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CONSOL unmoved by bids for coal MLP, focuses 100% on spinoff

CONSOL Energy Inc. said efforts to sell its coal mining master limited partnership "did not produce compelling results" so the company will focus 100% on preparing a spinoff transaction to be ready before 2017 ends.

CONSOL, which is increasingly focused on its natural gas exploration and production operations, launched a process that would separate the Pennsylvania mining complex, operated by CNX Coal Resources LP, and other coal assets from CONSOL. CONSOL President and CEO Nicholas DeIuliis said in an Aug. 1 earnings report that the company was "fully immersed" in preparing to spin off and separate the coal and gas operations.

"When you look at everything from cost structure, quality of the reserves, the abundance of reserves, access to the domestic and international markets and the ability to drive and generate free cash flow in both strong and weak markets, along with a workforce and management team that is second to none, the sky is the limit for the coal team moving forward," DeIuliis said on an Aug. 1 earnings call.

He added that pursuing both a sale and spinoff as dual avenues for extracting value from the coal and gas split was a "great decision" and getting up close to other peers was "eye-opening" for the company's coal team. He called the Pennsylvania complex the "premier thermal coal complex in the world" and said it was capable of generating cash flow "in any part of the cycle."

DeIuliis said CONSOL received multiple bids for the company's coal business. He divided the interested buyers into two types: strategic buyers who were willing to buy but unable to pay fair value and financial buyers who were able to buy, but unwilling to pay because they had become accustomed to distressed coal assets at lower valuations. He added that several potential peers had a "credibility deficit" with their equity owners in the wake of recent market struggles.

DeIuliis said CONSOL would still consider any last-minute bids for the coal segment as it works on figuring out the best timing for the coal spinoff. He noted that while the company should be spin ready by year-end, it may not "hit the spin button" until early 2018 depending on what the company determines is favorable timing.

On an earnings call for CNX Coal, James Brock, the CEO and director of the general partner, said that in the spinoff, CNX will remain "basically unchanged from a cost standpoint." Brock also pointed out that CNX has been successful in securing the trust and confidence of customers who are willing to offer long-term contracts for coal plants that are expected to continue to operate for several years.

"While much has been discussed about the shrinking duration of utility contracts in the coal industry, our team demonstrated that we are able to enter into longer-term, 3-plus-years-out commitments with the right partners," Brock said on the July 31 earnings call. "These new commitments take a big step towards growing and strengthening our portfolio to a dominant position in the Northern Appalachian rail market."

The company reported that about 30% of planned production from its Pennsylvania mining complex was sold for 2019.