CNX Coal Resources LP, which is to be spun off from CONSOL Energy (NYSE: CNX) in an IPO, filed its latest prospectus with the SEC on June 10, with the spaces still blank for how many master limited partnership units will be offered to the public and at what price.
The company noted that its common units have been approved for listing on the New York Stock Exchange under the symbol “CNXC.”
Besides getting upfront a 20% share of the Pennsylvania mining complex that includes three longwall-equipped mines – Bailey, Enlow Fork and Harvey – that work the Pittsburgh coal seam and feed raw coal into a common prep plant, CONSOL said it has three right of first offer assets that it has the option to buy from CONSOL in the future, after the IPO:
- The Baltimore Marine Terminal is owned by CONSOL Energy in the Port of Baltimore, Maryland, and provides coal transshipments from rail cars primarily to ocean-going vessels. Located at the northern end of the Chesapeake Bay, the Baltimore Marine Terminal is strategically located on the eastern U.S. seaboard, with access to the attractive seaborne markets supplying both Europe and Asia. It is served by two railroads, the Norfolk Southern and CSX Transportation, which provides operational flexibility to the terminal and its customers. In addition, the terminal has coal blending capabilities to meet customer specifications. Typically, the Baltimore Marine Terminal handles both metallurgical coal and thermal coal, with met coal representing the majority of its business. CONSOL has operated the terminal since 1983. It underwent an infrastructure expansion in 2011 and 2012 that increased effective annual throughput capacity to 15 million tons per year. In 2014, the terminal handled 9.6 million tons of coal.
- The Buchanan mine is an underground complex owned by CONSOL Energy located in Mavisdale, Virginia, that produces a premium low-vol met coal for sale to domestic and international customers. The Buchanan mine’s favorable geology, automated longwall mining systems and recent upgrades enable it to be one of the most cost efficient met coal mines in North America, achieving an average operating cost per ton of $30.37 in the first quarter of 2015. The mine’s reserves benefit from thick seams that average about 5.5 feet, which provides for efficient mining conditions. Coal from the Buchanan mine is sold primarily to the steel industry and coke producers, both domestically and internationally. In addition, this coal has physical characteristics that allow it to be sold in non-metallurgical markets when pricing conditions are favorable. In 2014, Buchanan produced 4 million tons. The right of first offer on Buchanan is subject to CONSOL’s right to contribute that asset to a new entity in connection with a separate initial public offering of its met coal business.
- Cardinal States Gathering is a natural gas gathering system that comprises approximately 110 miles of pipeline and associated assets located in Virginia, Kentucky and West Virginia. Located near the Buchanan mine, Cardinal Gathering consists of four interconnected pipelines (Cardinal numbers 1, 2, 3 and 4), a treating and compressor station known as Grant Station, and a downstream pipeline that connects to the Columbia natural gas pipeline system. Cardinal #1 began service in 1992, Cardinal #2 and Cardinal #3 commenced operations in 1998 and Cardinal #4 went into service in 2003. Cardinal Gathering has a diversified resource base that gathers production from both CONSOL and third party wells, the substantial majority of which is coalbed methane (CBM). As of March 31, 2015, Cardinal Gathering serviced approximately 3,940 active producing wells across approximately 155,000 acres and transported an average of 202 MMcf/d for the three months ended March 31, 2015. In addition to its connection to the Columbia pipeline system, Cardinal Gathering connects to the East Tennessee Natural Gas Pipeline via the Jewell Ridge Lateral Pipeline.
The prospectus said about future acquisitions: “We expect to make accretive acquisitions of additional assets from CONSOL Energy over time to increase our distributable cash flow per unit. In connection with the completion of this offering, CONSOL Energy will grant to us a right of first offer to acquire its retained 80% undivided interest in the Pennsylvania mining complex, as well as the Baltimore Marine Terminal, the Buchanan mine (subject to CONSOL Energy’s right to contribute all or part of the Buchanan mine to an affiliate in connection with such affiliate’s initial public offering) and Cardinal Gathering. Although we believe that CONSOL Energy’s significant ownership interest in us will incentivize it to provide us with accretive transaction opportunities, CONSOL Energy is under no obligation to present us the opportunity to purchase additional assets from it (including the assets covered by our right of first offer, unless and until it otherwise intends to divest such assets), and we are under no obligation to purchase any assets from CONSOL Energy.”
Second longwall for Harvey can be added, CONSOL will handle the CNX coal marketing
In some other points from the prospectus:
- “We intend to evaluate increasing the production capacity of the Pennsylvania mining complex if market dynamics for thermal coal are favorable and we are able to secure complimentary sales contracts with attractive margins. The Harvey mine’s existing infrastructure, including its bottom development, slope belt and material handling system, is able to support an additional permanent longwall mining system with moderate additional capital investment in mining equipment.”
- “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 2.37%. 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 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 2.37% 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.”
- “[F]or the year ended December 31, 2014, the Pennsylvania mining complex generated an average cash margin per ton of $25.27 compared to the average cash margin per ton of $11.80 for coal master limited partnerships, based on management’s computations utilizing data contained in their annual reports on Form 10-K for the year ended December 31, 2014. For the year ended December 31, 2014, the cash margin per ton for four peer coal master limited partnerships was $0.77, $6.58, $20.77 and $19.08, respectively, for an average of $11.80, as determined by deducting each company’s (i) operating costs, excluding depreciation depletion and amortization (‘DD&A’), per ton sold (or in the last case, operating costs, including transportation costs and excluding DD&A, per produced ton sold) from (ii) coal sales per ton, as disclosed in such company’s annual report on Form 10-K for the year ended December 31, 2014.”
- 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 May 11, 2015, the Pennsylvania mining complex’s committed and priced contract portfolio, on a 100% basis, comprised 23.0 million tons, 13.1 million tons and 7.7 million tons for the years ending December 31, 2015, 2016 and 2017, respectively, which represents approximately 93.3%, 53.1% and 31.2%, respectively, of forecasted total production for the twelve months ending June 30, 2016.”
- “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 exclusive 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. The administration of these coal purchase and sale contracts, which we refer to as our contracts, will include CONSOL Energy’s making elections, enforcing rights, executing coal sale confirmations and invoicing, in each case at our direction and with respect to the coal reserves attributable to our interests and CONSOL Energy’s interest in the Pennsylvania mining complex.”
- “In connection with the completion of this offering, we will enter into a terminal and throughput agreement with a wholly owned subsidiary of CONSOL Energy pursuant to which we will have the option, but not the obligation, to transport or to cause to be transported through CONSOL Energy’s Baltimore Marine Terminal up to 5 million tons of coal each calendar year (prorated for the year in which this offering is completed) for a terminal fee of $4 per ton of coal transported through the Baltimore Marine Terminal, plus certain standard fees for long-term or excess storage of coal at the Baltimore Marine Terminal, re-handling services at the Baltimore Marine Terminal (if we elect such services) and certain fees related to the docking and undocking of vessels at the Baltimore Marine Terminal. The per ton terminal fee and other fees may be reasonably escalated by the owner of the Baltimore Marine Terminal on a quarterly basis based on changes in the volume of coal shipped through the Baltimore Marine Terminal and increases in operating costs at the terminal. The terminal and throughput agreement will have an initial term of seven years.”