CONSOL Energy (NYSE: CNX) announced April 1 that its subsidiary, CNX Coal Resources LP, filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission for the initial public offering of common units representing limited partner interests.
CNX Coal Resources’ initial assets are expected to consist of a 20% undivided interest in, and operational control over, CONSOL Energy’s Pennsylvania mining complex, which consists of three underground mines (the Bailey, Enlow Fork and Harvey longwall mines in the Pittsburgh coal seam in Northern Appalachia) and related infrastructure. All three mines feed into a common prep plant.
The number of common units to be offered and the price range for the offering have not been determined. The offering is expected to be completed in mid 2015. CNX Coal Resources intends to apply to list the common units on the New York Stock Exchange under the symbol “CNXC.” A registration statement relating to the common units of CNX Coal Resources has been filed with the SEC but has not yet become effective.
BofA Merrill Lynch and Wells Fargo Securities will act as book-running managers of the offering.
CONSOL Energy is a Pittsburgh-based producer of natural gas and coal. The company is one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian Basin. In late 2013, it sharply reduced its coal presence by selling several unionized Pittsburgh-seam longwall mines in northern West Virginia to Murray Energy.
Following the completion of this offering, CONSOL Energy will continue to own an 80% undivided interest in the Pennsylvania mining complex, as well as 100% of the general partner and, indirectly through the general partner, a 2% general partner interest and incentive distribution rights. CNX Coal expects to make accretive acquisitions of additional undivided interests in the Pennsylvania mining complex from CONSOL Energy over time to increase its distributable cash flow per unit. In connection with the completion of this offering, CONSOL Energy will grant it a right of first offer to acquire its retained 80% undivided interest in the Pennsylvania mining complex.
CNX Coal will be based on three modern, highly-productive mines
Said the S-1 statement: “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. We mine our reserves from 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 December 31, 2014, the Pennsylvania mining complex included 785.6 million tons (157.1 million tons net to our 20% interest on a pro forma basis) of proven and probable coal reserves with an average gross heat content of approximately 13,000 Btus per pound and an average sulfur content of 2.38%. Based on our current production capacity, these reserves are sufficient to support over 27 years of production. In addition, all of our reserves exhibit thermoplastic behavior suitable for cokemaking and contain an average of approximately 39% volatile matter (on a dry basis), which enables us, if market dynamics are favorable, to capture greater margins from selling our coal in the metallurgical market to cokemakers and steel manufacturers who utilize modern cokemaking technologies.
“We currently operate five longwalls and 18 continuous mining sections at the Pennsylvania mining complex. The current production capacity of the Pennsylvania mining complex’s five longwalls is 28.5 million tons of coal per year, and it produced approximately 26.1 million tons (5.2 million tons net to our 20% interest on a pro forma basis) of coal for the year ended December 31, 2014. We also recently upgraded our preparation plant, which is connected via conveyor belts to each of our mines, to clean and process up to 8,200 tons of coal per hour. Our 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, which enables us to simultaneously accommodate multiple unit trains and significantly increases our efficiency in meeting our customers’ transportation needs.
“We believe that we are favorably positioned to compete with coal producers in all four primary coal producing basins in the United States primarily because of: (i) our significant transportation cost advantage compared to producers in the Illinois Basin and the Powder River Basin that incur higher rail transportation rates to deliver coal to our core market in the eastern United States, (ii) our favorable operating environment compared to producers in the Central Appalachian Basin, where production has been declining and is expected to continue to decline primarily due to the basin’s high cost production profile, reserve degradation and difficult permitting environment and (iii) the high-quality characteristics of our coal, which enables us to compete for demand from a broader range of coal-fired power plants compared to mining operations in basins that typically produce coal with a comparatively lower heat content, such as the Illinois Basin and Powder River Basin, mining operations in basins that typically produce coal with a comparatively higher sulfur content, such as the Illinois Basin and most areas in the Northern Appalachian Basin, and mining operations in basins that typically produce coal with a comparatively higher chlorine content, such as the Illinois Basin. For example, our recoverable coal reserves have an average gross heat content of approximately 13,000 Btus per pound and an average sulfur content of 2.38% compared to an average gross heat content of 11,619 Btus per pound and an average sulfur content of 2.74% for other coal master limited partnerships, based on publicly available data. In addition, our logistics infrastructure and proximity to coal-fired power plants in the eastern United States provide us with operational and marketing flexibility, reduce the cost to deliver coal to our core market and allow us to realize higher netback prices. These advantages, combined with our ability to maintain low operating costs, allow us to generate favorable margins in relation to our peers.
“We also have favorable access to international coal markets through our long-standing commercial relationship with a leading coal trading and brokering company that maintains a broad market presence with foreign coal consumers and through CONSOL Energy’s Baltimore Marine Terminal. The Baltimore Marine Terminal provides coal transshipments directly from rail cars to ocean-going vessels and is the only coal marine terminal on the East Coast served by two rail lines (Norfolk Southern and CSX). For the years ended December 31, 2013 and 2014, the Pennsylvania mining complex sold (on a 100% basis) approximately 4.2 million tons and 3.3 million tons of coal (or 20% and 13% of total sales), respectively, into international coal markets. Both the thermal coal and metallurgical coal international markets provide us with valuable options for delivering our coal and allow us to optimize our sales portfolio and take advantage of pricing opportunities in the international market as they arise. We believe that projected global growth in both the thermal and metallurgical coal markets will support growing international demand for our coal as well as improved margins for our international sales.
“We have a well-established and diverse, blue chip customer base, the majority of which is comprised of domestic utility companies located in the eastern United States. As of March 25, 2015, the Pennsylvania mining complex’s committed and priced contract portfolio, on a 100% basis, comprised 22.3 million tons, 11.8 million tons and 6.7 million tons for the years ending December 31, 2015, 2016 and 2017, respectively, which represents approximately 85.5%, 45.1% and 25.6%, respectively, of total production for the year ended December 31, 2014.”
CNX Coal says it’s pretty well protected from MATS impact
The Form S-1 added: “To reduce our exposure to retirements of coal-fired power plants, we have strategically developed our customer base to include power plants that are positioned to continue operating for the foreseeable future and that are equipped with environmental controls for recent EPA measures. The Mercury Air and Toxics Standards (‘MATS’) rules, in combination with other environmental regulations and economic factors, resulted in the retirement of more than 20 GW of domestic coal-fired generating capacity prior to 2015 and has led to the announcement of more than 40 GW of additional domestic coal-fired generating capacity retirements for the period from 2015 through 2019. However, for the year ended December 31, 2014, we only sold approximately 1.5 million tons of coal, representing 5.7% percent of our total 2014 coal sales, to power plants in our core market states that have announced plans to retire prior to 2020. We believe that coal will continue to be a primary source for the generation of electric power, and that coal-fired power plants able to operate into the future will have a substantial cost advantage compared to other power plants that utilize more expensive fuel sources. Our strategy is to continue to serve these customers under multi-year contracts and operate low-cost longwall mining operations with advanced distribution capabilities and access to key logistics infrastructure. We believe this strategy will position us for long-term success.
“For the year ended December 31, 2014, the Pennsylvania mining complex derived greater than 10% of its total coal sales revenues from each of Duke Energy Corporation (‘Duke Energy’) and GenOn Energy, Inc. (‘GenOn Energy’). For the year ended December 31, 2013, the Pennsylvania mining complex derived greater than 10% of its total coal sales revenues from each of Duke Energy, GenOn Energy, Xcoal Energy & Resources and the South Carolina Public Service Commission.” (Notable is that that last named customer is probably actually the South Carolina Public Service Authority, also known as Santee Cooper. XCoal is an international coal marketing company based in Pennsylvania.)
“According to Wood Mackenzie, thermal coal production in the Northern Appalachian Basin is expected to stay relatively constant, with 116 million tons per year expected to be produced by 2035. Wood Mackenzie believes, in the near-term, this stable production forecast will be driven by a combination of the continued decline in coal production in the Central Appalachian Basin, the proximity to demand centers and high-Btu content of coal reserves. Also, coal produced in the Northern Appalachian Basin is a cost competitive fuel resource on a delivered cost, heat content and sulfur content adjusted basis to a large percentage of baseload coal fired power plants in the eastern United States. Long-term, Wood Mackenzie anticipates that an increasingly greater amount of Northern Appalachian thermal coal will be demanded by the international markets as a low-cost high-Btu source of coal supply.
“The logistics capabilities of coal producers are important to customers, who focus on the cost, reliability and flexibility of product delivery. We have direct and indirect rail access to domestic customers and the Baltimore Marine Terminal through Norfolk Southern and CSX rail lines. We also have rail-to-barge access to multiple third-party barge-loading terminals on the Monongahela River and the Ohio River if we determine in the future to transport our coal by barge. Because our customers desire to minimize excess coal inventory levels, they seek to arrange for product to be delivered as needed, which requires predictable and efficient loading and transporting of the product. The integrated nature of our logistics operations minimizes the time required to successfully load shipments, even at times of peak activity, lowers product handling costs and facilitates optimal train staging and exiting. Our onsite rail infrastructure includes our new dual-batch train loadout facility and 19.3 miles of track, including two sidings, in a single loop configuration that is linked to separate Class I rail lines owned by Norfolk Southern and CSX, which enables us to simultaneously accommodate multiple unit trains and significantly increases our efficiency in meeting our customers’ transportation needs. Our ability to accommodate multiple unit trains allows for the seamless transition of locomotives from empty inbound trains to fully loaded outbound trains at our facility, which, combined with our high-capacity train loadout facility, minimizes locomotive staging time.
“Our new, dual-batch, high-volume train loadout facility commenced operations in 2013 and is able to load up to 9,000 tons of coal per hour and has the ability to load up to ten unit trains per day. Our advanced loading system enables us to load rail cars at a target weight on a consistent, repeatable car-to-car basis. Our online quality monitoring systems analyze coal specifications as a rail car is loaded with a high degree of precision, which allows for more predictable loads of coal and allows us to tailor coal qualities to each customer’s requirements.
“CONSOL Energy’s Baltimore Marine Terminal is located on 200 acres along the north shore of the Patapsco River in the Port of Baltimore. The Baltimore Marine Terminal is the only East Coast marine terminal served by two rail lines (Norfolk Southern and CSX). The terminal features high-speed, high-capacity equipment that provides coal transshipments directly from rail cars to ocean-going vessels. The terminal’s throughput capacity is 15 million tons of coal per year, with tandem rotary dumpers able to dump coal at a rate of 5,000 tons per hour and a shiploader that can load vessels at a rate of 7,000 tons per hour. The terminal’s pier is approximately 1,253 feet long and is capable of accommodating vessels with a beam of 174 feet and an air draft of 55 feet. The terminal has storage capacity for more than 1.1 million tons of coal and exported 9.6 million tons in 2014, making the Baltimore Marine Terminal one of the largest coal terminals on the East Coast. In connection with the completion of this offering, we will enter into a contract with CONSOL Energy for the right to ship coal through the terminal for a fixed fee per ton of coal.
“In connection with the completion of this offering, we will enter into a contract agency agreement with a wholly owned subsidiary of CONSOL Energy pursuant to which, at our direction and subject to our control, CONSOL Energy will act as our agent to market and sell the coal produced from the Pennsylvania mining complex and will administer our existing coal purchase and sale contracts, including any extensions or renewals thereof, and any new coal purchase and sale contracts for the sale of coal produced from the Pennsylvania mining complex that we direct CONSOL Energy to enter into as part of the operational services provided by CONSOL Energy under the employee services agreement.”
CONSOL Energy veterans named to CNX Coal posts
Top managers of CNX Coal are:
- James A. Brock was appointed Chief Executive Officer and a director of the general partner effective March 16. Brock has been Chief Operating Officer—Coal of CONSOL Energy since December 2010. Prior to this appointment, he served as Senior Vice President—Northern Appalachia—West Virginia Operations of CONSOL Energy from 2007 to 2010.
- Lorraine L. Ritter was appointed Chief Financial Officer and Chief Accounting Officer of the general partner effective March 16. Ritter joined CONSOL Energy’s Accounting Department in November 1989, where she served in positions of increasing responsibility.
- Martha A. Wiegand was appointed General Counsel and Secretary of the general partner effective March 16. Wiegand joined CONSOL Energy’s Legal Department in December 2008 as Senior Counsel.
- Nicholas J. DeIuliis was appointed a director and elected Chairman of the Board of the general partner effective March 16. DeIuliis has been President of CONSOL Energy since February 2011, and in May 2014 he was named CONSOL Energy’s Chief Executive Officer. DeIuliis previously served in various positions at CNX Gas, a subsidiary of CONSOL Energy, including President, Chief Executive Officer and Chief Operating Officer. He is currently Chairman of the Board at CNX Gas.
- Stephen W. Johnson was appointed a director of the general partner effective March 16. Johnson has served as Executive Vice President and Chief Legal and Corporate Affairs Officer of CONSOL Energy and CNX Gas since January 2013. Prior to that time, Johnson served as Senior Vice President and General Counsel of CONSOL Energy and CNX Gas.
- David M. Khani was appointed a director of the general partner effective March 16. Khani joined CONSOL Energy in September 2011 as its Vice President—Finance, and was promoted to Executive Vice President and Chief Financial Officer effective March 1, 2013. Prior to joining CONSOL Energy, Khani was with FBR Capital Markets & Co., an investment banking and advisory firm.