In another major tectonic shift for the struggling U.S. coal industry, Bowie Resource Partners LLC said Nov. 20 that it has entered into a definitive agreement to purchase the El Segundo and Lee Ranch surface mining complexes in New Mexico and the Twentymile underground mining complex in Colorado from Peabody Energy (NYSE: BTU) for $358 million in cash plus the assumption of certain liabilities.
The acquisition will nearly double the size of Bowie’s production output to 25 million tons per year, generating top line revenues of $1 billion annually. BRP will operate five mining complexes in Colorado, New Mexico and Utah, employing over 1,700 people. Bowie earlier this decade bought three mining operations in Utah from Arch Coal (NYSE: ACI).
“These acquisitions fit the vision and model that were the genesis of BRP, as we continue to buck the industry trend with long term contractual partnerships with our customers and secure margins in our niche,” said John Siegel, Executive Chairman of Bowie. “The El Segundo and Twentymile mining complexes have exemplary safety and productivity records, long-term relationships with domestic customers and superior reserve quality that combine to render this an accretive and synergistic acquisition for us that will create economies of scale and lower cost.”
As part of this transaction, a U.S. private equity fund will invest $112 million of common equity and $201 million of preferred equity to facilitate the acquisition and buyout of Galena U.S. Holdings Inc., Bowie’s existing partner. A portion of the proceeds from the new partner’s investment will be used to purchase the Bowie ownership interest currently held by Galena, an affiliate of Trafigura Beheer BV. Trafigura will remain the exclusive export marketing agent for Bowie’s production. “While Galena has been a great partner, we will continue to utilize Trafigura’s vast expertise to meet the needs of power generation customers around the world,” Siegel said.
The El Segundo and Twentymile mining complexes are located in northwestern New Mexico and northern Colorado, respectively. These two assets currently produce approximately 12 million tons of high-Btu, low-sulfur coal with a reserve base that allows for long mine lives with considerable extension and development opportunities.
These mining complexes will build upon Bowie’s strong, long-term contract portfolio in the Western Bituminous region. Production at these mines is fully committed for the next several years and, like Bowie’s current operations, are also supported by other contracts that run into the next decade. After the transaction, the workforces of El Segundo and Twentymile are all expected to remain in place and become employees of Bowie.
Bowie has three underground coal mines in Utah’s Uinta Basin with a productive capacity of 12.6 million tons per year. The majority of BRP’s current coal sales are to domestic customers, pursuant to long-term, high volume coal supply agreements with fixed pricing.
As part of Bowie’s domestic sales portfolio, BRP has multi-year coal supply agreements with PacifiCorp and the Intermountain Power Agency, two investment-grade regional utilities that operate power plants located in close proximity to its mines. These multi-year supply agreements have minimum volume guarantees, with durations ranging from 2020 to 2029.
The sale of El Segundo and Twentymile has been by approved by the Peabody Energy Board of Directors and is expected to be completed in the first quarter of 2016. The transaction is subject to usual closing conditions and regulatory approvals.
Citi acted as financial advisor to Bowie in the partner transaction while Deutsche Bank acted as financial advisor to Bowie on the acquisition of the Peabody assets. Holland & Hart LLP and Vinson & Elkins LLP acted as legal counsel to Bowie.
Peabody says Bowie won a competitive bidding process
Peabody Energy said Nov. 20 that this transaction was entered into following a competitive bidding process and includes the El Segundo and Lee Ranch mines in New Mexico and the Twentymile Mine in Colorado, which have combined coal reserves of approximately 330 million tons.
“This transaction is consistent with our stated focus area of portfolio optimization. While our New Mexico and Colorado operations and workforce have been substantial contributors to our success over the years, we are reshaping our portfolio focus around our core regions including the Powder River Basin, Illinois Basin and Australia,” said President and Chief Executive Officer Glenn Kellow. “At this time, we believe it is appropriate to monetize the value of these mines in a transaction that would bring forward multiple years of cash flows.”
Peabody’s New Mexico and Colorado mines are projected to produce 11 million tons in 2016. Based on Peabody’s current operating plans, pre-tax cash flows after capital expenditures for these mines are projected to be approximately $70 million in 2016.
Peabody said it expects to use transaction proceeds for general corporate purposes and/or deleveraging activities. In addition, the sale reduces the amount of Peabody’s self-bonding in place for reclamation obligations by more than $300 million. Morgan Stanley & Co. LLC is acting as the financial advisor to Peabody.
St. Louis-based Peabody Energy is the world’s largest private-sector coal company and the largest coal producer in the U.S.
This deal continues a recent trend that runs counter to a trend from around the year 2000 when a number of U.S. coal producers, like Peabody, went public. In the current troubled U.S. coal market, there is a movement for big chunks of the industry to shift back into the private sector. Examples of that include:
- the recent sale of assets in bankruptcy court to private interests of the formerly-public Patriot Coal;
- the sale in late 2013 of several longwall mines in northern West Virginia by CONSOL Energy (NYSE: CNX) to privately-held Murray Energy;
- the 2013 sale of the three Utah mines by Arch Coal to Bowie;
- the prospect of the U.S. assets of bankrupt coal producer Walter Energy (OTC Pink: WLTG) to be sold to the company’s creditors; and
- bankrupt Alpha Natural Resources (OTC PINK: ANRZQ) is looking to reorganize, but plans to sell non-core assets, with all or most of those assets likely to wind up in private hands.
Notable is that Bowie has made filings with the SEC related to possibly going public as a master limited partnership based on the three Utah mines, though the last of the filings was way back on June 19.