CONSOL reports higher coal output; continued plans for coal MLP/IPO

Coal and gas producer CONSOL Energy (NYSE: CNX) reported Jan. 30 that its Coal Division produced 8.0 million tons in the 2014 fourth quarter, up from 7.1 million tons in the year-ago quarter.

In the Pennsylvania Operations, the Bailey longwall mine had a record year in 2014 and annual production was 12.3 million tons, which exceeded the mines previous annual production record of 11.1 million tons in 2005. In the Virginia Operations, CONSOL’s premier Buchanan longwall mine, again, repeated its stellar cost performance. Total costs per ton sold at Buchanan Mine were $53.96 per ton in the just-ended quarter, or a reduction of $12.64 per ton from the year-earlier quarter.

In the fourth quarter, CONSOL received $270m in cash proceeds from the sale of assets and return on equity investments, including $252m in cash proceeds from the sale of: an industrial supply subsidiary, coal reserves in the Illinois Basin to two strategic buyers, surface properties in Illinois, and a 50% working interest in 3,433 gross Utica Shale acres in the Moundsville, West Virginia area to a joint venture partner, Noble Energy.

In early December 2014, CONSOL announced its intent to pursue transactions for a Thermal Coal master limited partnership (MLP) and MetCo IPO. Since then, the company has hired advisers for the Thermal Coal MLP and expects timing to remain around mid-year 2015. The company expects the MetCo IPO, related to metallurgical coal properties, to occur around early fourth quarter 2015.

In its earnings slides, CONSOL identified these other coal assets for future sale:

  • Illinois Basin reserves/resources, Thermal, 1,082 MM tons
  • Fola/Birch/Canfield coal mines/reserves, Met/Thermal, 230 MM tons
  • Itmann coal mines/reserves, Metallurgical, 30 MM tons
  • Amonate coal mines/reserves, Metallurgical, 260 MM tons
  • Nordegg coal reserves, Metallurgical, 39 MM tons
  • Emery/Hidden Valley coal mine/reserves, Thermal, 30 MM tons
  • CNX Baltimore Terminal Transportation, 15 MM tons
  • Burning Star No. 5 surface property, Land, 8.3K acres

Coal Fourth Quarter Summary:

During the fourth quarter, CONSOL’s Coal Division produced 8.0 million tons, which was in-line with previous quarter’s guidance, despite a roof fall on a longwall at the Bailey Mine and continued geological conditions at the adjacent Enlow Fork longwall mine, which ultimately resulted in 10 days of reduced production. Both mines produce coal out of the Pittsburgh seam in southwest Pennsylvania.

The Bailey Mine produced 2.7 million tons in the fourth quarter, compared to 2.8 million tons produced in the year-earlier quarter. The Enlow Fork Mine produced 2.6 million tons in the fourth quarter, which is flat when compared to the year-earlier quarter. Despite difficult geological conditions, Enlow Fork managed to record total unit costs of $38.25 per ton, which is the lowest unit cost across the Coal Division. Enlow Fork’s 2014 annual production was 10.6 million tons. The neighboring Harvey longwall mine produced 1.1 million tons in the fourth quarter of 2014. The Harvey Mine started longwall operations in late March 2014, and CONSOL expects normal levels of longwall production moving forward.

The Buchanan Mine, which works the Pocahontas met coal seam in southwest Virginia, continued to operate on a reduced schedule of two shifts per day and produced 1.0 million tons during the fourth quarter, compared to 1.2 million tons produced in the year-earlier quarter. The reduced schedule allowed the mine to optimize its cost structure for decreased levels of production, which is reflected in much lower all-in unit costs during the fourth quarter 2014 of $53.96 per ton, compared to $66.60 per ton in the year-earlier quarter. The Buchanan Mine is able to quickly ramp up to the full production capacity rate of 5.0 million tons per year when market conditions warrant. During the quarter, and in conjunction with the reduced operating schedule, CONSOL has continued maintenance work on the production shaft, which is on-track for completion by late 2015, or early 2016.

Miller Creek’s Twin Branch Mine in southern West Virginia produced 0.5 million tons for the fourth quarter, which is a slight increase when compared to the year-earlier quarter.

During the quarter, CONSOL’s active coal operations generated $187m of cash before capital expenditures.

Coal Marketing Update:

Pennsylvania Operations:

 During the fourth quarter, CONSOL sold 6.5 million tons to 45 different end users. CONSOL’s customers continue to demonstrate a steady demand for coal through term contracts that vary in length. During the quarter, CONSOL contracted for 1.4 million additional tons for 2015, bringing the total firm and priced contracted position to 20.7 million tons, or 80% of estimated sales volumes based on the midpoint of guidance.

For 2015, Pennsylvania Operations coal was committed and priced attractively under term or spot contracts. During the quarter, CONSOL contracted for 1.0 million additional tons for 2016, bringing the total firm and priced contracted position to 11.8 million tons, or 46% of expected sales volumes based on the midpoint of guidance. CONSOL’s contracted strategy allows the company to hedge against the dynamics and potential downside of the market.

In the fourth quarter, CONSOL exported 0.2 million tons of Bailey high-vol coal to existing end users in Korea and Brazil. In 2014, CONSOL retained a footprint in the high-vol market shipping a total of 1.3 million tons. Worldwide customers continue to demand Bailey coal, and the versatility of the coal allows it to compete as high-vol metallurgical, PCI and high-BTU thermal product.

Virginia Operations:

 In the fourth quarter, CONSOL sold 1.1 million tons of Buchanan low-vol coal. Buchanan’s low unit costs allow the mine to compete, and remain profitable, in the current domestic and worldwide metallurgical markets. In 2014, CONSOL added 11 new end users in 8 countries to its already strong portfolio. Buchanan will continue to prosper as additional supply cuts are announced and the market recovers. During the quarter, CONSOL contracted for 0.6 million additional tons for 2015 and expects strong demand in the first quarter of 2015, as well as subsequent quarters. During the fourth quarter, Virginia Operations sales exceeded previous guidance by around 200 thousand tons due to CONSOL expanding into new markets and growing its base of end users. The company believes that these new sales opportunities are ongoing and are now reflecting in sales guidance for Virginia Operations.

Other:

In the fourth quarter, CONSOL sold 0.5 million tons of Miller Creek coal, which is flat when compared to the year-earlier quarter. During the quarter, CONSOL contracted for 0.75 million additional tons for 2015 and for 2016 bringing the total firm and priced contracted position to 1.9 million tons for 2015, or 93% of estimated sales volumes based on the midpoint of guidance, and 0.85 million tons for 2016, or 41% of estimated sales volumes based on the midpoint of guidance.

















COAL DIVISION GUIDANCE (millions of tons)

                 
   

Q1 2015

 

2015

   

2016

 

     Est. Total Coal Sales

 

8.0 – 8.5

   

30.5 – 33.0

   

30.5 – 33.0

 

       Tonnage: Firm

 

7.3

   

24.2

   

13.4

 

       Price: Sold (firm)

 

$

62.24

   

$

63.06

   

$

63.12

 

     Est. PA Operations Sales

 

6.6 – 6.8

   

24.9 – 26.6

   

24.9 – 26.6

 

       Tonnage: Firm

 

5.9

   

20.7

   

11.8

 

     Est. VA Operations Sales

 

1.0 – 1.2

   

3.7 – 4.2

   

3.7 – 4.2

 

       Tonnage: Firm

 

0.9

   

1.6

   

0.8

 

     Est. Other Sales

 

0.4 – 0.5

   

1.9 – 2.2

   

1.9 – 2.2

 

       Tonnage: Firm

 

0.5

   

1.9

   

0.8

 
                         

Note: While most of the data in the table are single point estimates, the inherent uncertainty of markets and mining operations means that investors should consider a reasonable range around these estimates. CONSOL has chosen not to forecast prices for open tonnage due to ongoing customer negotiations. Firm tonnage is tonnage that is both sold and priced, and excludes collared tons. CONSOL Energy has sold additional coal volumes that are not yet priced. Those volumes are excluded from this table. There are no collared tons in 2015. Collared tons in 2016 are 0.9 million tons, with a ceiling of $61.46 per ton and a floor of $57.54 per ton. Not included in the category breakdowns are the tons from Western Allegheny Energy (WAE) in Pennsylvania. WAE has 0.1 million tons for Q1 2015, and 0.5 million tons and 0.4 million tons for all of 2015, and 2016, respectively.

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.