Bowie Resource Partners LP, which is a major coal producer in Utah, filed on June 19 at the Securities and Exchange Commission an initial prospectus for its planned public offering as the nation’s newest coal-based master limited partnership.
Bowie operates three underground coal mines in Utah with a productive capacity of approximately 12.6 million tons per year that it bought earlier this decade from Arch Coal (NYSE: ACI). They are:
- the Sufco mine, near Salina, Utah, which is a longwall operation with a productive capacity of approximately 7.0 million tons per year;
- the Skyline mine, near Scofield, Utah, which is a longwall operation with a productive capacity of approximately 4.5 million tons per year; and
- the Dugout Canyon mine, near Price, Utah, which has been a longwall operation but is currently a multi-continuous miner operation with a productive capacity of approximately 1.1 million tons per year.
These mines are located in the Uinta Basin in Utah within the Western Bituminous region where a significant percentage of the coal qualifies as “compliance coal” under the Clean Air Act. These operations were among the most productive underground coal mines in the United States in 2014 on a clean tons produced per man hour basis based on MSHA data and, according to consultant Wood Mackenzie, Bowie is one of the largest producers of low-cost, high margin thermal coal in the Western Bituminous region.
The majority of Bowie’s coal sales for the year ended December 31, 2014 and the three months ended March 31, 2015 were made to domestic customers pursuant to long-term, high-volume coal supply agreements with fixed pricing, subject to certain price escalators and adjustments. On a pro forma basis, after giving effect to the closing of the “Utah Transaction,” which involves a major coal supply deal with PacifiCorp, Bowie expect coal sales under existing coal supply agreements for each of the next four years to surpass 80% of production for the twelve months ended March 31, 2015, which should provide significant sustainable revenue and allow it to generate stable and reliable cash flows.
The prospectus added: “As part of our domestic sales portfolio, we have multi-year coal supply agreements with PacifiCorp and Intermountain Power Agency (“IPA”), two investment-grade regional utilities that operate power plants located in close proximity to our mines. These plants were designed to burn high Btu, low sulfur Utah coal. Our coal supply agreements with PacifiCorp and IPA provide for aggregate sales of (i) a minimum of 7.0 million tons and a maximum of 10.5 million tons per year through December 31, 2020, (ii) a minimum of 4.5 million tons and a maximum of 6.0 million tons per year through December 31, 2024 and (iii) a minimum of 2.0 million tons and a maximum of 3.0 million tons per year through December 31, 2029. We believe that our contracts with PacifiCorp and IPA that are set to expire in 2020 and 2024 have the potential to be extended in the future, should we choose to do so. All of our coal supply agreements with PacifiCorp and IPA include price escalators, as well as provisions that allow us to pass through (by means of a price increase) certain increases in mining and transportation costs.”
Coal production at Bowie’s mines increased from 9.7 million tons for the year ended December 31, 2013 to 11.4 million tons for the year ended December 31, 2014. During the year ended December 31, 2014, it realized net loss, operating income and Adjusted EBITDA of $4.9 million, $31.4 million and $125.3 million, respectively, as compared to net income, operating income and Adjusted EBITDA of $8.1 million, $22.1 million and $75.5 million, respectively, for the year ended December 31, 2013.”
Company looks to acquire refined coal facilities from affiliate
“We plan to seek acquisition targets similar to our current operations, utilizing our sales contract position, our strategic export capacity and our proven ability to maximize productivity in order to facilitate future accretive transactions,” the company said. “Pursuant to the omnibus agreement that we expect to enter into in connection with this offering, our sponsor will grant us a right of first refusal with respect to certain coal and terminal properties. In addition, we expect to enter into an agreement with Bowie Refined Coal, LLC, an affiliate of our sponsor, providing us with a right of first refusal to acquire certain refined coal projects that it owns. Additionally, we will pursue three organic development projects in the next decade; specifically, the addition of a third continuous miner to our Dugout Canyon mine, the development of the Fossil Rock reserves and the development of reserves in the Lower Hiawatha seam of our Sufco mine.”
Fossil Rock is an undeveloped, deep-minable coal reserve that Bowie recently got in the deal with Bowie, along with the long-shut Trail Mountain mine of PacifiCorp, which is located next to the Fossil Rock reserves.
The company said: “We benefit from a differentiated transportation and logistics network established by our sponsor, including its access to port terminals in California through which we export our coal to a variety of growing economies on the Pacific Rim. According to Wood Mackenzie, overall demand for thermal coal imports into the Pacific market is expected to increase from 757 million metric tons in 2014 to 910 million metric tons in 2020 and 1.3 billion metric tons in 2030. Through our sponsor, we are the only coal producer with contracted U.S. West Coast export capacity, with access to terminals with an aggregate throughput capacity of approximately 5.7 million tons per year. For the year ended December 31, 2014, our sponsor exported approximately 3.3 million tons through these terminals, and we expect our sponsor to export approximately 1.0 million tons through these terminals for the year ending December 31, 2015. Prior to our sponsor leasing these terminals, no significant amount of thermal coal had been shipped through these terminals for over 10 years.
“Trafigura AG (“Trafigura AG”) is the exclusive marketer of our uncommitted coal, and its parent company, Trafigura Beheer B.V. (“Trafigura BV”), indirectly owns a minority interest in our sponsor. Trafigura AG and its affiliates directly or indirectly market approximately 50 million tons of coal per year in the international market. By leveraging Trafigura AG’s and its affiliates’ significant expertise in the coal export market and existing commodities trading infrastructure, we are able to sell our coal internationally to a variety of intermediary and end users in the power generation business.
“We believe our Dugout Canyon mine can support an additional continuous miner unit without any additional surface infrastructure, which would increase its productive capacity from approximately 1.1 million tons per year to approximately 1.5 million tons per year. The Fossil Rock reserves increase our proven and probable reserves by an estimated 11.2 million tons and 32.5 million tons, respectively, and at full production, we expect to produce approximately 4.0 million tons of coal per year from the Fossil Rock reserves from 2017 through 2034. Additionally, we expect to obtain a lease from the BLM through the lease by application process for the Greens Hollow tract, which contains approximately 50.5 million tons of non-reserve coal deposits, including those in the Lower Hiawatha seam, accessible through our Sufco mine.
On a pro forma basis, after giving effect to the closing of the Utah Transaction, Bowie expects coal sales under existing coal supply agreements of about 11.2 million tons in 2015, 9 million tons in 2016, 9.5 million tons in 2017 and 9.3 million tons in 2018, which represent around 100%, 82%, 86% and 84%, respectively, of production for the twelve months ended March 31, 2015. Included in the sales portfolio are coal supply agreements with PacifiCorp and IPA providing for aggregate sales of: a minimum of 7.0 million tons and a maximum of 10.5 million tons per year through Dec. 31, 2020; a minimum of 4.5 million tons and a maximum of 6 million tons per year through Dec. 31, 2024; and a minimum of 2 million tons and a maximum of 3 million tons per year through Dec. 31, 2029. All of thes deals have fixed pricing, subject to certain price escalators and adjustments.
Development of Fossil Rock would cut transportation costs to PacifiCorp plants
On June 5, as part of the Utah Transaction, Bowie’s sponsor entered into an agreement with PacifiCorp to supply all of the coal requirements of PacifiCorp’s Huntington Power Plant in Utah through 2029. The Fossil Rock reserves are located closer to PacifiCorp’s Huntington and Hunter plants than Bowie’s existing mines, which Bowie believes will significantly reduce its transportation costs to this principal customer.
On June 17, Bowie was notified by the BLM, as part of the lease by application process, that it submitted the only bid in the competitive lease sale of the Flat Canyon tract. On June 19, it was notified by the BLM, as part of the lease by application process, that its bid met or exceeded the BLM’s estimate of the fair market value of the tract, which contains approximately 14.2 million tons and 15.2 million tons of proven and probable reserves, respectively. The issuance by the BLM of the lease of the Flat Canyon tract remains subject to a 30-day antitrust review of the U.S. Department of Justice. The leasing action could also be challenged in the Department of Interior’s Board of Land Appeals or in federal district court. The May 15, Notice of Lease Sale of the Flat Canyon tract prompted letters by several non-governmental organizations objecting to the lease sale on, among other things, environmental grounds.
The prospectus said: “One of our principal strengths is our relationship with our sponsor. Our sponsor is owned by Cedars Energy, LLC (“Cedars”) and Galena US Holdings, Inc. (“Galena”). Cedars is a coal sector investor with a track record of acquiring, integrating and developing coal and coal-related assets. Galena is wholly owned by Galena Private Equity Resource Fund, which is managed by Galena Asset Management S.A. (“Galena Asset Management”), a wholly-owned subsidiary of Trafigura BV. Trafigura AG, a wholly-owned subsidiary of Trafigura BV, is our exclusive marketing agent. Trafigura BV has 45 offices in 36 countries around the world and generated revenues of approximately $127.6 billion in 2014. By leveraging Trafigura AG’s and its affiliates’ significant expertise in the coal export market and existing commodities trading infrastructure, we are able to sell our coal internationally to a variety of intermediary and end users in the power generation business.
“Our sponsor has extensive experience in identifying, acquiring, financing and integrating assets that enhance the value of our business. Our sponsor successfully executed a business plan that increased the post-acquisition profitability of our operations, resulting in a 66% increase in Adjusted EBITDA from the year ended December 31, 2013 to the year ended December 31, 2014. We believe that our sponsor’s experience and expertise in mergers and acquisitions of strategic assets will enhance our ability to achieve our growth objectives.”