Consol expects its coal portfolio to perform well during the transition period when the impacts of carbon constraints begin to be felt, he said.

"We have always believed that a diversified energy portfolio of coal and gas, which combined account for two-thirds of fuel for U.S. electricity generation, is a winning combination," Harvey said.

Consol intends to file its exchange offer and related documentation with the Securities and Exchange Commission soon and expects to complete the transaction by midyear, Harvey said.

Pittsburgh-based Consol has 17 bituminous coal mining complexes in six states and reports proven and probable coal reserves of 4.5 billion tons. In an earnings report Tuesday, Consol reported 4Q2007 net income of $6.8 million (4 cents/share), down from $115.3 million (62 cents/share) in 4Q2006. The downturn was blamed in large part on idle production and expenses due to a roof failure at the Buchanan Mine in southwest Virginia.

Consol is a member of the FutureGen Industrial Alliance, a nonprofit organization representing some of the world's largest coal companies and electric utilities, which, in partnership with the U.S. Department of Energy, is designing and building a clean coal project in Mattoon, IL.

CNX, also based in Pittsburgh, is an independent natural gas exploration, development, production and gathering company operating in the Appalachian and Illinois basins.

Consol's announcement came just days after CNX said it planned to use the bulk of its 2008 capital budget to target natural gas deposits in the Marcellus, Huron, Chattanooga and New Albany shales, as well as the Trenton Black River this year (see NGI, Jan. 28). In the Marcellus Shale, CNX has a leasehold that includes about 161,000 acres. In Kentucky and Virginia's Huron Shale CNX holds another 193,000 acre-leasehold. Tennessee's Chattanooga Shale holdings number about 132,000 acres, and in the New Albany Shale play, which extends into Kentucky, Indiana and Illinois, CNX has about 300,000 acres.

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