CONSOL Energy eyes MLP structure for its thermal coal operations

CONSOL Energy (NYSE: CNX) officials said during an Oct. 28 earnings call that a master limited partnership (MLP) for the company’s thermal coal mining operations is in the works.

David Khani, CONSOL’s Chief Financial Officer and Executive Vice President, said in comments that followed up on a statement from Nick DeIuliis, President and CEO: “Now Nick mentioned that we are assessing different structural opportunities for CONSOL Energy. Let me provide a little color. When we look at our strong cash flows generated by our thermal coal operations, especially as we are able to contract those tons over a longer term, we see the opportunity for a thermal coal MLP. On the met coal side, we are looking at various structures to capitalize on the potential rebound in the met market, our low-cost position and strong management team. At this point, we are now evaluating feasibility and structure of these transactions. We do not have board approval, but we did want to give you a sense of what we are looking at. Our teams have gone at depth of these type of transactions, and we expect to announce the direction before the year ends and with an eye of executing in 2015.”

CONSOL in the last couple of years has divested various coal mining assets as it focuses on its lowest-cost coal mines and its growing natural gas production business. Late last year it sold several Pittsburgh-seam longwall mines in northern West Virginia to Murray Energy. Remaining assets are primarily the Baily, Enlow Fork and Harvey (formerly known as BMX) longwall mines in the Pittsburgh seam in southwest Pennsylvania, and the Buchanan longwall mine in the Pocahontas seam in southwest Virginia. Buchanan is mainly a low-vol met coal mine, but has sold thermal coal. The Bailey, Enlow Fork and Harvey mines mainly produce thermal coal, but can produce a washed, high-vol met coal. So coming up with some kind of structure that separates the thermal and met coal assets can be tricky, since they are so intertwined.

DeIuliis said during the earnings call about operations in the third quarter: “On the Pennsylvania operations side, our three coal mine, five longwall complex fought through some sticky, lingering geological issues at Enlow Fork to deliver on our production targets for the quarter. And despite those conditions that we fought through, thermal year-to-date cash costs are lower than those for the same period 2013. It’s a good sign of continuous improvement. Our marketing effort for our Bailey coal brand is unfolding just as we strategically envisioned. We are out there tactically executing term business with must-run power plants that are in our core market regions for the next three years. So as an example, since our last earnings call, we’ve executed three major coal deals with critical must-run power plants.

“And since we are rapidly selling out the 2015 Bailey portfolio, we’re going to place the tons we have left to sell with customers that place their value on the quality, on the reliability, on the service that we provide. Customers, basically, that we are strategically aligned with for the long term.

“On the met side, at our Buchanan complex, we continue to drive down unit cost despite decreasing production volumes in a very difficult market environment. Third quarter saw the Buchanan complex post all-in costs that nearly broke below the $60 per ton threshold, and that was done at a reduced production level. Buchanan remains an earnings and cash flow contributor while we’re riding out that market trough. And most importantly, we’re poised and prepared to return Buchanan to its historical production levels when that market rebounds. That’s the advantage of being a low-cost producer.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.