Westmoreland Resource Partners LP (NYSE: WMLP) on June 2 filed a registration statement on Form S-1 with the Securities and Exchange Commission related to its plan to buy the Kemmerer coal mine in Wyoming from sponsor Westmoreland Coal (NasdaqGM: WLB) in a “drop down” transaction that may be the first of several such deals for Westmoreland Coal mines.
The Form S-1 supports the planned float to the public of new units in Westmoreland Resources to help pay for the Kemmerer buy.
Said the Form S-1: “The Kemmerer Mine supplies approximately 2.7 million tons per year to the adjacent 687 MW Naughton Power Station in Wyoming, which is owned and operated by PacifiCorp. The Naughton Power Station is a base load plant that operates at a high capacity factor, with a monthly average capacity factor of approximately 86% over the past three years. Electrostatic precipitators and scrubbers are installed on all three units to control particulate emissions and sulfur-dioxide and are expected to keep the plant compliant with environmental rules. Coal is delivered along a 4,200-foot belt conveyor under a long-term sales agreement that expires in December 2021. Kemmerer also supplies approximately 1.7 million tons a year to various industrial customers through long-term contracts extending to 2026. Certain of the Kemmerer Mine reserves were contributed to WMLP from [Westmoreland Coal] as part of its acquisition of our general partner.”
Notable is that PacifiCorp plans to switch Naughton Unit 3 to natural gas later this decade for clean-air reasons, leaving the other two units on coal.
“We expect the Contribution [of Kemmerer] to significantly expand the size of our production base, diversify the customers we serve and improve the stability of our cash flows by increasing the average remaining term of our long-term supply contracts from 3.2 years to 5.8 years,” said the Form S-1. “In 2014, Kemmerer produced 4.4 million tons of coal, supplying the adjacent Naughton Power Station as well as various industrial customers. The Naughton Power Station supplies power to the Mountain West region, which the U.S. Census Bureau has forecasted will grow at a rate of 17.6% between 2010 and 2020, and at a rate of 17.0% between 2020 and 2030. In addition to PacifiCorp, which owns the Naughton Power Station, Kemmerer’s industrial customers include Tata Chemicals North America Inc. and FMC Corporation, which are sources of steady and predictable demand. When combined with our existing operations, the addition of Kemmerer represents a 78% increase to our overall coal production as of December 31, 2014. Further, Kemmerer has long-term contracts that have a weighted-average remaining life of seven years. Many of these long life contracts also have varying levels of cost protection which help reduce the impact of external market conditions on Kemmerer’s margins and cash flows. Following [Westmoreland Coal’s] acquisition of Kemmerer in 2012, [Westmoreland Coal] management significantly enhanced its financial performance, driving strong improvements in productivity, costs and safety.”
Westmoreland Resources was formed to take on the operations of Ohio-based coal producer Oxford Resource Partners and its subsidiary, Oxford Mining. Said the S-1 about the mainstay coal contract for those Ohio mines: “On February 26, 2015, Oxford Mining and AEP Generation Resources Inc. entered into a coal purchase and sale agreement (the ‘AEP Agreement’). Under the AEP Agreement, Oxford Mining agreed to sell, and AEP agreed to purchase, certain quantities of coal from January 1, 2016 through December 31, 2018 to supply AEP’s Conesville, Ohio generating plant: 1.3 million tons during 2016; 1.2 million tons during 2017; and 0.8 million tons during 2018. In addition, pursuant to the AEP Agreement, Oxford Mining has the right of first refusal to supply up to a certain number of additional tons of coal, as needed by AEP: 400,000 tons during 2016; 300,000 tons during 2017; and 200,000 tons during 2018, an increase of 31%, 25%, and 27% over contracted levels, respectively.
“We believe our long-term coal sales contracts provide us with a reliable and stable revenue base. For the year ended December 31, 2014, approximately 96.9% of our coal tons sold were sold under long-term supply contracts. We currently have long-term coal sales contracts in place for 2015, 2016, 2017 and 2018 that represent approximately 89.3%, 69.3%, 61.3% and 48.0%, respectively, of our 2015 estimated coal sales of 3.5 to 4.0 million tons. These estimates are based on our historical relationship with our customers and management’s knowledge of the customers’ coal requirements and the customers’ other coal supply arrangements. Substantially all of our customers purchase coal for terms of one year or longer, and the customers served by our Kemmerer Mine purchase coal for terms of one year or longer. We also supply coal on a short-term or spot market basis for some of our customers.”
In other points of note from the S-1:
- Currently, none of the Westmoreland Resources employees are represented under collective bargaining agreements. However, about 236 of Kemmerer’s 297 employees are represented by the United Mine Workers of America union. “Although we expect that the Kemmerer employees will continue to be employed at the [Westmoreland Coal] level following the Contribution, the exposure to unionized labor in our workforce nonetheless presents an increased risk of strikes and other labor disputes, and our ability to alter labor costs will be subject to collective bargaining, which could adversely affect stability of production and our results of operations. While the occurrence of labor strikes are generally deemed force majeure events under Kemmerer’s long-term coal supply agreements, which would thereby exempt the mine from its delivery obligations, the loss of revenue from the Kemmerer Mine caused by a labor strike for even a short time could have a material adverse effect on our financial results, cash flows and ability to make distributions to our unitholders.”
- For the year ended Dec. 31, 2014, Westmoreland Resources derived approximately 99.1% of total revenues from coal sales to its ten largest customers (including their affiliates), with affiliates of the following top three customers accounting for approximately 87.5% of coal revenues for that period: American Electric Power (56.7%); FirstEnergy Corp. (16.5%); and East Kentucky Power Cooperative (14.3%). Approximately 32.2% of these sales were facilitated by coal brokers.
- As of March 31, 2015, the company owned or controlled approximately 104.1 million tons of coal reserves, of which it has leased or subleased approximately 53.6 million tons of reserves to others. These estimates are based on an initial evaluation, as well as subsequent acquisitions, dispositions, depletion of reserves, changes in available geological or mining data and other factors.
- In 2013, Oxford idled its Illinois Basin operations, which are in western Kentucky. “We are seeking to sell the remaining Illinois Basin equipment, consisting of a large-capacity shovel and several smaller pieces of equipment, and would consider offers to purchase the remaining coal reserves and/or facilities related to our Illinois Basin operations,” the Form S-1 said.
Efforts ongoing to sell assets out of Oxford’s shut operations in western Kentucky
The western Kentucky operations consist of the Muhlenberg mining complex, located in Muhlenberg and McLean counties. Oxford began mining operations at this complex in October 2009. Operations at the Muhlenberg mining complex targeted the #5, #6, #9, #10, #11, #12 and #13 coal seams of the Illinois Basin. As of March 31, 2015, the Muhlenberg mining complex included 16.3 million tons of proven and probable coal reserves.
Coal produced from this mining complex was usually crushed at the mine site and then trucked to the Island river terminal on the Green River or directly to the customer. Coal trucked to the Island river terminal was then transported to the customer by barge. While the company sold the Island river terminal in April 2014, it retained the right to ship tons through that dock.
This mining complex used the area method of surface mining. The infrastructure at this mining complex includes one coal crusher and one truck scales. This mining complex was idled in December 2013 and remained idled throughout year ended Dec. 31, 2014. None of these assets were classified as held for sale as of March 31, 2015.
The mining operations in Ohio are:
Cadiz Mining Complex
This operation is located principally in Harrison County, and also includes reserves located in Jefferson County. It consists of the Harrison Resources, Daron, Ellis and Sandy Ridge mines. Operations at the Cadiz mining complex target the Pittsburgh #8, Redstone #8A and Meigs Creek #9 coal seams. As of March 31, 2015, the Cadiz mining complex included 7.3 million tons of proven and probable coal reserves. Coal produced from the Cadiz mining complex is trucked either to the Bellaire river terminal on the Ohio River and then transported by barge to the customer, trucked directly to the customer, or trucked to the Cadiz rail loadout facility on the Ohio Central Railroad and then transported by rail to the customer, or trucked to the Strasburg preparation plant then transported by truck to the customer after processing is completed. This mining complex uses the area, contour, auger and highwall miner methods of surface mining. The infrastructure at this mining complex includes three coal crushers, three truck scales and the Cadiz rail loadout. This mining complex produced 3.1 million tons of coal for the year ended Dec. 31, 2014 and 0.6 million tons of coal for the three months ended March 31, 2015.
In early October 2014, Oxford Mining entered into a membership interest redemption agreement with Harrison Resources and CONSOL of Ohio LLC under which Harrison Resources redeemed all of CONSOL’s interest in Harrison Resources. Harrison Resources had been a joint venture owned 51% by Oxford Mining and 49% by CONSOL, and as a result of the redemption Oxford Mining owns 100% of Harrison Resources. In connection with the redemption, Harrison Resources acquired 0.9 million tons of coal reserves from a CONSOL affiliate, and also options to purchase an aggregate of 5.6 million additional tons of coal reserves from a CONSOL affiliate. These tons are in addition to the 2.6 million tons of coal reserves already owned by Harrison Resources. Harrison Resources paid total consideration of $3.6 million in these transactions. These transactions were effective as of Oct. 1, 2014.
Tuscarawas Mining Complex
The Tuscarawas complex is in Tuscarawas, Columbiana and Stark counties, and currently consists of the East Canton, Garrett, Hunt and Stillwater mines. Operations at this complex target the Brookville #4, Lower Kittanning #5, Middle Kittanning #6, Upper Freeport #7 and Mahoning #7A seams. As of March 31, 2015, the Tuscarawas mining complex included 5.7 million tons of proven and probable coal reserves. Coal produced from the Tuscarawas complex is transported by truck directly to customers, the Barb Tipple blending and coal crushing facility or the Strasburg preparation plant. Coal trucked to the Barb Tipple blending and coal crushing facility, the Conesville preparation plant, or the Strasburg prep plant is then transported by truck to the customer after processing is completed. This complex uses the area, contour, auger and highwall miner methods of surface mining. Infrastructure includes three coal crushers with truck scales and the Strasburg blending facility and prep plant. This mining complex produced 1.2 million tons of coal for the year ended Dec. 31, 2014 and 0.2 million tons of coal in the first quarter of this year.
Plainfield Mining Complex
The Plainfield complex is in Muskingum, Guernsey and Coshocton counties, and is currently inactive. Operations at the complex target the Middle Kittanning #6 seam. As of March 31, 2015, the Plainfield complex included 3.4 million tons of proven and probable coal reserves. When operating, the majority of the coal produced from the Plainfield complex is trucked to the Barb Tipple facility for crushing and blending or directly to the customer. Coal trucked to the Barb Tipple is transported by truck to the customer after processing. Some of the coal production is trucked to the Conesville prep plant and then transported by truck to the customer. This complex uses contour and highwall miner methods of surface mining. The infrastructure includes the Barb Tipple blending and coal crushing facility, and Conesville prep plant and truck scale. This complex produced no coal last year or in the first quarter of this year. The company intends to resume mining at the Plainfield complex in 2018.
Belmont Mining Complex
The Belmont complex is in Belmont County, and currently consists of the Speidel and Wheeling Valley mines. Operations at the Belmont complex target the Pittsburgh #8 and Meigs Creek #9 coal seams. As of March 31, 2015, the Belmont complex included 10.5 million tons of proven and probable coal reserves. Coal produced from this complex is primarily transported to the Bellaire river terminal on the Ohio River and then transported by barge to the customer, or by truck to the Barb Tipple or the Conesville prep plant and then transported by truck to the customer. Coal produced here is crushed and blended at the Bellaire river terminal before it is loaded onto barges for shipment to customers on the Ohio River. This complex uses area, contour, auger and highwall miner methods of surface mining. It produced 0.4 million tons of coal for the year ended Dec. 31, 2014, and 0.2 million tons of coal in the first quarter of this year.
New Lexington Mining Complex
The New Lexington complex is located in Perry, Athens and Morgan counties, and currently consists of the Avondale and New Lexington mines. Operations at the complex target the Lower Kittanning #5 and Middle Kittanning #6 coal seams. As of March 31, 2015, the complex included 5.9 million tons of proven and probable coal reserves. Coal produced here is delivered via off-highway trucks to the New Lexington rail loadout on the Ohio Central Railroad where it is then transported by rail to the customer or to the Barb Tipple. Some of the coal production is trucked to the Conesville prep plant and then trucked to the customer. This complex uses the area and auger methods of surface mining. The infrastructure here includes a coal crusher and the New Lexington rail loadout. This complex produced 0.7 million tons of coal for the year ended Dec. 31, 2014, and 0.2 million tons of coal for the three months ended March 31, 2015.
Noble Mining Complex
The Noble complex is located in Noble and Guernsey counties, and currently consists of the King-Crum mine. Operations target the Pittsburgh #8 and Meigs Creek #9 coal seams. As of March 31, 2015, the Noble complex included 1.3 million tons of proven and probable coal reserves. Coal produced here is trucked to the Bellaire river terminal on the Ohio River or to the Barb Tipple. Coal trucked to the Bellaire river terminal is then transported by barge to the customer. Coal trucked to the Barb Tipple blending and coal-crushing facility is transported by truck to the customer after processing is completed. The Noble complex uses the area, contour and auger methods of surface mining. This complex produced 0.2 million tons of coal for the year ended Dec. 31, 2014, and less than 0.1 million tons of coal for the three months ended March 31, 2015.