Westmoreland Coal to ‘drop down’ a Wyoming mine to new MLP affiliate

Westmoreland Coal (NasdaqGM:WLB) and Westmoreland Resource Partners LP (NYSE: WMLP) announced June 2 that WMLP has agreed to acquire 100% of the outstanding equity interests in Westmoreland Kemmerer LLC, which owns and operates the Kemmerer surface mine in Wyoming.

Upon closing of the transaction, Westmoreland will receive $135 million of cash, $20 million of WMLP common units, and $75 million of new WMLP Class A convertible units.

Since Westmoreland’s acquisition of the Kemmerer Mine from Chevron in January 2012, as part of Chevron’s exit from the U.S. coal business, Westmoreland said that its management has significantly enhanced financial and operating performance, exceeding guidance, and signed a new labor agreement driving operational and productivity improvements while reducing safety citations and reportable incidents.

“We are excited to announce the first transaction of our MLP drop-down strategy,” said Keith E. Alessi, CEO of Westmoreland and WMLP. “We expect the contribution of Kemmerer to significantly expand the size of the production base at WMLP, diversify the customers we serve, and improve the stability of its cash flows through Kemmerer’s long-term contracts. This transaction demonstrates Westmoreland’s continued support of WMLP and our commitment to properly capitalize the partnership and position the balance sheet to fund future transactions.”

The acquisition, which is expected to close in the third quarter, is expected to be immediately accretive to distributable cash flow on a per unit basis to WMLP. Kemmerer will operate as a wholly-owned subsidiary of WMLP. The transaction is subject to a financing condition and other customary closing conditions.

Westmoreland’s coal operations include sub-bituminous and lignite surface coal mining in the Western United States and Canada, an underground bituminous coal mine in Ohio, a char production facility, and a 50% interest in an activated carbon plant. Westmoreland also owns the general partner of and a majority interest in Westmoreland Resource Partners, formerly Oxford Resource Partners LP, a publicly-traded coal master limited partnership. Westmoreland Resources Partners up to now has been based on the ex-Oxford mines in Ohio.

The Kemmerer Mine is a 13,400-acre surface mine complex located in southwest Wyoming. It currently produces coal in three active areas from 12 primary seams and their splits. Coal from this operation primarily supplies fuel to PacifiCorp’s adjacent Naughton Power Station via overland conveyor. Notable is that for clean-air reasons, PacifiCorp plans to switch one of the plant’s three units to natural gas later this decade.

In an integrated resource plan filed March 31 at the Idaho Public Utilities Commission, PacifiCorp said for Naughton Unit 3 it planned to issue a request for proposals (RFP) to procure gas transportation and resume engineering, procurement, and construction (EPC) contract procurement activities for the natural gas conversion in the first quarter of 2016. PacifiCorp said it may update its economic analysis of natural gas conversion in conjunction with the RFP processes to align gas transportation and EPC cost assumptions with market bids. Unit 3 of the three-unit plant is owned and operated by PacifiCorp and was commissioned in 1971. Naughton Unit 3 has a capacity of 330 MW. 

U.S. Mine Safety and Health Administration data shows that Kemmerer produced 1.1 million tons in the first quarter of this year and 4.4 million tons in all of 2014.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.