TECO Energy (NYSE: TE) has signed an agreement to sell its coal mining subsidiary, TECO Coal and its subsidiaries, to Cambrian Coal Corp., a member of the privately-held Booth Energy Group.
The total sales price of $170m for the coal subsidiary, which operates mostly in eastern Kentucky, includes future contingent consideration of $50m if certain coal benchmark prices reach certain levels over the next five years. The $120m cash base purchase price is subject to post-closing adjustments.
The sale is expected to close by year end, subject to the purchasers obtaining financing, and other normal closing conditions. TECO Energy, the parent of Florida utility Tampa Electric, said Oct. 20 that it expects to use sale proceeds to repay debt and for general corporate purposes.
As a result of the agreement, in the third quarter of 2014, TECO Coal will be classified as an asset held for sale and its operating results will be reported as discontinued operations. TECO Energy will record a non-cash valuation adjustment of approximately $65m, after tax, to the carrying value of TECO Coal to reflect the sales price.
TECO Energy Chief Executive Officer John Ramil said: “This transaction will result in a complete exit from the coal mining business. TECO Coal has been an important component of TECO Energy’s business mix since the mid-1970s, contributing strong earnings and cash flow for many years.”
Ramil added: “When this transaction closes, it will complete a long journey returning TECO Energy to its core utility businesses. I would like to thank all those who have successfully contributed over the years to positioning our company to completely focus on growing our strong utility operations.”
In connection with the signing of this agreement, TECO Coal is issuing a Worker Adjustment and Retraining Notice (WARN) to all of its team members to allow the new owners maximum flexibility in the operations of the company.
J.P. Morgan Securities LLC acted as TECO Energy’s financial advisor, and Skadden, Arps, Slate, Meagher & Flom LLP acted as its legal advisors. Deutsche Bank Securities Inc. acted as exclusive financial advisor, and Frost Brown Todd acted as legal advisors to Cambrian Coal.
TECO Energy is an energy-related holding company with regulated electric and gas utilities in Florida and New Mexico. Tampa Electric serves more than 700,000 customers in West Central Florida; Peoples Gas System serves more than 350,000 customers across Florida; and New Mexico Gas Co. serves more than 513,000 customers across New Mexico.
The TECO Energy statement didn’t give further information about Booth Energy Group. It is controlled by veteran coal operator Jim Booth, who has extensive Central Appalachia operations in eastern Kentucky and southern West Virginia under names like Beech Fork Processing and Argus Energy WV LLC.
Said the Booth Energy Group website: “Booth Energy produces coal using the underground and surface mining methods. We mine primarily in the central Appalachia coal fields of Kentucky, West Virginia and Virginia. We employ 1400 members within the Booth Energy Group. We market our coal to various utilities, including Detroit Edison, Progress Energy, American Electric Power, Virginia Electric Power and Georgia Power. We market our coal by Norfolk Southern Rail, CSX Railroad, via truck to the Big Sandy AEP Plant and via barge on the Big Sandy River through our Wayne County River Terminal. The Booth Energy Group produces and ships 7.0 million tons annually to domestic and export markets.”
TECO Coal did record net income in the latest quarter
TECO Energy reported July 31 that TECO Coal had second quarter 2014 net income of $0.8m on sales of 1.5 million tons, compared with net income of $0.7m on similar sales volumes in the same period in 2013. In 2014, second-quarter results reflect an average net per ton selling price, excluding transportation allowances, of $80, more than $5 lower than in 2013. In the second quarter of 2014, the all-in total per-ton cost of sales was $80, compared with almost $86 in the 2013 period.
Second quarter costs include an approximately $0.30 per ton negative impact of incremental transportation costs due to a tunnel fire on the railroad serving the Premier Elkhorn Coal mining complex in eastern Kentucky. These costs are expected to be recovered from the railroad in a future quarter.
Headquartered near Myra in Pike County, Ky., Premier Elkhorn Coal has both underground and strip mines that produce high-quality steam coal for utilities, specialty stoker products for ferro-silicon and industrial uses, pulverized coal injection coals for steel mills and other metallurgical products.
TECO Coal recorded a 2014 year-to-date loss through the second quarter of $0.8m on sales of 2.8 million tons, compared with net income of $3.7m on similar sales volumes in the 2013 period. The 2014 year-to-date average net per-ton selling price was almost $80, compared with $87 in 2013. The all-in total per-ton cost of sales was $81, compared with almost $87 in 2013.
TECO Coal expects 2014 sales of about 6 million tons, reflecting almost 70% specialty coal. At prices currently being paid for its products, about $80 per ton, TECO Coal expects to be about earnings breakeven for the year, and cash-flow positive, the parent company reported on July 31. However, the most recent quarterly Asian benchmark price was set at levels below the level at which TECO Coal’s current prices were set. The all-in cost of sales is expected to be $79-$83 per ton.
This is the second recent case this year of a utility holding company divesting a coal mining operation to focus on core utility operations. Hallador Energy (NASDAQ: HNRG) said Aug. 29 that its wholly owned subsidiary, Sunrise Coal LLC, closed the acquisition of Indiana coal producer Vectren Fuels for $320m. Hallador is headquartered in Denver, Colo., and through its wholly owned subsidiary, Sunrise Coal, produces coal in the Illinois Basis for the electric power generation industry. The buy from Vectren Corp. (NYSE: VVC) included three deep mines that in large part supply coal to Vectren utility plants. Tampa Electric, on the other hand, had some years ago weaned itself off of using coal from TECO Coal.