CNX Coal Resources LP, to be partially spun off from Pittsburgh-based CONSOL Energy (NYSE: CNX), is a growth-oriented master limited partnership recently formed by CONSOL Energy to manage and further develop all of its active thermal coal operations in Pennsylvania.
Said the CNX Coal initial prospectus filed with the SEC on April 1: “Our initial assets include a 20% undivided interest in, and operational control over, CONSOL Energy’s Pennsylvania mining complex, which consists of three underground mines and related infrastructure that produce high-Btu bituminous thermal coal that is sold primarily to electric utilities in the eastern United States, our core market. Since 2006, CONSOL Energy has invested over $2.0 billion at the Pennsylvania mining complex to develop technologically advanced, large-scale longwall mining operations that enable us to efficiently mine large volumes of coal with low operating costs, high reliability and strong safety and environmental compliance.”
The prospectus indicated that over time, CNX Coal may acquire the other 80% of itself from CONSOL Energy.
The Pennsylvania mining complex, which includes the Bailey mine, the Enlow Fork mine and the newly opened Harvey mine, has extensive high-quality coal reserves. These mines work the Pittsburgh No. 8 coal seam, which is a large contiguous formation of uniform, high-Btu thermal coal that is ideal for high productivity, low-cost longwall operations.
As of Dec. 31, 2014, the Pennsylvania mining complex included 785.6 million tons (157.1 million tons net to CNX Coal’s 20% interest on a pro forma basis) of proven and probable coal reserves with an average gross heat content of approximately 13,000 Btu/lb and an average sulfur content of 2.38%. Based on current production capacity, these reserves would support over 27 years of production. This coal can be burned in power plants. In addition, all of these reserves exhibit thermoplastic behavior suitable for cokemaking and contain an average of approximately 39% volatile matter (on a dry basis), which enables the company, if market dynamics are favorable, to capture greater margins from selling coal in the metallurgical market to cokemakers and steel manufacturers.
All three of these mines utilize longwall mining, which is a highly automated underground mining technique that produces large volumes of coal at lower costs compared to other underground mining methods. CNX currently operates five longwalls and 18 continuous mining sections. The current production capacity of the complex’s five longwalls is 28.5 million tons of coal per year, and it produced approximately 26.1 million tons of coal in 2014. CNX also recently upgraded its preparation plant, which is connected via conveyor belts to each of the mines, to clean and process up to 8,200 tons of coal per hour. Onsite logistics infrastructure at the preparation plant includes a new dual-batch train loadout facility capable of loading up to 9,000 tons of coal per hour and 19.3 miles of track linked to separate Class I rail lines owned by Norfolk Southern and CSX Transportation, which enables it to simultaneously accommodate multiple unit trains and significantly increases efficiency in meeting customers’ transportation needs.
Current operations include two longwalls at the Bailey mine, two longwalls at Enlow Fork and one longwall at Harvey. “Unless we determine to add an additional permanent longwall mining system at the Harvey mine in the future in order to expand the production capacity of the Pennsylvania mining complex, we generally expect to run five longwall mining systems five days per week under normal operations,” said the company. “We also have the flexibility and spare equipment to run an additional longwall mining system at both the Bailey mine and the Enlow Fork mine. Therefore, to the extent sales exceed our normal operating capacity, we may, from time to time, temporarily run an additional longwall mining system at the Bailey mine and/or the Enlow Fork mine to increase our production to meet our forecasted sales commitments. In addition, we may, from time to time to meet our forecasted sales commitments, (i) run weekend shifts at one or more of our mines to increase our production or (ii) reduce work schedules or idle one or more of our mines to decrease our production.”
The Harvey mine’s existing infrastructure, including its bottom development, slope belt and material handling system, is able to support an additional permanent longwall system with moderate additional capital investment in mining equipment. The potential future production capacity of the Pennsylvania complex consistently running six longwalls would be 33 million tons per year (with current recoverable reserves sufficient to support over 23 years of production) compared to its current production capacity of 28.5 million tons per year running five longwalls under normal operations.
In some other points of note scattered through the prospectus:
- “Coal revenue was $323 million for the year ended December 31, 2014 compared to $271 million for the year ended December 31, 2013. The $52 million increase was attributable to 1.0 million additional tons sold during 2014 partially offset by a $2.05 per ton lower average sales price. The lower average coal sales price in the 2014 period was the result of the roll-off of some higher-priced legacy sales contracts. Revenue was also impacted by 0.7 million tons of coal being priced in the export market for the year ended December 31, 2014, which was 0.2 million tons lower than the tons priced in the export market for the year ended December 31, 2013. Higher sales volumes were the result of market demand and the commissioning of the Harvey mine in March 2014.”
- “For the year ended December 31, 2014, the total capital expenditures of our Predecessor were $68 million compared to capital expenditures of $82 million for the year ended December 31, 2013. The 2014 capital expenditures included $6 million for the Bailey mine, $11 million for the Enlow Fork mine, $39 million for the Harvey mine, $8 million related to the preparation plant and $4 million related to land and other projects. The Bailey mine and Enlow Fork mine expenditures were for equipment and infrastructure. The Harvey mine expenditures were primarily for new mine development. The preparation plant projects were related to water treatment and refuse disposal areas.”
- “We intend to evaluate opportunities to acquire strategic and economically attractive coal reserves and mining operations from third parties in order to extend the life of our coal reserves and grow our distributable cash flow. We intend to prudently and selectively pursue undeveloped reserves that are adjacent to the Pennsylvania mining complex, as well as active mining operations that are complementary to our existing operations. Through our relationship with CONSOL Energy, we expect that we will have access to its significant pool of management talent and industry relationships, which we believe will provide us a competitive advantage in pursuing potential third-party acquisition opportunities. We may have the opportunity to work jointly with CONSOL Energy to pursue certain acquisitions of coal properties that may not otherwise be attractive acquisition candidates for either of us individually.”