Consol Energy Inc. has put in a bid to roll up CNX Gas Corp., which holds rights to drill for coalbed methane and in other formations in Consol's Appalachian coalfields and elsewhere. The offer is entirely for Consol stock. A roughly 20% stake in CNX was offered in a 144a in 2005, and the shares began trading in January 2006. Consol says it wants to roll up CNX to bring natural gas into its portfolio, balancing its coal business, as it expects carbon-constraint energy policy to put pressure on the coal business. Analysts and investors believe CNX stock is worth more (approx. $35) than Consol's offer (0.4425 Consol share per CNX share). CNX holds drilling rights to acreage prospective for Marcellus and Chattanooga shale gas. Meanwhile, CNX's CFO has resigned and Consol is handling CNX's books for now. A special CNX committee to evaluate the Consol offer is being advised by UBS. Here's a look into Consol's credit quality and financials, according to analysts with DBRS. --Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, DBRS Confirms CONSOL Energy Inc. at BB DBRS has today confirmed the rating for CONSOL Energy Inc. (Consol or the Company) at BB with a Stable trend. The Company’s business profile and financial profile are still commensurate with the assigned rating, despite the fact that its 2007 financial performance was slightly weaker than expected and its balance sheet is anticipated to weaken in the near term due to high capex spending. Although Consol’s earnings in 2007 were lower than in the same period last year, earnings are still above historical norms. Earnings were primarily impacted by (1) lower production volumes and high costs due to the roof collapse in the Buchanan mine (resulting in temporary closure since July 2007), and (2) higher labour, maintenance and supply costs. DBRS notes that the impact on earnings was partially offset by higher coal and gas prices. DBRS expects earnings to improve in the near to medium term. Volumes are expected to increase with the 2007 purchase of additional coal reserves via the acquisition of AMVEST Corporation (AMVEST) and with the Buchanan mine restart (expected in March 2008). The financial impact of the roof collapse may be further reduced through additional potential insurance payments during 2008. Coal and gas prices are expected stay strong and even increase on the back of strong supply and demand fundamentals and as such, Consol should benefit from these prices with respect to its unpriced volumes in 2009 and 2010. In the near to medium term, profitability should be enhanced as greater efficiencies are realized from capex expenditures. The Company experienced negative free cash flows during 2007 due to high capex spending related to operation expansions and efficiency improvements. DBRS expects this trend to continue in the near term in light of the proposed capex program of $1 billion in 2008. To fund negative free cash flows, Consol will most likely raise additional debt; this may be tempered by the sale of non-core assets. DBRS notes that the increase in debt levels will still be in line with the rating. During 2007, Consol sold assets for a realized gain of $100 million. Consol has strong credit metrics (its debt-to-capital ratio is at 41%, cash flow-to-total debt at 0.56 and EBITDA interest coverage greater than 14 times at December 31, 2007). Despite this, DBRS is concerned that the Company has generated negative gross free cash flows during 2007 and is expected to continue to do so in the near term due to high capex requirements. In addition, there are concerns related to operational difficulties that Consol has experienced – for example, there have been significant issues related to the Buchanan mine in both 2007 (roof collapse) and 2005 (mine fire and a skip hoist mechanism). DBRS does expect that in the medium to long-term Consol will generate positive gross free cash flows (resulting in debt reduction) as earnings grow and capex requirements moderate, once expansion plans are completed. Supporting the rating is Consol’s solid business profile as the third largest coal producer in the United States, behind Peabody Energy Corporation and Arch Coal Inc., with coal reserves sufficient for over 50 years of production at current rates. --Isha Aggarwal, DBRS, Assistant Vice President - Mining --Robert Mantse, DBRS, Senior Vice President - Mining