Vectren Corp. (NYSE: VVC) announced July 1 that it has reached an agreement to sell its wholly owned coal mining subsidiary, Vectren Fuels Inc., to Sunrise Coal LLC, an Indiana-based subsidiary of Hallador Energy Co. (NASDAQ: HNRG).
Sunrise already owns and operates coal mines in Indiana, where Vectren’s mines are located.
Vectren Fuels owns three underground coal mines in southwestern Indiana, including two basically new mines in Oaktown and one longstanding mine, Prosperity, in Petersburg. Both Oaktown mines are operated by outside contractor Black Panther Mining LLC, while the Petersburg mine is operated by Five Star Mining Inc. Both contract companies are controlled by the Blankenberger family, longtime veterans of the Indiana coal industry. Collectively, the three mines employ approximately 850 contract miners.
“Given our company’s emphasis on growing our infrastructure and energy services businesses, now is the right time for us to divest of these commodity-based assets. Sunrise Coal is a logical buyer that is already an active participant in the coal mining industry, specifically in the Illinois Basin and will put additional capital to work to continue to grow the overall business,” said Carl Chapman, Vectren chairman, president and CEO.
“I am very pleased Sunrise Coal has advised us they have already established plans to promptly conduct job fairs at which the contract miners currently employed by Black Panther and Five Star will be considered for employment at the mines. These contract miners should be very well situated given the combined workforce needs of the mines being sold by Vectren Fuels and the overall available workforce of miners in Southwest Indiana,” Chapman said. “We’re confident the transition will go smoothly for the existing customers of Vectren Fuels, including Vectren’s electric utility, and that Sunrise Coal will maintain the excellent level of service our coal customers have come to expect.”
The sales price is $296m in cash, plus an estimated $20m change in working capital from Dec. 31, 2013, until the transaction is closed. Closing is expected in the third quarter of 2014. The after-tax net proceeds from the sale are estimated to be approximately $280m. The transaction is expected to result in a second quarter book loss of approximately $20m to $22m after tax.
Following prior sales of its retail gas marketing and wholesale gas marketing businesses in 2011 and 2013, respectively, once the sale of Vectren Fuels is closed, the company will have fully exited its non-utility commodity-related businesses.
Sunrise Coal plans a big, combined coal mining complex
The two underground mines in Oaktown are seven miles south of Sunrise Coal’s mainstay Carlisle underground mine. During the last twelve months, the Oaktown mines sold 5.1 million tons of coal, the Prosperity mine sold 1.8 million tons and Sunrise sold 3.2 million tons from the Carlisle mine. Current 2015 coal sales commitments stand at a total of 9.5 million tons, said Hallador Energy in its own July 1 announcement.
Sunrise Coal is working with its group of banks headed by PNC Bank to secure the necessary financing. Closing is expected to occur around Sept. 1.
“This acquisition enables Sunrise to mine our War Eagle reserve, which is adjacent to the Oaktown 2 mine, through the Oaktown 2 portal without spending the approximately $150 million in capital expenditures that would otherwise be necessary to develop War Eagle to its full capacity,” said Brent Bilsland, Hallador’s President and CEO. “Oaktown 1, Oaktown 2, Carlisle and War Eagle will become one large underground complex representing 230 million tons of identified reserves (with 161 million tons controlled reserves), with three portals, two wash plants and two rail facilities. We look forward to working with Vectren in an orderly transition.”
The coal operations lost money for Vectren in the first quarter
Vectren said May 12 that its Coal Mining operations, run by Vectren Fuels, lost $1.1m in the first quarter of this year, compared to a loss of $6m in the first quarter of 2013. Coal Mining revenues were $81.5m in the first quarter 2014 compared to revenues of $63.1m in first quarter 2013, primarily due to additional volumes sold of 0.3 million tons as well as an increased sales price per ton. While additional cost improvement measures are still being implemented at the older Prosperity deep mine, substantial progress was made in the second half of 2013 and continued into the first quarter of 2014. The execution of the revised mining plan has resulted in significant improvement in the production costs at this mine.
Vectren Fuels’ expected production is approximately 7.3 million tons in 2014, compared to 6.2 million tons in 2013. Coal sales in 2014 were estimated at 7.6 million tons, compared to 6.2 million tons in 2013. The expected production increase in 2014 primarily relates to a full year of operation at the second mine at the company’s Oaktown mining complex, which opened during the second quarter of 2013.
As of Mar. 31, 2014, nearly all of the expected 2014 sales were committed and priced. Longer term, the company said in May that it continues to believe that there will be reduced coal volumes available from Central Appalachia due to increased regulation and that the large number of scrubbers to be installed throughout the United States, including the Midwest, should continue to drive stronger demand for Illinois Basin coal, including the coal from its three deep mines in Indiana.