While the majority of coal operators in the U.S. are on a sinking ship due to liability worries amid decreasing demand, CONSOL Energy CNX is about to raise nearly $200 million from the market. The plan is fairly simple. What CONSOL is doing is separating its thermal coal segment and related mining operations to form a master limited partnership (“MLP”).

CONSOL’s Coal MLP

This thermal coal MLP, CNX Coal Resources LP, will own 20% of CONSOL Energy’s thermal coal and mining properties in Pennsylvania, including the Bailey Mine, Enlow Fork Mine, Harvey Mine and the related preparation plant.

As per earlier plans, the coal MLP will make an initial public offering (“IPO”) of 10 million partnership units in a price range of $19 to $21 per common unit, so that the midpoint raises $200 million. CNX Coal Resources will also offer the underwriters a window of 30 days to purchase up to an additional 1.5 million units at the same price.

CNX Coal Resources is expected to price the offering next week. The units will trade on the New York Stock Exchange under the symbol CNXC. The previous coal IPO came in from Foresight Energy LP FELP in June last year when it issued 17.5 million common units at $20 per unit.

MLPs Offer a Safe Option

MLPs have become an important investment vehicle for companies since the first MLP was launched in 1981. MLPs have indeed gained prominence over the last three decades due to tax advantages and lower cost of capital. They generate ample cash flow, which are regularly distributed among unitholders in the form of cash distribution.  

The attractive attributes of an MLP structure have prompted CONSOL Energy to start an MLP for its coal business.  The funds raised from the IPO can be utilized by CNX Coal Resources to strengthen the existing infrastructure of the Pennsylvania mining complex and carry out large volume production of coal at low operating costs. It could also be used to acquire additional interest in the mining complex.

CONSOL’s Pennsylvania Coal Asset Post-IPO

Following the debut, CONSOL Energy will continue to own an 80% undivided interest in the Pennsylvania mining complex. However, the company will provide the partnership a right of first offer to acquire its retained 80% undivided interest in the Pennsylvania mining complex.

As of Dec 31, 2014, the Pennsylvania mining complex included 785.6 million tons of proven and probable coal reserves. Going by the present product rate, it is sufficient to support over 27 years of production.

The company also reassured investors that it has strategically developed its customer base so as to include power plants that are positioned to continue operating for the foreseeable future. These plants are equipped with environmental controls for mercury and sulfur abatement. This would insulate coal business from retirement of coal-fired plants that have become so widespread in the power sector.

Performance of the Coal Division

In the first quarter, the company produced 8.3 million tons of coal, which was within its coal production guidance of 8.0–8.5 million tons. Of the total production, 6.5 million tons came from the Pennsylvania operations, 1.2 million tons from Virginia and 0.6 million tons from Other operations.

The company sold 6.5 million tons of coal from its Pennsylvania operations, up by 0.1 million tons from the year-ago quarter. However, the realized price per ton of coal decreased nearly 9% year over year to $58.82 per ton.

CONSOL Depends on MLP Route

In Jun 2014, CONSOL Energy and Noble Energy Inc. NBL had announced their plan to form CONE Midstream Partners LP CNNX, an MLP that would provide midstream services for production from their joint venture in the Marcellus Basin.

CONSOL Energy, a Zacks Rank #2 (Buy) stock, will now primarily comprise its core oil and gas E&P assets with an interest in CONE Midstream Partners LP, and controlling interests in its thermal coal MLP and met coal subsidiary.

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