As some observers had been expecting, Peabody Energy (NYSE: BTU) and Alpha Natural Resources (NYSE: ANR) have worked out a coal reserve swap in the Wyoming Powder River Basin after each of them leased away from the other coal reserves for the Caballo mine of Peabody and the Belle Ayr mine of Alpha.
In July 2011, Peabody was named by the U.S. Bureau of Land Management (BLM) as the winning bidder for about 220 million tons of federal coal reserves adjacent to Peabody’s Caballo mine at a bid price of $0.95 per mineable ton, with payments of $42.1m due annually in each of the years from 2011 through 2015 under the Belle Ayr North Lease, said Peabody in its Nov. 7 quarterly Form 10-Q report. In that auction, it outbid a unit of Alpha, which had originally applied for a lease on this coal as new reserves for its adjacent Belle Ayr mine.
Then in September 2011, a subsidiary of Alpha was named by the BLM as the winning bidder for about 130 million tons of federal coal reserves at a bid price of $1.10 per mineable ton, with contractual payments of $28.6m due annually in each of the years from 2011 through 2015 under the Caballo West Lease. In this case, Alpha outbid Peabody, the original applicant for this coal, which had wanted to add this tract to the reserves for the Caballo mine.
The problem is that at least some parts of these reserves are not readily accessible from the mine of the party that won each of the auctions. The reserves tend to be better suited for the mines that were originally supposed to get them.
“In July 2012, the Company and Alpha executed a lease exchange agreement with the BLM whereby the Company agreed to sell, assign and transfer its interest in the Belle Ayr North Lease in exchange for (i) Alpha’s interest in the Caballo West Lease, (ii) reimbursement of $13.5 million for the difference in the related federal coal lease payments made by each party in 2011 and (iii) five annual true up payments of $3.9 million for the excess of the $1.10 bid price per mineable ton assumed under the Caballo West Lease over the $0.95 price under the transferred lease,” said the Peabody Form 10-Q. “An aggregate of $17.4 million was received from Alpha at closing for the reimbursement payment and first true up payment, which was classified in ‘Proceeds from disposal of assets’ in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2012. The four remaining annual true up payments are due from Alpha on November 1 in each of the years from 2012 through 2015. The federal coal leases executed with the BLM described above expire after a 20-year initial term, unless at such time there is ongoing production on the subject leases or within an active logical mining unit of which they are part.”
Alpha had this take on the deal in its Nov. 8 Form 10-Q filing: “In September 2011, we entered into a federal coal lease, which contains an estimated 130.2 million tons of proven and probable coal reserves in the Powder River Basin. The lease bid was $143.4 million, payable in five equal annual installments of $28.7 million. The first installment was paid in September 2011. In August 2012, we entered into an agreement with a third party to exchange our federal coal lease for another federal coal lease, which contains an estimated 222.0 million tons of proven and probable coal reserves in the Powder River Basin adjacent to our existing mining operations. As a result of the exchange, we paid $17.4 million at closing and have four annual remaining lease bid installments of $42.1 million due each November until the obligation is satisfied in 2015. Also, as a result of the exchange, we recorded a note payable which had a present value of approximately $14.0 million as of September 30, 2012, of which approximately $3.9 is included in current portion of long-term debt and approximately $10.1 million is included in long-term debt on our consolidated balance sheet. This note is payable in four annual installments of $3.9 million due each November through 2015.”
In other points of interest from the Peabody Form 10-Q:
- Peabody is in a coal contract dispute with the Gulf Power unit of Southern Co. (NYSE: SO). In 2006, Gulf Power filed a lawsuit against a Peabody subsidiary in the U.S. District Court for Northern District of Florida, contesting a force majeure declaration by the Peabody subsidiary and seeking damages for alleged past and future tonnage shortfalls of nearly 5 million tons under this contract, which expired at the end of 2007. In June 2009, the court granted Gulf Power’s motion for partial summary judgment on liability and denied the Peabody motion for summary judgment. In September 2010, the court entered its order on damages, awarding Gulf Power zero dollars and the Peabody subsidiary its costs to defend the lawsuit. In November 2010, Gulf Power contested the trial court’s damages order, to which the Peabody subsidiary objected. The court entered an order in July 2011 that affirmed its September 2010 decision in all respects except for 2007 cover coal purchases and granted in part Gulf Power’s motion to alter judgment with respect to 2007 cover coal purchases. In September 2011, the court awarded Gulf Power damages of $20.5m for its 2007 cover coal purchases. On Jan. 19, the court awarded Gulf Power prejudgment interest of $6.9m plus post-judgment interest. Peabody’s subsidiary has filed its appeal and briefing is complete. Oral arguments before the U.S. Court of Appeals for the Eleventh Circuit is scheduled for the week of Jan. 26, 2013.
- In response to adverse domestic coal market conditions, numerous coal mining companies have implemented production cuts and idled operations throughout 2012, the Form 10-Q noted. “We permanently ceased production at our Air Quality Mine in Indiana in September 2012 due to uneconomic market conditions for the type of coal product previously produced at the site,” it added. “The U.S. Energy Information Administration (EIA) reported total U.S. production decreased from the prior year through September 2012 by 6% on both a quarter-to-date and year-to-date basis. As a result of the contraction in demand, we are targeting 2012 U.S. sales volumes of 188 to 192 million tons, a projected decline of approximately 6% to 8% from our 2011 volumes.”
- In the third quarter, Peabody entered into long-term agreements with Kinder Morgan Energy Partners LP to secure and expand the Gulf Coast export platform of its western and Midwest U.S. coal. Under the multi-terminal agreements, Peabody will gain additional access to Kinder Morgan’s Deepwater Terminal and Houston Bulk Terminal near Houston, Texas, and International Marine Terminal in Myrtle Grove, La., through 2021 and 2020, respectively. The agreements are expected to increase Peabody’s annual Gulf Coast coal export capacity by about 2 million and 4 million tons in 2013 and 2014, respectively, and 5 million to 7 million tons in each of the years from 2015 through 2020. The agreements are subject to customary minimum throughput obligations during those periods at commercially reasonable coal handling, blending and storage rates.
- In October 2007, Peabody spun-off companies in the eastern U.S. to form Patriot Coal. On July 9, Patriot and certain of its wholly owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York. “We believe that our only material exposure to the bankruptcy of Patriot relates to up to $150 million in possible federal and state black lung occupational disease liabilities,” said the Form 10-Q. “As Patriot noted in its Annual Report on Form 10-K/A for the year ended December 31, 2011, it has posted $15 million in collateral with the U.S. Department of Labor (DOL) in exchange for the right to self-insure its liabilities under the Federal Coal Mine Health and Safety Act of 1969 (Black Lung Act). If Patriot is unable to meet its black lung liability obligations, we believe that the DOL will first look to this collateral for payment. The Black Lung Act allows the DOL to seek recovery from other potentially liable operators as well. We may be considered a potentially liable operator for purposes of the Black Lung Act with respect to the black lung liabilities of Patriot at the time of the spin-off. We also have a small number of commercial arrangements with Patriot and believe that our potential exposure under these agreements will not have a material adverse effect on our consolidated results of operations, financial condition or cash flows.”