As it prepares for its initial public offering, Western Kentucky coal producer Armstrong Energy revealed a lot about its 2011 operations in a recent filing with the U.S. Securities and Exchange Commission (SEC), but it did not say in an updated March 7 Form S-1 filing say how many shares it plans to offer and at what price.
Armstrong Energy, which currently operates several coal mines under presumptive subsidiary Armstrong Coal, expects to apply to list its common stock on the Nasdaq Global Market under the symbol ARMS. This is the fourth amendment to an initial Form S-1 that was filed in October 2011.
The company reported revenue of $299.3m for 2011, compared to $220.6m in 2010. Coal sales increased 30% to 7 million tons in 2011, compared to 5.4 million tons in 2010. Armstrong’s average sales price per ton in 2011 increased 3.9%, or $1.61, compared to 2010. Net income decreased from $8.2m in 2010 to $3.5m in 2011. Adjusted EBITDA decreased slightly to $41m for 2011 from $41.1m for 2010.
The tons of coal produced in 2011 increased 17.7% to 6.6 million tons in 2011 from 5.6 million tons in 2010. This increase is primarily attributable to the commencement of production at the Equality Boot, Lewis Creek, and Maddox surface mines, which increased sales by 2.6 million tons for 2011, as compared to 2010. This increase was partially offset by lower production at other surface mines as a result of high levels of rainfall, decreases at the East Fork operation of 0.9 million tons as a portion of the mine was depleted and U.S. Mine Safety and Health Administration mandates that impacted production at the Big Run mine.
Sales volume during 2011 was slightly lower than anticipated due to weather-induced high water issues on the Green and Ohio rivers, which delayed barge deliveries to two customers. However, the reduction in barge-delivered tons was partially offset by an increase in the number of tons delivered by truck. In addition, maintenance cycles at the primary plants receiving the company’s coal under contracts with the Tennessee Valley Authority resulted in the deferment or force majeure of about 327,000 tons of scheduled deliveries during 2011.
The average sales price per ton increased 3.9% to $42.57 in 2011 from $40.96 in 2010. This $1.61 increase resulted from the combination of: higher pricing on long-term contracts due to the annual increases under the majority of its multi-year coal supply agreements; and spot sales that did not occur in 2010. These increases were partially offset by the elimination of the $3.29/ton price adjustment in December 2010 that it received from Louisville Gas and Electric (LGE) pending permitting approval of the Equality Boot mine.
Company grew fast from 2008 start
Based on 2011 production, Armstrong Energy said it is the sixth-largest producer in the Illinois Basin and the second largest in western Kentucky. The company commenced production in the second quarter of 2008 and currently operates seven mines, including five surface and two underground, and is seeking permits for three additional mines. Its reserves and operations are located in Ohio, Muhlenberg, Union and Webster counties, Ky.
In September 2011, Armstrong commenced operations at the Kronos underground mine. It expects that the Kronos deep mine will have an annual production capacity of about 2.3 million tons. In November 2011, it also commenced operations at the Maddox surface mine. Operations at the Big Run mine ended in October 2011 and operations at the Kronos pit at the East Fork mine ended in the fourth quarter of 2011.
In December 2011, Armstrong entered into a series of transactions with Cyprus Creek Land Resources LLC and Cyprus Creek Land Co. LLC, each of which is an affiliate and/or subsidiary of Peabody Energy (NYSE:BTU), under which it acquired additional property near its existing and planned mines containing an estimated total of 7.7 million clean recoverable tons of coal and entered into leases for an estimated 14 million clean recoverable tons.
In addition, Armstrong entered into a joint venture relating to coal reserves near its Parkway mine. In connection with the joint venture, Peabody has agreed to contribute about 25 million tons of clean recoverable coal reserves located in Muhlenberg County, and Armstrong agreed to contribute mining assets to the joint venture. Armstrong and Peabody have also agreed to contribute 51% and 49%, respectively, of the cash needed to complete the development of the mine and for down payments on mining equipment. Armstrong will manage the joint venture’s day-to-day operations and the development of the mine in exchange for a $0.50 per ton sold management fee. Peabody will receive a $0.25 per ton commission on all coal sales by the joint venture.
In December 2011, Armstrong and Midwest Coal Reserves of Kentucky LLC, an affiliate of Peabody, entered into a contract to sell and lease real estate pursuant to which it acquired from Midwest Coal its right, title and interest in and to #9 seam coal reserves in Union County, Ky. In addition, Midwest Coal agreed to lease to Armstrong about 2,000 acres of #9 seam of coal.
Armstrong markets its coal primarily to large utilities with coal-fired, baseload, scrubbed power plants under multi-year coal supply agreements. In 2011, it sold approximately 89% of its coal under multi-year coal supply agreements. At Dec. 31, 2011, it had 10 multi-year coal supply agreements with terms ranging from one to seven years. For the fiscal year ended Dec. 31, 2011, coal sales to LGE and TVA constituted approximately 35% and 28%, respectively, of its total coal revenues. Armstrong said it is contractually committed to sell 8.1 million tons of coal in 2012 and 8.2 million tons of coal in 2013, which represents about 88% and 77% of expected total coal sales in 2012 and 2013, respectively.