On Feb. 21, Armstrong Energy amended a 2007 coal supply agreement with the Tennessee Valley Authority to reduce the base tonnage to be delivered for 2012 to 1 million tons.
The reopener provision for the remaining years of the contract has also been invoked and the parties will seek to renegotiate the terms of the contract for the remaining years, said Armstrong Energy in a May 4 Form S-1/A filing at the SEC. In addition, also on Feb. 21, the company amended a 2008 coal supply agreement with TVA to reflect that the base tonnage to be delivered for 2012 is 1 million tons.
Armstrong said it has two multi-year coal supply agreements with TVA.
The agreement with TVA entered into in 2007, as amended, calls for the delivery of 1 million tons annually in 2011 and 2012, and 2 million tons from 2013 through 2018. The price ranges from $40.57 to $41.68 per ton in 2011 and 2012. The agreement then provides that either party may elect at its sole option to reopen the contract for negotiations on price and/or other terms as it concerns all coal to be delivered in 2013 and beyond. TVA has exercised its right to reopen the agreement. If the parties are unable to reach a mutually acceptable deal by July 1, the agreement will terminate as of Dec. 31. The agreement also provides for typical quality adjustments. In addition, commencing on July 1, 2011, TVA has the unilateral right to terminate the agreement upon 60 days written notice, in which case TVA is required to pay Armstrong a termination fee equal to 10% of the base price multiplied by the remaining number of tons to be delivered under the deal.
The 2008 agreement with TVA calls for between 0.9 million and 1.1 million tons annually in the 2009-2013 period. The price ranges from $56 per ton to $58 between 2011 and 2013. The agreement provides that either party may elect at its sole option to reopen the deal for negotiations on price and/or other terms on all coal to be delivered in 2012 and 2013. TVA exercised its option under the agreement. As a result, the parties reached an agreement to reprice the coal to be delivered in 2012 and 2013 with pricing from $54.25 to $55.88 per ton.
In another piece of news, effective May 1, Richard Craig is the company’s new Vice President of Operations. Craig has over 19 years experience in coal mining, having served most recently as the president of the southern Kentucky business unit of Alpha Natural Resources (NYSE: ANR). Prior to working for Alpha, Craig worked for Cumberland Resources, James River Coal (NASDAQ: JRCC) and Massey Energy. Craig will report directly to Ken Allen, Executive Vice President of Operations, and indirectly to Martin Wilson, President, and will be located in the company’s Madisonville, Ky., field office. Its main headquarters is in St. Louis.
The Form S-1/A filed May 4 was the latest in a series of such filings as Armstrong Energy, the parent of western Kentucky coal producer Armstrong Coal, prepares to go public in an IPO. This is the fifth amendment since the original Form S-1 was filed in October 2011. Once again, though, the number of shares to be offered to the public and at what price are not included in this latest filing. Armstrong Energy has applied to list on the Nasdaq Capital Market under the symbol ARMS.
Armstrong grew rapidly from 2006 start
Based on 2011 production, Armstrong Energy is the sixth largest producer in the Illinois Basin and the second largest in western Kentucky. It was formed in 2006 to acquire and develop a large coal reserve holding. It 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. The coal reserves and operations are located in Ohio, Muhlenberg, Union and Webster counties. It also owns and operates three coal processing plants which support mining operations.
The company is seeking permits for three additional mines. Permit applications for the Hickory Ridge surface mine have been submitted to the U.S. Army Corps of Engineers and the state of Kentucky but have yet to be issued. It is also preparing permit applications relating to Ken surface mine and the Lewis Creek underground mine. It intends to submit those permit applications in the spring of 2012. The company anticipates opening the Lewis Creek deep mine in 2013. Lewis Creek will work the West Kentucky #9 seam utilizing two continuous miner super sections. The Lewis Creek deep mine is projected to produce about 1.3 million tons of clean coal per year. There are about 22 million tons of proven and probable reserves at Lewis Creek. Armstrong anticipates opening the Hickory Ridge and Ken surface mines in 2013 and 2014. They will produce thermal coal from primarily the West Kentucky #14, #13, #13A and #11 seams. The Hickory Ridge and Ken surface mines have about 23 million tons in total of proven and probable reserves.
Armstrong Energy’s revenue has increased from zero in 2007 to $299.3m in 2011, which it achieved despite a period of recession-driven declines in U.S. demand for coal and a challenging environment in the credit markets. For the year ended Dec. 31, 2011, it generated operating income of $7.9m and Adjusted EBITDA of $41m. Operating income and Adjusted EBITDA in the first quarter of this year was $2.8m and $11.9m, respectively.
In 2011, the company produced 6.6 million tons of coal, with seven mines in operation. In the first quarter of this year, it produced 2.2 million tons of coal, again with seven mines in operation. It is contractually committed to sell 8.3 million tons of coal in 2012 and 7.1 million tons of coal in 2013, which represents 95% and 71% of its expected total coal sales in 2012 and 2013, respectively.
Armstrong’s coal aimed primarily at newly-scrubbed power plants
“We expect that the demand for Illinois Basin coal will rise as a result of an increase in power plants being retrofitted with scrubbers and the construction of new power plants throughout the Illinois Basin market area,” said the Form S-1/A. “We intend to continue to focus our marketing efforts principally on power plants in the Mid-Atlantic, Southeastern and Midwestern states that we expect will become consumers of Illinois Basin coal and to seek to diversify our customer base through a combination of multi-year coal supply agreements and sales in the spot market. As of March 31, 2012, we are contractually committed to sell 8.3 million tons of coal in 2012, and 7.1 million tons of coal in 2013, which represents 95% and 71% of our expected total coal sales in 2012 and 2013, respectively. In addition, we believe that the relative heat, ash, sulfur content and cost of our coal, combined with the accessibility of our coal mines and coal processing facilities to the Mississippi River and to rail connecting to Louisiana export terminals will provide the opportunity to export our coal to overseas customers.”
Armstrong Energy said it currently has two multi-year coal supply agreements with the Louisville Gas and Electric unit of PPL Corp. (NYSE: PPL).
The first LG&E agreement was entered into in 2008, as amended, and expires in 2016. It calls for 2.1 million tons annually through 2015 and 0.9 million tons in 2016. Pricing ranges from $28.19 to $30.25 per ton over the term of the agreement subject to certain additional quality related adjustments. There is no price reopener provision in this agreement.
The LG&E agreement that was entered into in 2009 calls for annual delivery of 1.25 million tons from 2011 through 2013 and 0.75 million tons from 2014 through 2016. In addition to typical quality adjustments, the price ranges from $42 to $45 per ton from 2011 through 2013. The agreement then provides that either party may elect at its sole option to reopen the agreement for negotiations with respect to price and/or other terms as it concerns all coal to be delivered in 2014 and beyond. Should either party seek to reopen the agreement (which must be done no later than April 1, 2013) and the parties are unable to reach a mutually acceptable agreement on the terms being renegotiated, the agreement will terminate as of Dec. 31, 2013.