Fitch: CNX Coal Resources Well Positioned Despite Coal Weakness

CHICAGO--(BUSINESS WIRE)-- CNX Coal Resources LP (CNXC) should be well positioned long-term despite current coal market weakness due to its contracted volumes, stable cash flow, low operating costs and strong dropdown pipeline, according to Fitch Ratings. Fitch expects future dropdowns at a more favorable multiple which should provide additional liquidity for CONSOL Energy Inc. (CONSOL) to continue growing its E&P business.

CNXC was formed as a master limited partnership (MLP) by CONSOL, which contributed initial assets of 20% of its Pennsylvania mines to the MLP. These assets accounted for 5.2 million tons of coal sold and an EBITDA of $125 million for the year ended Dec. 31, 2014. The Pennsylvania mines primarily sell thermal coal under contracts averaging from one to three years in length. At May 11, 2015, based on the mid-point of CONSOL's coal volume guidance, approx. 89%, 51% and 30% of 2015, 2016 and 2017 coal sales at the Pennsylvania complex were committed and priced at $59.33, $59.25 and $61.35/ton respectively which should help mitigate near-term price and volumetric risk.

CNXC priced its initial public offering at $15/share, a significant discount from its target of $19-$21/share. Fitch believes the discount reflects overall coal market pressure and investor concern at CNXC's ability to sustain distribution growth after the dropdowns from CONSOL are complete. Fitch projects CNXC will generate annual operating EBITDA around $105 million for the years 2015-2017 before additional dropdowns, which should translate to annual distributable cash flow between $65-$70 million (assuming interest expense and maintenance CapEx of $8 million and $30 million, respectively). This should provide CNXC a cushion to meet its stated intent to pay a minimum quarterly distribution of $.5125 per unit ($48.6 million annually).

Fitch believes that thermal coal markets, currently pressured from warmer weather, market oversupply and low natural gas prices, are at or near the bottom and should exhibit signs of recovery over the next two to three years following potential industry consolidation. CNXC should be well positioned to benefit from this recovery as a low-cost coal producer with a favorable geographic location near its customers - primarily eastern utilities. Fitch expects Central Appalachian thermal coal sales to continue to decline due to high production costs and regulatory requirements and believes basins with traditionally higher sulfur coal, like Northern Appalachia where CNXC is based, should continue to be viewed as favorable alternatives due to the emergence of flue gas desulfurization systems (scrubbers).

Once thermal markets have rebounded, both CNXC and CONSOL should benefit from additional dropdowns. In addition to owning the right of first refusal on the remaining 80% of the Pennsylvania operations CNXC also has first rights to the Baltimore Marine Terminal and CONSOL's metallurgical coal mines in Virginia (though the latter terminates if CONSOL chooses to place these assets in a separate subsidiary). Fitch estimates that CONSOL's total coal assets generated an EBITDA of $733 million for the year ended Dec. 31, 2014 which should provide a strong dropdown pipeline. CONSOL should see more favorable multiples for future dropdowns to CNXC once coal market dynamics normalize, which would provide additional liquidity for CONSOL as it builds out its E&P business.

For additional details on CNXC and CONSOL, see Fitch's special report on CONSOL Energy Inc at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Related Research

CONSOL Energy Inc.

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868359

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Fitch Ratings
David Cameli
Analyst
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Fitch Ratings, Inc.
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Source: Fitch Ratings

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