CONSOL’s coal spinoff working its way through the public offering process

CNX Coal Resources LP, which is to be spun off from CONSOL Energy (NYSE: CNX) in an IPO, is still working toward that public offering of master limited partnership units.

“We are 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 a prospectus the company filed May 28 with the SEC, which is the second amended version of this report since a first one was filed on April 1. “Our initial assets will 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.

“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.

“The design of the Pennsylvania mining complex is optimized to produce large quantities of coal on a cost efficient basis. We are able to sustain high production volumes at comparatively low operating costs due to, among other things, CONSOL Energy’s significant investments in technologically advanced longwall mining systems, logistics infrastructure and safety. 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.

“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 a result of our right of first offer, we believe that we possess significant growth potential that will be generated through accretive acquisitions of additional undivided interests in the Pennsylvania mining complex. However, CONSOL Energy is under no obligation to present us the opportunity to purchase additional assets from it (including its retained undivided interest, unless and until it otherwise intends to divest such undivided interest), and we are under no obligation to purchase any assets from CONSOL Energy. While we believe that our right of first offer is a significant positive attribute, it is also a source of potential conflicts of interest. Following the completion of this offering, CONSOL Energy will own our general partner, and there will be substantial overlap between the officers and directors of our general partner and the officers and directors of CONSOL Energy.

“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.

“We derive a significant portion of our revenues from four customers: Duke Energy Corporation (‘Duke Energy’), GenOn Energy, Inc. (‘GenOn Energy’), the South Carolina Public Service Commission (the ‘SCPSC’) and Xcoal Energy & Resources (‘Xcoal Energy’). For the three months ended March 31, 2015, the Pennsylvania mining complex derived approximately 16.3%, 15.2%, 11.7% and 10.0% of its total coal sales revenues from Xcoal Energy, Duke Energy, GenOn Energy and the SCPSC, respectively. For the year ended December 31, 2014, the Pennsylvania mining complex derived approximately 17.2%, 15.2%, 9.8% and 7.1% of its total coal sales revenues from Duke Energy, GenOn Energy, the SCPSC and Xcoal Energy, respectively. For the year ended December 31, 2013, the Pennsylvania mining complex derived approximately 14.0%, 12.9%, 12.6% and 11.9% of its total coal sales revenues from Duke Energy, GenOn Energy, Xcoal Energy and the SCPSC, respectively.”

Notable is that Xcoal is a Pennsylvania-based international coal marketing company. GenOn is part of NRG Energy (NYSE: NRG). And the SCPSC referred to is more commonly known as the South Carolina Public Service Authority (or Santee Cooper).

The filing said there are certain limits to its growth prospects: “Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations.”

The management for CNX Coal will include:

  • James Brock, age 58, CEO and Director;
  • Lorraine Ritter, 49, CFO and Chief Accounting Officer; and
  • Nicholas DeIullis, 46, Chairman of the Board.

CONSOL Energy earlier this decade sold its Pittsburgh-seam longwall mines in northern West Virginia to privately-held Murray Energy, leaving its biggest mines as the three Pennsylvania operations going (at least 20% of) to CNX Coal, and a longwall mine in Virginia. It has other scattered operations and assets, though a recent selling splurge has sharply reduced the number of those remaining assets.

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.