In a move that signals a major realignment in the coal industry, Murray Energy and Foresight Energy GP LLC (FEGP) announced March 15 that Murray Energy and Foresight Reserves LP (the owner of FEGP) have entered a definitive agreement for a Murray partial buy of Foresight.
Under this transaction, Murray Energy will acquire a controlling interest in Foresight Energy LP (NYSE: FELP) and FEGP (together with FELP referred to as “Foresight Energy”), to create what its backers call the premier coal mining company in the U.S., controlling over 9 billion tons of coal reserves. Following the closing, Chris Cline, the founder of Foresight Energy, will remain a significant investor in Foresight Energy, maintaining 22.5% equity interest in FEGP and an approximately 35% interest in FELP and will be actively involved as a member of the Board of Directors of that company.
“Mr. Chris Cline, who is very much respected in the United States coal industry, and his team at Foresight Energy, have built and operated four (4) of the most efficient coal mines in America utilizing the longwall mining technique. We are pleased that these operations will join Murray Energy’s twelve (12) mines employing thirteen (13) longwall systems,” stated Robert E. Murray, Chairman, President, and Chief Executive Officer of Murray Energy. “We are very excited about this new venture and the resultant world class organization. It is truly a transformative event for our companies and the entire world coal industry.”
“This is a great day for American coal,” said Cline. “Bob Murray and I both started as miners, and we know how to run safe, efficient and low cost mining operations. We think that we will do that even better together by sharing best practices and exploiting obvious synergies on cost.”
Murray added: “The United States coal markets are severely depressed, due to excessive government regulation and the growing utilization of natural gas for electric power generation. In this extremely distressed coal marketplace, a coal mining company must strive to be the lowest cost producer in any sourcing region. Foresight Energy has continued to be the low cost producer in the Illinois Basin, with a focus on safely producing high quality, high heat coal, strategically located near low cost transportation. This is wholly consistent with the ‘Concentric Ellipse’ strategy that I outlined for Murray Energy nearly thirty (30) years ago. By partnering with Foresight Energy, we will be able to continue to insure the safety of our miners, further reduce our coal production costs, and exploit the numerous synergies in our respective operations. This will help us to compete at an entirely new level in the global marketplace.”
Murray also stated: “Moreover, the newly combined companies and operations will provide a strategic platform for further growth of our businesses. The structure and financial benefits of this transformative transaction will facilitate the reduction of our debt and further acquisitions and will provide additional operating flexibility.”
“Foresight Energy and Murray Energy are very similar in that both were founded by entrepreneurs whose entire careers have centered on underground coal mining,” said Robert D. Moore, Chief Operating and Financial Officer of Murray Energy. “Both Messrs. Murray and Cline developed their companies from scratch into the low cost producers in the regions in which they operate, Mr. Murray in Northern Appalachia and Mr. Cline in the Illinois Basin.”
This new business combination will lead to further synergies, which will, in turn, lead to even lower mining costs and safer operations, and will provide for future growth of the companies through future drop-downs of other assets into the public partnership. Murray Energy’s current operation in Illinois, where Foresight operates, is the Galatia longwall mine complex.
Michael Beyer, Chief Executive of Foresight Energy added: “This is a beneficial transaction for Foresight Energy’s unit holders, as it partners the low cost operators in the Northern Appalachian and Illinois Basins. Murray Energy brings a strong visible pipeline of growth opportunities with twelve (12) mines and over $713 million in 2014 Adjusted EBITDA that will supplement Foresight Energy’s organic growth opportunities.”
In consideration for the transaction, Murray Energy will pay cash consideration of $1.395 billion, and will acquire:
- An 80% voting interest in FEGP, with a 77.5% interest in the incentive distribution rights;
- Approximately 50% of the limited partner interest in Foresight Energy, including all of the outstanding subordinated units; and
- Access to certain other coal handling, transportation and transloading facilities.
Murray Energy works out finances related to this buy
Murray Energy will finance the purchase price with additional indebtedness. To that end, Murray Energy announced March 16 that it expects to finance the acquisition and pay related fees and expenses with the proceeds of debt financing arranged by Deutsche Bank Securities Inc. and Goldman, Sachs & Co., with Deutsche Bank acting as lead, together with cash on hand. Subject to market and other conditions, the debt financing is expected to consist of a new $1,600 million term loan facility (which will refinance Murray Energy’s existing term loan B) and approximately $860 million of second-lien senior secured notes. In addition, Murray Energy plans to amend its existing asset-based lending facility, and to solicit consents to amend certain items in the indentures relating to its existing 9.500% 2nd lien notes, due 2020 and its existing 8.625% 2nd lien notes, due 2021, in each case in order to permit the acquisition and related financing transactions.
In connection with the acquisition, Foresight is expected to refinance its existing term loan and revolving credit facilities with new facilities arranged by Deutsche Bank and Goldman Sachs, with Deutsche Bank acting as lead. Subject to market and other conditions, the new facilities are expected to consist of a new $625 million term loan facility and a $125 million asset-based revolving credit facility. If the acquisition closes, it would constitute a Change of Control event for the existing Foresight 7.875% notes, due 2020, unless the indenture governing those notes is amended. Any notes that are tendered pursuant to a change of control offer are expected to be refinanced with indebtedness of Foresight and its subsidiaries. Murray Energy said it has not obtained any financing commitments in connection with the acquisition.
Also on March 16, Murray Energy announced that it will solicit consents from holders of its outstanding 8.625% Senior Secured Notes due 2021 (the “2013 Notes”) and from holders of its outstanding 9.50% Senior Secured Notes due 2020 (the “2014 Notes” and, together with the 2013 Notes, the “Notes”) to approve amendments (the “Proposed Amendments”) to the indenture relating to the 2013 Notes and the indenture relating to the 2014 Notes (together, the “Indentures”).
Murray Energy is seeking the consent on these proposed amendments in order to facilitate the implementation of changes to its capital structure in connection with the acquisition of interests in Foresight Energy GP Foresight Energy LP and to provide Murray Energy with additional operational flexibility following the acquisition. In particular, the proposed amendments will allow the incurrence of additional secured indebtedness in order to finance and facilitate the acquisition.
Murray already dominates the Pittsburgh seam longwall space in Northern Appalachia
This is the latest aggressive move for Bob Murray, the founder of Murray Energy. In late 2013, he acquired the Pittsburgh-seam longwall mines in northern West Virginia of CONSOL Energy. That move, along with his existing two longwall mines in neighboring Ohio, secured his position as the dominant producer of that type of coal in Northern Appalachia. CONSOL remained in the game with three longwall mines in southwest Pennsylvania, with Alpha Natural Resources (Emerald and Cumberland mines) and Patriot Coal (Federal No. 2) controlling the other Pittsburgh-seam longwall mines in that region.
This latest deal for Foresight makes Murray the top longwall producer in Illinois and in the Illinois Basin more broadly. U.S. Mine Safety and Health Administration data shows two active mines under Murray’s American Coal at the Galatia complex in Saline County, Ill. MSHA data shows that the New Era portal produced 5.5 million tons in 2014 and 4.4 million tons in 2013, while the New Future portal produced 5.7 million tons in 2014 and 5.5 million tons in 2013.
Foresight Energy LP on Feb. 6 reported financial and operating results 2014, when it set new records for coal production, sales volumes, coal sales revenue and Adjusted EBITDA. Coal sales revenue for the year grew to $1.1bn, up 16% from 2013, contributing to record Adjusted EBITDA of $404.5m and record net income attributable to controlling interests of $135.2m.
The company produced 22.5 million tons of coal in all of 2014 from its Illinois mines, up sharply from 18 million tons in 2013. It produced 5.7 million tons in the fourth quarter of 2014, up from 4.2 million tons in the year-ago quarter. The start-up of the second longwall at the Sugar Camp complex in June 2014 and a higher committed sales position drove record coal sales revenue and record sales volumes in 2014.